SECURITIES AND EXCHANGE COMMISSION
(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, 2013
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| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014 |
ORo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number:
001-343541-34354
Altisource Portfolio Solutions
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
(Exact name of
registrantRegistrant as specified in its
charter)Charter)
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| 98-0554932
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| (State or other jurisdiction of incorporation or organization) |
| 98-0554932
(I.R.S. Employer Identification No.) |
Grand Duchy of Luxembourg
(Address and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class |
| Name of each exchange on which registered |
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Common Stock, $1.00 par value | | NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes xþ 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 xþ Indicate by check mark whether the Registrantregistrant (1) has filed all reports required to be filed by Sectionsection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xþ Noo Indicate by check mark whether the Registrantregistrant has submitted electronically and posted on its corporate Website,Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationsRegulation 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 xþ 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. xþ
Indicate by check mark whether the Registrantregistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
company (as defined in Rule 12b-2 of the Exchange
Act.Act): |
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Large accelerated filerþ | x
| | | | Accelerated filer | o |
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Non-accelerated filer | o | | (Do (Do not check if a smaller reporting company)
| | Smaller reporting company | o |
Indicate by check mark whether the Registrantregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No xþ
The aggregate market value of the voting stock held by
nonaffiliatesnon-affiliates of the registrant as of June 30,
20132014 was
$1,602,571,543$1,824,344,937 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, 2014,February 20, 2015, there were
22,628,61820,132,326 outstanding shares of the
Registrant’sregistrant’s shares of beneficial interest (excluding
2,784,1305,280,422 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
StockholdersShareholders to be held on May
21, 201420, 2015 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,
2013.2014.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
FORM 10-K
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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,” 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.
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
Altisource®, together with its subsidiaries, is a premier marketplace and transaction solutions provider for the real estate, mortgage and consumer debt industries offering both distribution and 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.” We are incorporated under the laws of Luxembourg. On August 10, 2009, we became a stand-alone public company in connection with our separation from Ocwen Financial Corporation (“Ocwen”) (the “Separation from Ocwen”). Prior to our Separation from Ocwen
®, our businesses were wholly-owned subsidiaries of Ocwen.20132014 Highlights
Our
20132014 highlights include:
·
Recognized revenue of
$768.4$1,078.9 million, a
35%40% increase compared to the year ended December 31,
2012;·2013;
Recognized service revenue of
$662.1$938.7 million, a 42% increase compared to the year ended December 31,
2012;·2013;
Recognized diluted earnings per share of
$5.19,$5.69, a
17%10% increase compared to the year ended December 31,
2012;·2013;
Generated cash flows from operations of
$185.5$197.5 million, a
59%6% increase compared to the year ended December 31,
2012;·2013;
The average number of loans serviced by Ocwen
Financial Corporation and its subsidiaries (“Ocwen”) on REALServicing totaled
1.22.2 million, a
57%91% increase compared to the year ended December 31,
2012;·2013;
On November
15, 2013,21, 2014, we acquired
Equator,certain assets and assumed certain liabilities of Owners Advantage, LLC (“
Equator”Owners.com”), a
national leader in mortgage andleading self-directed online real estate
related business process management solutions,marketplace, for an initial purchase price of
$63.4$19.8 million plus
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contingent earn-outearn out consideration of up to an additional $80$7.0 million over two years, subject to Owners.com achieving annual performance targets;
On September 12, 2014, we completed the acquisition of certain assets and assumed certain liabilities of Mortgage Builder Software, Inc. (“Mortgage Builder”), a provider of mortgage loan origination and servicing software systems, for an initial purchase price of $15.7 million plus contingent earn out consideration of up to an additional $7.0 million over three years, subject to
EquatorMortgage Builder achieving annual performance targets;
· and
On
March 29, 2013,August 1, 2014, we
completed the acquisition of the Homeward Residential, Inc. (“Homeward”) fee-based businesses from Ocwen for an aggregate purchase price of $75.8 million;·On April 12, 2013, we completed the Residential Capital, LLC (“ResCap”) fee-based business transaction with Ocwen for an aggregate purchase price of $128.8 million;
·On May 7, 2013, we increased borrowings underamended our senior secured term loan agreement to $400and increased our borrowings by $200.0 million. Furthermore, on December 9, 2013, we refinanced the senior secured term loan which included, among other changes, lowering the interest rate of the term loans and
·We repurchased 1.2 million shares of our common stock under our stock repurchase program during the year ended December 31, 2013 at an average price of $116.99 per share.
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, loan originators, investors and investors inother sellers of single family homes. We provide most of 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, real estate owned (“REO”) asset management, ourthe Hubzu® and Owners.com® consumer real estate portal - Hubzu®portals and REOreal estate brokerage services. We also provide property management, lease management and renovation management services for single family rental properties.
Insurance services —- Insurance services include an array of title insurance services including pre-foreclosure, REO and REOrefinance title searches, title commitments,insurance agency services, settlement and escrow services and other title insurance services including title insurance for loan originations. We also provideloss draft claims processing. Prior to the November 11, 2014 discontinuation, we provided insurance program management and insurance agency and brokerage services applicable to lendersfor REO and residential loan servicers.lender placed insurance companies.
Residential property valuation —- Residential property valuation services principally include traditional appraisal products through our licensed appraisal management company and alternative valuation products, primarilysome of which are through our network of real estate professionals. We generally provide these services for residential loan servicers, residential lenders and 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.
Origination management services —- Origination management services principally include Mortgage Partnership of America, L.L.C. (“MPA”) and our contract underwriting and quality control businesses. MPA serves as the manager of Best Partners Mortgage Cooperative, Inc. (“BPMC”), which is referred to as the Lenders One® Mortgage Cooperative (“Lenders One”), a national alliance of independent mortgage bankers that provides its members with education and training along with revenue enhancing, cost reducing and market share expanding opportunities. We provide other origination related services in the residential property valuation business.business and insurance services businesses. In addition, some ofSeptember 2014, we launched a new cooperative, Best Partners Mortgage Brokers Cooperative, Inc., which is referred to as the originationWholesale One™ Mortgage Cooperative (“Wholesale One”), for the wholesale mortgage industry. Wholesale One provides a platform for mortgage brokers, wholesale lenders and related reseller businesses, including the flood certification business, are included in the Technology Services REALSuite business.vendors to provide quality loans to U.S. consumers nationwide. The new cooperative will assist mortgage brokers and other third party originators with tools to improve their businesses.4
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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 and mortgage) and the utility, insurance and insurancehotel industries. Within the Financial Services segment, we provide the following services:
Asset recovery management —- Asset recovery management principally includes post-charge-off debt collection services on a contingency fee basis.
Customer relationship management —- Customer relationship management principally includes customer care, technical support and early stage collections services as well as insurance and claims processing, call center services and analyticaladministrative support.
Technology Services: Comprises our REALSuite™ of software applications, Equator’sEquator, LLC (“Equator”)software applications, Mortgage Builder® software applications and our information technology (“IT”) infrastructure management services. We currently provide our IT infrastructure management services to Ocwen, and its subsidiaries, Home Loan Servicing Solutions, Ltd. (“HLSS”), Altisource Residential Corporation (“Residential”), and Altisource Asset Management CompanyCorporation (“AAMC”), through managed services agreements, and our other segments. segments in a shared services model. Brief descriptions of the key REALSuite, Equator® and Mortgage Builder software solutions are below:
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 productplatform that offers an efficient and effective platform for loan servicing including default administration. This technology solution features automated workflows 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® enterprise commercial loan servicing system.
REALResolution™ - A technology platform that provides servicers with an automated default management and home retention solution for delinquent and defaulted loans.
REALTrans® — -A patented electronic business-to-business exchange that automates and simplifies thevendor selection, ordering, tracking and fulfilling of vendor provided services principally related to mortgages.real estate and mortgage marketplaces. This technology solution, whether web-basedaccessed through the web or integrated into a servicing system, connects multiple service providersto a marketplace of services through a single platform and formsdelivers 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, provides servicers with the ability to automatically adjudicate invoices according to compliance rules and for paymentelectronic payments to be delivered after review and to have invoice payments deposited directly to their respective bank accounts.approval.
REALDoc® — A correspondence- An automated document management platform that extracts, storesconsists of three primary modules: REALDoc Capture, which converts document images into processable data, indexes documents and generatesprovides customizable workflows based on data attributes; REALDoc Correspondence, which provides a scalable correspondence creation, management and is capabledelivery platform; and REALDoc Vault, which provides a scalable and distributed storage platform and secure document viewer.
REALAnalytics™ - A software platform that incorporates econometric models and behavioral economics to assist servicers in various aspects of integrating with commercially available servicing, origination and process management applications.including determination of loss mitigation options for decision-making by the servicer.
Equator’s SolutionsEquator — The- Includes the EQ Workstation®, EQ Marketplace®, EQ Midsource® and EQ Portal™Portal™ platforms and can be used a la carteseparately or together as an end-to-end solution. EQ Workstation provides comprehensive, end-to-end workflow and transaction services to manage real estate and foreclosure related activities. EQ Marketplace provides a coordinated means of purchasing a variety of real estate services from vendors including realtors,real estate brokerage, 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.
5Mortgage Builder - Includes the Architect®, Surveyance®, Colonnade® and LoanXEngine™ technologies, which are software solutions for mortgage banks, community banks, credit unions and other financial institutions. The Architect platform is a next generation all-inclusive origination platform available in the cloud that manages loans from prequalification through interim servicing and delivery. The Surveyance platform is a mobile origination solution that provides originators with the ability to service their clients remotely. The Colonnade platform is a comprehensive loan servicing solution and the LoanXEngine platform provides customer relationship management and product pricing and eligibility solutions.
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Corporate Items and Eliminations: Includes interest expense and costs related to corporate support functions including executive, finance, legal, compliance, human resources, vendor management, risk and operational effectiveness and marketing, and also includes eliminations of transactions between the reportingreportable segments. Corporate Items and Eliminations also include the cost of facilities until approximately 40% of the facilities are occupied by the business units,unit(s), at which time costs are allocatedcharged to the business units.unit(s).
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 consists of amounts attributable to our fee-based services. Reimbursable expenses and non-controlling interests are pass-through items for which we earn no margin. Reimbursable expenses consist of amounts we incur on behalf of our customers in performing our fee-based services, but we pass such costs 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, and are included in revenue and reduced from net income to arrive at net income attributable to Altisource.
Separation of the Residential Asset Businesses
On December 21, 2012, we completed the spin-offsspin-off of two 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.” WeOn December 24, 2012, 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 as well as single family homes at or following the foreclosure sale 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
Our customers include one of the
United States’ largest sub-prime servicers
in the United States, a government-sponsored enterprise (“GSE”), utility companies, commercial banks, servicers, investors, mortgage bankers and financial
service companies across the United States.Our three largest customers in 2013 accounted for 76% of our total revenue.services companies. Our largest customer, Ocwen, accounted for 65%60% of our total revenue in 2013. From January 1 through September 30, 2013, Ocwen’s residential loan servicing portfolio grew from $203.7 billion in unpaid principal balance (“UPB”) to $434.8 billion. Ocwen is positioned as the fourth largest mortgage servicer in the United States. 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.
2014.
Related party revenue primarily consists of revenue earned directly from Ocwen and its subsidiaries and revenue earned from the loans serviced by Ocwen and its subsidiaries when Ocwen designates us as the service provider. Related party revenue from Ocwen as a percentage of segment and consolidated revenue was as follows for the years ended December 31:
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| | 2014 | | 2013 | | 2012 |
| | | | | | |
| Mortgage Services | 67% | | 71% | | 68% |
| Financial Services | 27% | | 30% | | <1% |
| Technology Services | 41% | | 49% | | 42% |
| Consolidated revenue | 60% | | 65% | | 59% |
We record revenue we earn from Ocwen under the service agreements at rates we believe to be market rates as we believe they are consistent with the fees we charge to other customers for comparable services and/or fees charged by our competitors.
We earn additional revenue on the portfolios serviced by Ocwen
and its subsidiaries that
areis not considered related party revenue when a party other than Ocwen selects Altisource as the service provider.
Related party revenue as a percentage of segment and consolidated revenue was as follows forFor the years ended December
31: | | 2013 | | 2012 | | 2011 | |
| | | | | | | |
Mortgage Services | | 71% | | 68% | | 72% | |
Financial Services | | 30% | | < 1% | | < 1% | |
Technology Services | | 49% | | 42% | | 39% | |
Consolidated revenue | | 65% | | 60% | | 58% | |
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Table31, 2014, 2013 and 2012, we recognized revenue of Contents
We record revenue we earn from$256.0 million, $161.9 million and $125.4 million, respectively, on the portfolios serviced by Ocwen and its subsidiaries under various long-term servicing contracts at rates we believe to be market rates as theythat 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; and fees charged by our competitors.
not considered related party revenue.
Our services are provided to customers primarily located in the United States. Financial information for our segments can be found in Note
2223 to our consolidated financial statements.
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 requests for proposal
processes from key industry participants.processes. Our sales team works collaboratively and is compensated principally with a base salary and commission for sales generated.
Our primary sales and marketing focus is
supporting the growth of Ocwen and its subsidiaries, expanding relationships
with MPA’s members and
Equatorservices provided to existing customers and
targetingLenders One and Wholesale One members as well as adding new Lenders One and Wholesale One members, adding new customers
that could have a material positive impact on our results of
operations.Equator and Mortgage Builder, new default services customers and more consumer limited service brokerage customers. Given the highly concentrated nature of the industries we serve, the time and effort
spentwe spend in expanding relationships or winning new relationships is significant.
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,
2013,2014, we have been awarded one patent that expires in 2023,
threefour patents that expire in 2024, six patents that expire in 2025,
two patents that expire in 2026, one patent that expires in
20272029 and one patent that expires in 2030. In addition, we have registered trademarks, or recently filed applications for
the registration of trademarks, in a number of
countries or groups of countriesjurisdictions including the United States, the European Community, India and in eight other
countries or groups of countries.jurisdictions. These trademarks generally can be renewed indefinitely, provided they are being
used.used in commerce.
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.
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 and in-house providers resulting in a fragmented market with disparate service offerings. From an overall perspective, we compete with 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.
We also compete with companies providing online real estate auction services and limited service brokerage firms. 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-sizedlarge 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. ForCompetitive factors in our Financial Services competitive factorsbusiness include the ability to achieve a collection rate comparable to our competitors; the compliance, quality, timeliness and personal nature of the service; the consistency and professionalism of the service; and the recruitment, training and the retention of our workforce. Competitive factors in our Technology Services business include the quality of the technology-based applications or 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 employees; and the cost of obtaining, maintaining and enforcing our patents.
Employees
EmployeesAs of December 31, 2013,2014, we had the following number of employees:
| | United | | | | | | | | Consolidated | |
| | States | | India | | Philippines | | Luxembourg | | Altisource | |
| | | | | | | | | | | |
Mortgage Services | | 346 | | 2,532 | | 204 | | 6 | | 3,088 | |
Financial Services | | 920 | | 1,768 | | 30 | | 2 | | 2,720 | |
Technology Services | | 458 | | 901 | | 8 | | 1 | | 1,368 | |
Corporate | | 109 | | 443 | | 9 | | 10 | | 571 | |
| | | | | | | | | | | |
Total employees | | 1,833 | | 5,644 | | 251 | | 19 | | 7,747 | |
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| | | | | | | | | | | | | | | |
| | | United States | | India | | Philippines | | Luxembourg | | Consolidated
Altisource |
| | | | | | | | | | | |
| Mortgage Services | | 442 |
| | 2,847 |
| | 377 |
| | 9 |
| | 3,675 |
|
| Financial Services | | 874 |
| | 2,113 |
| | 86 |
| | 2 |
| | 3,075 |
|
| Technology Services | | 634 |
| | 1,316 |
| | 12 |
| | 2 |
| | 1,964 |
|
| Corporate | | 123 |
| | 433 |
| | 23 |
| | 20 |
| | 599 |
|
| | | | | | | | | | | |
Total employees
| | 2,073 |
| | 6,709 |
| | 498 |
| | 33 |
| | 9,313 |
|
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
continuing ability
to continue to attract, hire and retain skilled and experienced personnel.
Certain of our revenues are seasonal. More specifically, Mortgage Services’ revenue is impacted by REO sales and lawn maintenance, which tend to be at their lowest levels during fall and winter months and highest during spring and summer months.
Financial Services’ asset recovery management 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
Government Regulation
Our business and
lawn maintenance, which tend to be at their lowest levels during fall and winter months and highest during spring and summer months.Government Regulation
Our businessesthe business of our customers are subject to extensive lawsscrutiny and regulationsregulation 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 and local agencies that license or oversee certain of our mortgage-relatedauction, real estate brokerage, mortgage and debt collection services, including insurance services and collection entities.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, Unfair, Deceptive or Abusive Acts and Practices statutes, 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’sHomeowner Bill of Rights and the Secure and Fair Enforcement for Mortgage Licensing (“SAFE”) Act. TheseWe are also subject to the requirements of the Foreign Corrupt Practices Act (“FCPA”) and comparable foreign laws, due to our activities in foreign jurisdictions.
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. The Dodd-Frank Act, among other things, created the CFPB, a 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 increasedsignificant and could lead to settlements or consent orders affecting us or our customers that may curtail or restrict the business as it is currently conducted.
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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 provider of certain services including, among others, services as a mortgage serviceorigination underwriter, valuation provider, and/orappraisal management company, asset manager, property manager, title insurance agent, property and casualty insurance broker, real estate broker, auctioneer, foreclosure trustee and debt collector in a number of states. We are subject to auditsOur employees and examinations that are conducted by the states. Our employeessubsidiaries may be required to be licensed by various state commissions for the particular type of service deliveredsold and to participate in regular continuing education programs. From timePeriodically, we are subject to time, we receive requests fromaudits and examinations by federal, state and local regulatory agencies and receive subpoenas, civil investigative demands or other requests for information from such regulatory 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.
connection with their regulatory or investigative authority.
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 website 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 the reports we file or furnish with the SEC, corporate governance information (including our Code of Business Conduct and Ethics), select press 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.
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
Ocwen is our largest customer and the loss of Ocwen as a customer or a reduction in the size of Ocwen could adversely affect our business and results of operations.
For the year ended December 31, 2014, we generated approximately 60% of our revenue from Ocwen. Additionally, 24% of our 2014 revenue was earned on the portfolios serviced by Ocwen, but is not considered related party revenue because a party other than Ocwen selects Altisource as the service provider. Prior to the 2009 separation from Ocwen, our businesses were wholly-owned subsidiaries of Ocwen and since the 2009 separation Ocwen has been our largest customer. Ocwen purchases certain services from our Mortgage Services, Financial Services and Technology Services segments under service agreements that extend through August 2025, subject to termination under certain conditions. In addition, Ocwen purchases certain origination services from Altisource under an agreement that extends through January 2017, subject to termination under certain conditions.
Ocwen has been and is subject to a number of pending federal and state regulatory investigations, inquiries and requests for information that have or could result in adverse regulatory actions against Ocwen. For example, as a result of various regulatory actions, Ocwen is (i) subject to an independent auditor’s review of compliance with California servicing laws and has agreed not to obtain any new servicing rights in California until the regulator is satisfied with future document requests, (ii) operating under the oversight of an on-site operations monitor imposed by New York Department of Financial Services (“NYDFS”), which is assessing the adequacy and effectiveness of Ocwen’s operations, including information technology systems, (iii) required to perform benchmarking pricing studies for transactions with related parties, which are subject to periodic review by the monitor imposed by the NYDFS and (iv) subject to requirements under an agreement with the CFPB and various states attorneys general and agencies that imposed specific servicing guidelines and oversight by an independent national monitor, who recently reported they were investigating the reliability of information Ocwen has provided. In addition to these matters, Ocwen continues to be subject to other regulatory investigations, inquiries and requests for information and pending legal proceedings, and Ocwen may become subject to future federal and state regulatory investigations, inquiries and requests for information, any of which could also result in adverse regulatory or other actions against Ocwen.
As a result of these various difficulties faced by Ocwen, its debt and servicer ratings have been downgraded. Further, certain bondholders of Ocwen-serviced residential mortgage-backed securities alleged that Ocwen, as servicer of certain mortgage-backed securities trusts, defaulted on these servicing agreements.
Ocwen relies, in part, on HLSS to finance its operations. For a significant portion of Ocwen-serviced non-GSE loans, HLSS owns (1) the rights to receive the servicing fees that Ocwen is entitled to receive and (2) associated servicing advances. As a result of certain of the foregoing matters, HLSS has received notices of default with respect to certain of its debt financing and has received demands from a shareholder that servicing be transferred away from Ocwen.
The foregoing may have significant and varied effects on Ocwen’s business and our continuing relationships with Ocwen. For example, Ocwen may be required to alter the way it conducts business, including the parties it contracts with for services (including information technology services), it may be required to seek changes to its existing pricing structure with related parties or otherwise, it may lose or sell some or all of its non-GSE servicing rights or subservicing arrangements or may lose one or more of its state servicing licenses. Additional regulatory actions may impose additional restrictions on or require changes in Ocwen’s business that would require it to sell assets or change its business operations. Further, Ocwen’s ability to finance its operations and repay maturing obligations rests in large part on its ability and the ability of HLSS to continue to borrow money, which also may be affected by any or all of the circumstances described above. Any or all of these effects could result in our eventual loss of Ocwen as a customer or a reduction in the volume of services they purchase from us.
The loss of Ocwen as a customer or a significant reduction in the volume of services they purchase from us would significantly reduce our revenue and materially adversely affect our results of operations. Further, if Ocwen were to lose or sell a significant portion or all of its non-GSE servicing rights or subservicing arrangements or lose its state servicing licenses in states with a significant number of loans in Ocwen's servicing portfolio, our revenue and results of operations would be materially adversely affected. In addition, if there are significant changes to our contractual relationship with Ocwen or significant changes to our pricing to Ocwen for services from which we generate material revenue, Altisource’s revenue and results of operations could be materially negatively impacted.
Our continuing relationship with Ocwen may inhibit our ability to
obtainattract and retain other
customers that compete with Ocwen.As of December 31, 2013,customers.
Given our Chairman owns or controls more than 13% of Ocwen’s common stock and 26% of our common stock. We derived 65% of our 2013 revenue from Ocwen and its subsidiaries. Given this close and continuing relationship with Ocwen and the regulatory scrutiny related to the way in which Ocwen does business with Altisource, we may encounter difficulties in obtainingattracting new customers and retaining other customers who compete with Ocwen.existing customers. Should
these and other potential customers 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 relationship, the loss of which or reduction in the size of which could affect our business and results of operations.
We currently generate approximately 65% of our revenue 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 2025 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 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.
Also, in a strengthening economy and housing market, reduced delinquencies negatively impact our default business. 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
are more established and better known, have substantial resources and some have
widely usedwidely-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 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.effective in every case. 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
certain of our innovations, it is possible we may not be able to protect
someall of
these innovations.the innovations for which we seek protection. Changes in patent law, such as changes in the law regarding patentable subject matter, can also impact our ability to obtain patent protection for our innovations. In addition, given the costs of obtaining patent protection, we may choose not to protect certain innovations that later turn out to be important. Furthermore, there is always the possibility, despite our efforts, that the scope of the protection gained will be insufficient or 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
resourcesresources; and/or
·
require us to enter into royalty or licensing agreements in order to obtain the right to use necessary technologies.
Technology failures,
defects or
defects,inadequacies, development delays or installation difficulties,
security breaches, acts of vandalism or the introduction of harmful code could damage our business operations and increase our costs.
Disruptions, failures,
defects or
defectsinadequacies in our technology,
or delays in the development of, or installation difficulties with, our
next generationtechnology, or security breaches, acts of vandalism, system attacks or the introduction of malicious code to our 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.
Further, Ocwen or other of our customers may require changes and improvements to the systems we provide to them to manage the volume and complexity of their businesses, which changes and improvements may be costly and time consuming to implement and may create disruptions in our provision of services to customers, which could have an adverse impact on our business operations and financial position, and increase our costs. Additionally, the improper implementation or use of Altisource technology by customers could impact the operation of that technology, and potentially cause harm to our reputation, loss of customers, negative publicity or exposure to liability claims.
The Company’s databases containing proprietary information and personal information of our customers and employees could be breached, which could subject us to adverse publicity, costly government enforcement actions or private litigation, and expenses.
As part of our business and operation of our technology, we
maintain proprietary information electronically and electronically receive, process, store and transmit
consumer information and confidential and sensitive business information of our
customers.customers and employees. We rely on the security of our networks, databases, systems and processes and, in certain circumstances, those of third parties, such as vendors, to protect our proprietary information and information about our customers and employees. Criminals are constantly devising schemes to circumvent information technology security safeguards and other large companies have recently suffered serious data security breaches. If unauthorized parties gain access to our networks or databases, or those of our vendors, they may be able to steal, publish, delete, or modify our sensitive proprietary information and sensitive third party information, including personally identifiable information. In addition,
employees may intentionally or inadvertently cause data or security breaches that result in unauthorized release of such personal or confidential information. In such circumstances, our business could suffer and we
collect personal consumer datacould be held liable to our customers, other parties, or employees, as well as be subject to regulatory or other actions for breaching privacy law or failing to adequately protect such
as names and addresses, social security numbers, driver’s license numbers and payment history records. The secure transmission of this information over the Internet is essential to maintaining consumer confidence. Security breaches and acts of vandalisminformation. This could result in
a compromisecostly investigations and litigation, civil or
breachcriminal penalties, operational changes or other response measures, loss of
the technology we use to protect our customers’ business and personal information and transaction data and could result in the assessment of penalties or could otherwise cause interruptionsconsumer confidence in our
operations.security measures and negative publicity that could adversely affect our financial condition, results of operations, and reputation. 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
development and sales
cyclecycles 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 ahave long
development and sales
cyclecycles for
developing certain services.many of our services and technology solutions. We may expend significant time and resources in pursuing a particular service,
technology solution 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 services or technology solutions and services.solutions. 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
materialmaterially adverse effect on our business, financial condition or results of operations.
Our business
isand the business of our customers are subject to extensive
scrutiny and regulation, and failure to comply with existing or new regulations may adversely impact us.
Our business
isand the business of our customers are subject to extensive
scrutiny and 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
auction, real estate brokerage, mortgage
relatedand debt collection 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,
Unfair, Deceptive or Abusive Acts and Practices statutes, RESPA, TILA, the Fair Credit Reporting Act, the Telephone Consumer Protection Act, the Homeowners Protection Act, the California
Homeowner’sHomeowner Bill of Rights, the SAFE Act, the Mortgage Act,
the FCPA and the
FCPA.Dodd-Frank Act. 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 federal, state and local consumer protection regulations. We also are subject to licensing and regulation as a mortgageprovider of certain services provider,including, among others, services as a mortgage origination underwriter, valuation provider, appraisal management
company, asset manager, property manager, title insurance
agency, otheragent, property and casualty insurance
related services, agent and provider,broker, real estate broker,
and/orauctioneer, foreclosure trustee and debt collector in a number of states.
We are subject to audits and examinations that are conducted by the states in which we do business. Our employees and subsidiaries may be required to be licensed by various state commissions for the particular type of service sold and to participate in regular continuing education programs.
From time to time, we receive requests from state and other agencies for records, documents and information regarding our policies, procedures and practices for our mortgage services and debt collection business activities. We incur significant ongoing costs to comply with
licensing requirements and governmental regulations.
As
Participants in the industries in which we operate are subject to a
resulthigh level of
increasedregulatory scrutiny. This scrutiny has included federal and state governmental
scrutinyagency review of all aspects of the mortgage
servicing and lending industries and the debt collection industry,
legislation has been enacted to address the mortgage market, with particularincluding an increased legislative and regulatory focus on
loansconsumer protection practices. In some cases, penalties for noncompliance are significantly increased and could lead to settlements or consent orders against us, or our customers, 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 impactedmay curtail or restrict our
default services revenue and profit. Itbusiness as 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.currently conducted. If regulators continue to 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.
Periodically, we are subject to audits and examinations by federal, state and local regulatory agencies and receive subpoenas, civil investigative demands or other requests for information from such regulatory agencies in connection with their regulatory or investigative authority. We are currently responding to such inquiries from federal and state agencies relating to certain aspects of our business. Responding to such audits, examinations and inquiries will cause us to incur costs, including legal fees or other charges, which may be material in amount. If
any such audits, examinations or inquiries result in findings of noncompliance, we
fail to comply with privacy regulationscould incur fines, penalties, settlement costs or other damages or have sanctions imposed on
providers of services to financial institutions,us or restrictions imposed on our business
that could
be harmed.Ashave a providermaterial adverse effect on our business and results of operations.
National servicing standards and federal and state government scrutiny and regulation and other requirements require very specific loan modification and foreclosure procedures that have further reduced the number of loans entering the foreclosure process and have negatively impacted our default 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 lawsuitsrevenue and profit. It is unclear when 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 rulesif volumes will increase in the
future on the federal or state level could have an adverse impact on us by increasing our costs or requiring changes in our services.future.
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
generally 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
key 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
materialmaterially adverse impact on our
company.Company.
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 and are not included in the accompanying consolidated balance sheets. We may become liable for funds owed to third
parties as a result of the failure of one or more of these financial institutions, 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; our level of debt and provisions in our debt agreements could limit our ability to react to 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 flows from operations is dedicated to servicing our debt and is not available for other purposes.
Our debt is secured by virtually all of our assets and is trading at a substantial discount to face value. Our ability to raise additional debt is limited, subject to lender approval and would require modification of our current debt agreements. 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,expenditures, 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 competecompete;
requiring us to repay a portion of our excess cash flow, as defined in the debt agreement, in the event our debt to EBITDA ratios, as defined in the debt agreement, exceed certain thresholds; and
·
placing us at a competitive disadvantage by limiting our ability to invest in the business.
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 flows 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 flows 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 failure to maintain certain debt to EBITDA ratios contained in our debt agreement could result in required payments to the lenders of a percentage of our excess cash
flow,flows, which could materially and adversely affect our ability to use our excess cash
flowflows for other purposes.
Our debt agreement requires us to distribute 50% of our excess cash flow,flows, as defined in the debt agreement, if our net debt to EBITDA ratio exceeds 3.50 to 1.00 and 25% of our excess cash flowflows if our net debt to EBITDA ratio is 3.50 to 1.00 or less, but greater than 2.753.00 to 1.00. If we were required to distribute a portion of our excess cash flowflows to our lenders, we may be limited
in our ability to grow our business through acquisitions or investments in technology and we may be limited in our ability to repurchase our common stock. We cannot assure you that we will maintain debt to EBITDA ratios at levels that will not require us to distribute a portion of our excess cash
flowflows to 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;
·
meet or exceed the expectations of our customers;
·
successfully leverage our existing client relationships to sell additional
servicesservices; and
·
attract other servicers and non-distressed home sellers as new customers.
If our efforts to retain and expand our client relationships and to attract new customers do not prove effective, it could have a
materialmaterially 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.”14
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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 services and develop and introduce new services that address the increasingly sophisticated needs of our customers and their customers. These initiatives carry the risks associated with any new service development effort, including cost overruns, delays in delivery and performance effectiveness. There can be no assurance that we will be successful in developing, marketing and selling new services that meet these changing demands 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 towards outsourcing.
Our continued growth at historical rates is dependent on the industry trend towards 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 to make acquisitions
Acquisitions to accelerate growth initiatives
involvesinvolve potential risks.
During 2014, we acquired Mortgage Builder and Owners.com. 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 acquisitions of entities offering greater access and expertise in other asset types and markets that are related to ours but we do not currently serve.
As we acquire businesses, we may face a number of risks including a loss of focus on our daily operations, the need for additional management, constraints on operating resources, constraints on financial resources from integration and system conversion costs, the inability to maintain key pre-acquisition relationships with customers, suppliers and employees and other integration risks.
Moreover, anyAny acquisition may result in the incurrence of additional amortization expense of related intangible assets, which could reduce our profitability.
We may be unable Our ability to achieve somepursue additional acquisitions in the future is dependent on our access to sufficient capital (equity or all ofdebt) to fund the benefits we expect from the continued relationship with Residential following the Separation of the Residential Asset Businesses.
acquisition and subsequent integration. We may not be able to fully achieve the strategicsecure adequate capital as needed on terms that are acceptable to us, or at all, and financial benefits we expect from our relationship with Residential following the Separation of the Residential Asset Businesses, orability to secure such benefits may be delayed. These outcomes may occur if, among other things, Residentialcapital through debt financing is not successful in fully executing its strategy to acquire non-performing loan portfolios with a portion of the portfolios converting to single family rental assets or if Residential is not successful in continuing to raise equity andlimited by our current debt to support its growth.
agreements.
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 operating expenses by utilizing lower cost labor in foreign countries such as India and the Philippines. As of December 31, 2013, 5,8952014, 7,207 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.
In many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by
The FCPA and other applicable anti-corruption laws and regulations
applicable to us, such as the FCPA.prohibit corrupting payments by our employees, vendors and agents. Any
violationsviolation of the
FCPAapplicable anti-corruption laws or
local anti-corruption lawsregulations 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
of 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 allowsAs a result, Altisource
to benefit fromhas a
favorablelower effective tax
treatment.rate than some of its competitors. It is possible that changes in
LuxembourgLuxembourg’s administrative taxation
statutes, administrative practicepractices or applicable regulations may cause
a reductionan increase in
or an elimination of, the benefits we receive under the existing Luxembourgour effective tax
treatment,rate, which could result in
a significant increase to our income tax expense and adversely affectan adverse effect on our results of operations.
Risks Related to Our Employees
Our success depends on our directors, executive officers and key personnel.
Our success is dependent on the efforts and abilities of our directors, executive officers and other key employees, many of whom have significant experience in the real estate and mortgage, financial services and technology industries. In particular, we are dependent on the services of
William C. Erbey, our
ChairmanBoard of
the Board,Directors and
William B. Shepro,key executives at our
Chief Executive Officer, as well as the services of keycorporate headquarters and 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
materialmaterially adverse effect upon our business, 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
16
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,
HLSS and certain members of our
Chairman, our CEO or management,
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 ofhave significant business
relationships with
and provide services to Ocwen
Residential and
AAMC andResidential. We also provide certain services to
HLSS. Conflicts may arise between Ocwen, HLSS, Residential or AAMC and
us becauseHLSS. Ocwen, Residential, AAMC and HLSS have been related parties of Altisource. Our former Chairman, William C. Erbey, who stepped down from the Altisource, Ocwen, Residential, AAMC and HLSS Boards of Directors effective January 16, 2015, owns or controls common stock in each of these companies. As of December 31, 2014, Mr. Erbey owned or controlled approximately 29% of the common stock of Altisource, approximately 14% of the common stock of Ocwen, approximately 4% of the common stock of Residential, approximately 28% of the common stock of AAMC and approximately 1% of the common stock of HLSS. Additionally, certain members 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 couldmanagement 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 investmentsequity interests in Ocwen, HLSS, Residential, and AAMC and certain of our other officers and directors own stock and/or options in one or more of Ocwen, HLSS, Residential and AAMC.HLSS. 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, AAMC and AAMC,HLSS, as the case may be.
We follow policies, procedures and practices to avoid potential conflicts with respect to our dealings with Ocwen, HLSS,Residential, AAMC and Residential, including our Chairman recusing himself from negotiations regarding, and approvals of, transactions with these entities.HLSS. 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)Directors and our current Chairman is an independent director), and we will also seek to manage these potential conflicts through dispute resolution and other provisions of our agreements with Ocwen, HLSS, Residential, AAMC and AAMC.HLSS. There can be no assurance that such measures will be effective, that we will be able to resolve all conflicts with Ocwen, HLSS, Residential, AAMC or AAMCHLSS or that the resolution of any such conflicts will be no less favorable to us than if we were dealing with a third party that had none of the connections we have with these businesses.
ITEM 1B.UNRESOLVED STAFF COMMENTS
| |
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
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,
20132014 and the segments primarily occupying each location is as follows:
|
|
|
| | | | | | |
| | Mortgage
Services |
| Financial
Services |
| Technology
Services |
| Corporate and
Support Services |
| | | | | | | | |
Luxembourg | | X | | X | | X | | X |
| | | | | | | | |
United States | | | | | | | | |
Atlanta, GA | | X | | X | | X | | X |
Boston, MA | | | | | | X | | X |
Dallas, Coppell, TX
| | X | | | | X | | |
Irvine, CA
Endicott, NY | | X
| | X | | X
| | |
Fort Washington, PA | | | | X | | | | |
| Irvine, CA | | | | | | X | | |
| Los Angeles, CA | | | | | | X | | |
Louisville, KY
Plano, TX | | X
| | | | X | | |
Plano, TX
Sacramento, CA | | | | X | | X
| | |
Sacramento, CA
Seattle, WA | | | | X
| | X | | |
Seattle, WA
Southfield, MI | | | | | | 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
From time to time, we are involved in legal and administrative proceedings arising in the ordinary course of our business. We record a liability for litigationthese matters if an unfavorable outcome is probable and the amount of loss can be reasonably estimated, including expected insurance coverage. For proceedings where a rangethe reasonable estimate of loss is determined,a range, we record a best estimate of loss within the range. When legal proceedings are material, we disclose
On September 8, 2014, the natureWest Palm Beach Firefighter’s Pension Fund filed a putative securities class action suit against Altisource and certain of its officers and directors in the United States District Court for the Southern District of Florida alleging violations of the litigation,Securities Exchange Act of 1934 and Rule 10b-5 with regard to disclosures concerning pricing and transactions with related parties that allegedly inflated Altisource share prices. The court subsequently appointed the extent possible,Pension Fund of the estimateInternational Union of loss or rangePainters and Allied Trades District Council 35 and the Annuity Fund of loss. In the opinionInternational Union of management, after consultation with legal counselPainters and considering insurance coverage where applicable,Allied Trades District Council 35 as Lead Plaintiffs. On January 30, 2015, Lead Plaintiffs filed an amended class action complaint which adds Ocwen Financial Corporation as a defendant, and seeks a determination that the action may be maintained as a class action on behalf of purchasers of the Company’s securities between April 25, 2013 and December 21, 2014 and an unspecified amount of damages. Altisource intends to vigorously defend this lawsuit. Altisource is unable to predict the outcome of currentthis lawsuit or reasonably estimate the potential loss, if any, arising from the suit, given that motions to dismiss have not yet been filed or adjudicated, discovery has not commenced and significant legal and factual issues remain to be determined.
In addition to the matter referenced above, we are involved in legal actions in the course of our business, some of which seek monetary damages. We do not believe that the outcome of these 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 or actions against us. See Item 1A of Part I, “Risk Factors” above. For further information, see Note 22 to the consolidated financial statements.
ITEM 4.MINE SAFETY DISCLOSURES
| |
| ITEM 4. | MINE SAFETY DISCLOSURES |
PART II — OTHER INFORMATION
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
| |
| ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is listed on the NASDAQ Global Select Market under the symbol “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:
| | 2013 | |
Quarter ended | | Low | | High | |
| | | | | |
March 31 | | $ | 67.35 | | $ | 96.02 | |
June 30 | | 69.43 | | 100.15 | |
September 30 | | 95.22 | | 142.30 | |
December 31 | | 132.88 | | 170.19 | |
| | | | | | | |
| | 2012 | |
Quarter ended | | Low | | High | |
| | | | | |
March 31 | | $ | 48.55 | | $ | 64.78 | |
June 30 | | 52.35 | | 73.23 | |
September 30 | | 70.70 | | 91.06 | |
December 31 | | 84.56 | | 124.33 | |
| | | | | | | |
|
| | | | | | | | |
| | | 2014 |
| Quarter ended | | Low | | High |
| | | | | |
| March 31 | | $ | 98.38 |
| | $ | 164.48 |
|
| June 30 | | 95.36 |
| | 125.84 |
|
| September 30 | | 83.98 |
| | 119.95 |
|
| December 31 | | 29.44 |
| | 101.99 |
|
|
| | | | | | | | |
| | | 2013 |
Quarter ended
| | Low | | High |
| | | | | |
| March 31 | | $ | 67.35 |
| | $ | 96.02 |
|
| June 30 | | 69.43 |
| | 100.15 |
|
| September 30 | | 95.22 |
| | 142.30 |
|
| December 31 | | 132.88 |
| | 170.19 |
|
The number of holders of record of our common stock as of
January 31, 2014February 20, 2015 was
70.65. The number of beneficial
stockholdersshareholders is substantially greater than the number of holders as a large portion of our common stock is held through brokerage firms.
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 paymentThe provisions of
cash dividends may be limited byour senior secured term loan agreement, as amended, limit, among other things, our ability to pay dividends. Luxembourg law
also limits our ability to pay dividends, including statutory reporting requirements and
by covenantsdividend amount limitations based on annual net income and net income carried forward, less any amounts placed in
our debt agreement.19
reserve.
The graph below compares the cumulative total stockholder return on our common stock with the cumulative total return on the S
&P’s&P 500 Index for the
five year period
commencing on August 10, 2009, the first trading day of our common stock, and ending on December 31,
2013.2014. The graph assumes an investment of $100 at the beginning of 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
graphsgraph below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock.
| | 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 | | $ | 772.95 | | $ | 1,300.25 | |
S&P 500 | | 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 | | 170.83 | | 209.64 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
20
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 12/31/09 | | 6/30/10 | | 12/31/10 | | 6/30/11 | | 12/31/11 | | 6/30/12 | | 12/31/12 | | 6/30/13 | | 12/31/13 | | 6/30/14 | | 12/31/14 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Altisource | | $ | 100.00 |
| | $ | 117.87 |
| | $ | 136.78 |
| | $ | 175.32 |
| | $ | 239.07 |
| | $ | 348.88 |
| | $ | 412.82 |
| | $ | 449.26 |
| | $ | 755.74 |
| | $ | 545.88 |
| | $ | 160.98 |
|
| S&P 500 | | 100.00 |
| | 92.43 |
| | 112.78 |
| | 118.43 |
| | 112.78 |
| | 122.16 |
| | 127.90 |
| | 144.05 |
| | 165.76 |
| | 175.79 |
| | 184.64 |
|
| NASDAQ Composite | | 100.00 |
| | 92.95 |
| | 116.91 |
| | 122.23 |
| | 114.81 |
| | 129.35 |
| | 133.07 |
| | 149.98 |
| | 184.06 |
| | 194.27 |
| | 208.71 |
|
The information required by this item is incorporated herein by reference to our definitive proxy statement in connection with our
20142015 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,
On February 28, 2014, our shareholders approved a new stock repurchase program, which replaced the previous stock repurchase program. Under the
new program, we are authorized to purchase up to
3.53.4 million shares of our common stock,
based on a limit of 15% of the outstanding shares of common stock on the date of approval, in the open market,
at a minimum price of $1.00 per share and a maximum price of $500.00 per share. This is in addition to amounts previously purchased under the prior
program.programs. From authorization of the previous
program in May 2010programs through December 31,
2013,2014, we have purchased approximately
3.76.2 million shares of our common stock in the open market at an average price of
$63.04$79.16 per share. We purchased
1.22.5 million shares of common stock
at an average price of $103.67 per share during the year ended December 31, 2014 and 1.2 million shares 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, 2012.2013. As of December 31,
2013,2014, approximately
2.31.1 million shares of common stock remain available for repurchase under the
new 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
alsoagreement limits the amount we can spend on share repurchases in any year and may prevent repurchases in certain circumstances. As of December 31,
2013,2014, approximately
$55$225 million was available to repurchase our common stock under our senior secured term loan.
The following table presents information related to
ourthe 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.
21
|
| | | | | | | | | | | | | |
| 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(2) |
| | | | | | | | | |
| Common stock: | | |
| | |
| | |
| | |
|
| October 1 — 31, 2014 | | 475,388 |
| | $ | 98.61 |
| | 475,388 |
| | 1,138,338 |
|
| November 1 — 30, 2014 | | — |
| | — |
| | — |
| | 1,138,338 |
|
| December 1 — 31, 2014 | | — |
| | — |
| | — |
| | 1,138,338 |
|
| | | | | | | | | |
| Total shares of common stock | | 475,388 |
| | $ | 98.61 |
| | 475,388 |
| | 1,138,338 |
|
| |
(1) | May include shares withheld from employees to satisfy tax withholding obligations that arose from the exercise of stock options. |
| |
(2) | On February 28, 2014, our shareholders approved a new stock repurchase program which replaced the previous program and authorized us to purchase up to 3.4 million shares of our common stock in the open market. |
ITEM 6.SELECTED FINANCIAL DATA
| |
| ITEM 6. | SELECTED FINANCIAL DATA |
The following selected financial data as of and for the years ended December 31,
2014, 2013, 2012, 2011
2010 and
20092010 has been derived from our audited consolidated financial statements.
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, 2009 and results of operations for the year ended December 31, 2009 would have been had we operated as a separate, stand-alone entity for the period prior to the Separation from Ocwen.performance.
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”Operations” and our consolidated financial statements and notes thereto in Item 8 of Part II, “Financial Statements and Supplementary Data.” | | For the years ended December 31, | |
(in thousands, except per share data) | | 2013 | | 2012 | | 2011 | | 2010 | | 2009 | |
| | | | | | | | | | | |
Revenue | | $ | 768,357 | | $ | 568,360 | | $ | 423,687 | | $ | 301,378 | | $ | 202,812 | |
Cost of revenue | | 492,480 | | 366,201 | | 275,849 | | 189,059 | | 126,797 | |
Gross profit | | 275,877 | | 202,159 | | 147,838 | | 112,319 | | 76,015 | |
Selling, general and administrative expenses | | 113,810 | | 74,712 | | 62,131 | | 57,352 | | 39,473 | |
Income from operations | | 162,067 | | 127,447 | | 85,707 | | 54,967 | | 36,542 | |
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 | | 142,333 | | 124,649 | | 85,910 | | 55,771 | | 37,576 | |
Income tax (provision) benefit | | (8,540 | ) | (8,738 | ) | (7,943 | ) | 403 | | (11,605 | ) |
Net income | | 133,793 | | 115,911 | | 77,967 | | 56,174 | | 25,971 | |
Net income attributable to non-controlling interests | | (3,820 | ) | (5,284 | ) | (6,855 | ) | (6,903 | ) | — | |
| | | | | | | | | | | |
Net income attributable to Altisource | | $ | 129,973 | | $ | 110,627 | | $ | 71,112 | | $ | 49,271 | | $ | 25,971 | |
| | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | |
Basic | | $ | 5.63 | | $ | 4.74 | | $ | 2.92 | | $ | 1.96 | | $ | 1.08 | |
Diluted | | $ | 5.19 | | $ | 4.43 | | $ | 2.77 | | $ | 1.88 | | $ | 1.07 | |
| | | | | | | | | | | |
Transactions with related parties included above: | | | | | | | | | | | |
Revenue | | $ | 502,087 | | $ | 338,227 | | $ | 245,262 | | $ | 154,988 | | $ | 94,897 | |
Selling, general and administrative expenses | | 2,921 | | 2,430 | | 1,893 | | 1,056 | | 4,308 | |
Other income (expense) | | 773 | | 86 | | — | | — | | (1,290 | ) |
22
|
| | | | | | | | | | | | | | | | | | | | |
| | | For the years ended December 31, |
| (in thousands, except per share data) | | 2014 | | 2013 | | 2012 | | 2011 | | 2010 |
| | | | | | | | | | | |
| Revenue | | $ | 1,078,916 |
| | $ | 768,357 |
| | $ | 568,360 |
| | $ | 423,687 |
| | $ | 301,378 |
|
| Cost of revenue | | 707,180 |
| | 492,480 |
| | 366,201 |
| | 275,849 |
| | 189,059 |
|
| Gross profit | | 371,736 |
| | 275,877 |
| | 202,159 |
| | 147,838 |
| | 112,319 |
|
| Selling, general and administrative expenses | | 201,282 |
| | 113,810 |
| | 74,712 |
| | 62,131 |
| | 57,352 |
|
| Income from operations | | 170,454 |
| | 162,067 |
| | 127,447 |
| | 85,707 |
| | 54,967 |
|
| Other income (expense), net: | | | | | | | | | | |
| Interest expense | | (23,363 | ) | | (20,291 | ) | | (1,210 | ) | | (85 | ) | | (119 | ) |
| Other income (expense), net | | 174 |
| | 557 |
| | (1,588 | ) | | 288 |
| | 923 |
|
| Total other income (expense), net | | (23,189 | ) | | (19,734 | ) | | (2,798 | ) | | 203 |
| | 804 |
|
| Income before income taxes and non-controlling interests | | 147,265 |
| | 142,333 |
| | 124,649 |
| | 85,910 |
| | 55,771 |
|
| Income tax (provision) benefit | | (10,178 | ) | | (8,540 | ) | | (8,738 | ) | | (7,943 | ) | | 403 |
|
| Net income | | 137,087 |
| | 133,793 |
| | 115,911 |
| | 77,967 |
| | 56,174 |
|
| Net income attributable to non-controlling interests | | (2,603 | ) | | (3,820 | ) | | (5,284 | ) | | (6,855 | ) | | (6,903 | ) |
| | | | | | | | | | | |
| Net income attributable to Altisource | | $ | 134,484 |
| | $ | 129,973 |
| | $ | 110,627 |
| | $ | 71,112 |
| | $ | 49,271 |
|
| | | | | | | | | | | |
| Earnings per share: | | | | | | | | | | |
| Basic | | $ | 6.22 |
| | $ | 5.63 |
| | $ | 4.74 |
| | $ | 2.92 |
| | $ | 1.96 |
|
| Diluted | | $ | 5.69 |
| | $ | 5.19 |
| | $ | 4.43 |
| | $ | 2.77 |
| | $ | 1.88 |
|
| | | | | | | | | | | |
| Transactions with related parties included above: | | | | | | | | | | |
| Revenue | | $ | 666,800 |
| | $ | 502,087 |
| | $ | 338,227 |
| | $ | 245,262 |
| | $ | 154,988 |
|
| Cost of revenue | | 38,610 |
| | 19,983 |
| | 13,469 |
| | 5,180 |
| | — |
|
| Selling, general and administrative expenses | | (268 | ) | | 569 |
| | (542 | ) | | (166 | ) | | (744 | ) |
| Other income | | — |
| | 773 |
| | 86 |
| | — |
| | — |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| (in thousands) | | 2014 | | 2013 | | 2012 | | 2011 | | 2010 |
| | | | | | | | | | | |
| Cash and cash equivalents | | $ | 161,361 |
| | $ | 130,324 |
| | $ | 105,502 |
| | $ | 32,125 |
| | $ | 22,134 |
|
| Accounts receivable, net | | 112,183 |
| | 104,787 |
| | 88,955 |
| | 52,005 |
| | 53,495 |
|
| Premises and equipment, net | | 127,759 |
| | 87,252 |
| | 50,399 |
| | 25,600 |
| | 17,493 |
|
| Intangible assets, net | | 245,246 |
| | 276,162 |
| | 56,586 |
| | 64,950 |
| | 72,428 |
|
| Goodwill | | 90,851 |
| | 99,414 |
| | 14,915 |
| | 14,915 |
| | 11,836 |
|
| Loan to Ocwen | | — |
| | — |
| | 75,000 |
| | — |
| | — |
|
| Total assets | | 788,221 |
| | 730,052 |
| | 429,226 |
| | 224,159 |
| | 197,800 |
|
| Long-term debt, net (including current portion) | | 588,614 |
| | 395,256 |
| | 198,027 |
| | — |
| | — |
|
| Capital lease obligations | | — |
| | — |
| | 233 |
| | 836 |
| | 1,532 |
|
| Total liabilities | | 746,778 |
| | 572,311 |
| | 269,397 |
| | 58,216 |
| | 45,902 |
|
Table of Contents | | 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 | |
| | | | | | | | | | | | | | | | |
Note: Significant events affecting our historical earnings trends in 2011from 2012 through 2013,2014, including acquisitions, are described in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations.”
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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
the MD&A are as follows:
Overview. This section, beginning on page 24,below, provides a description of recent developments we believe are important in understanding our results of operations and financial condition as 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 27, provides an analysis of our consolidated results of operations for the three years ended December 31, 2013.2014.
Segment Results of Operations. This section, beginning on page 29,30, provides an analysis of each business segment for the three years ended December 31, 20132014 as well as Corporate Items and 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 37,39, provides an analysis of our cash flows for the three years ended December 31, 2013.2014. We also discuss restrictions on cash movements, future commitments and capital resources.
Critical Accounting Policies. This section, beginning on page 40,42, identifies those accounting principles we believe are most important to our financial results and that require significant judgment and estimates on the part of management in application. We provide all of our significant accounting policies in Note 2 to the accompanying consolidated financial statements.
Other Matters. This section, beginning on page 43,45, 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.contingencies and related parties.23
OVERVIEW
We
through our subsidiaries, are a premier marketplace and transaction solutions provider for the real estate, mortgage and consumer debt industries offering both distribution and content. We leverage proprietary business process, vendor and electronic payment management software and 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 classify our businessbusinesses 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 inand other sellers of 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 and mortgage) and the utility, insurance and insurancehotel industries. The Technology Services segmentprincipally consists of our REALSuite software applications, Equator’s software applications, as well asMortgage Builder’s software applications and our IT infrastructure services. 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. Equator’s software applications provide comprehensive, end-to-end workflow and transaction services to manage real estate and foreclosure related activities and purchase related services from vendors. Mortgage Builder provides mortgage origination and servicing software applications. In addition, Corporate Items and Eliminations include eliminations of transactions between the reportingreportable segments, interest expense and costs related to corporate support functions including executive, finance, legal, compliance, human resources, vendor management, risk and operational effectiveness.effectiveness and marketing.
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 consists of amounts attributable to our fee-based services. Reimbursable expenses and non-controlling interests are pass-through items for which we earn no margin. Reimbursable expenses consist of amounts we incur on behalf of our customers in performing our fee-based services, but we pass such costs 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, and are included in revenue and reduced from net income to arrive at net income attributable to Altisource.
We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of
America (“GAAP”).America.
Altisource’s Vision and Growth Initiatives
Since our separation from Ocwen,
Altisource has becomeprovides a company providing a full suite of mortgage, real estate and consumer debt services, leveraging our technology and global operations. Our relationship with Ocwen provided a foundation on which we built our business and Ocwen, as our largest customer, remains an important priority for us. Altisource’s vision has evolved to becomeLeveraging the services we have built through the Ocwen and other relationships, Altisource is focused on becoming the premier provider of real estate and mortgage marketplaces offering both distribution and content.content to a diversified customer base. Within these industries,the real estate and mortgage markets, we are facilitating transactions related to home sales, home rentals, home maintenance, mortgage origination and mortgage servicing. The Equator acquisition, with
While we expect our revenue from Ocwen’s servicing portfolio will decline in 2015, we believe we have opportunities to continue to build our business from our revenue and diversification initiatives. Ocwen remains a very important component of our business and we believe that its
marketplace, real estate and servicing transaction solutions, is in line with this vision and accelerates our evolution and growth.We believe there are significant growthexisting non-GSE portfolio provides continuing revenue opportunities for Altisource inAltisource. While we have been working on our strategic growth initiatives for some time, we have historically had to balance this activity with the real estateneed to support Ocwen during a period of its own rapid growth. Given our current expectations relative to Ocwen going forward and mortgage markets, leveragingthe recognized importance of diversifying further our distribution and transaction solutions.customer base, we are increasing our focus on our strategic growth initiatives. Our strategic growth initiatives are:
Mortgage market:
attract new clients to our comprehensive default related businesses
grow our origination services and technologies
Real estate market:
·supporting Ocwen’s growth
·deploying Hubzu to other institutions and the non-distressed home sales market
24
expand our innovative online real estate marketplace
Table of Contents
·providinggrow our 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
business
Stock Repurchase Plan
In May 2012,
On February 28, 2014, our shareholders approved a new stock repurchase program, which replaced the previous stock repurchase program. Under the
new program, we are authorized to purchase up to
3.53.4 million shares of our common stock,
based on a limit of 15% of the outstanding shares of common stock on the date of approval, in the open market,
at a minimum price of $1.00 per share and a maximum price of $500.00 per share. This is in addition to amounts previously purchased under the prior
program.programs. From authorization of the previous
program in May 2010programs through December 31,
2013,2014, we have purchased approximately
3.76.2 million shares of our common stock in the open market at an average price of
$63.04$79.16 per share. We purchased
1.22.5 million shares of common stock
at an average price of $103.67 per share during the year ended December 31, 2014 and 1.2 million shares 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, 2012.2013. As of December 31,
2013,2014, approximately
2.31.1 million shares of common stock remain available for repurchase under the
new 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
alsoagreement limits the amount we can spend on share repurchases in any year and may prevent repurchases in certain circumstances. As of December 31,
2013,2014, approximately
$55$225 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 distributionspin-off of Residential and AAMC to our shareholders. See “Separation of the Residential Asset Businesses” in Item 1 of Part I, “Business.”
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. 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
10ten shares of Altisource common stock
heldheld; and
·
cash in lieu of fractional Residential and AAMC shares.
Residential is focused on acquiring and managing single family rental properties by acquiring
portfolios of sub-performing and non-performing residential mortgage loans
as well as single family homes at or following the foreclosure sale throughout the United States. AAMC provides asset management and certain corporate governance services to Residential. We
are providingprovide property management, lease management and renovation management services to Residential. Prior to the separation, we capitalized Residential with $100 million of cash and AAMC with $5 million of 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 were development stage companies and had not yet commenced operations at the time of separation, these entities had no historical results of operations. We do 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.
25
Table of Contents
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 | |
|
| | | | | | | | | | | | |
| (in thousands) | | Residential | | AAMC | | Total |
| | | | | | | |
| Cash | | $ | 100,000 |
| | $ | 5,000 |
| | $ | 105,000 |
|
| | | | | | | |
| Reduction in Altisource retained earnings | | $ | 100,000 |
| | $ | 5,000 |
| | $ | 105,000 |
|
Correction of Immaterial Errors
As previously disclosed, during 2014 we determined that while we properly identified our related parties in previously issued financial statements, disclosures of certain immaterial related party expenses were omitted. We have corrected the previously presented disclosures of related party expenses in Note 4 - Transactions with Related Parties and on the face of the consolidated statements of operations for the years ended December 31, 2013 and 2012. The impact of correcting these items in the notes to the consolidated financial statements had the effect of:
increasing the amounts disclosed as related party cost of revenue from Ocwen by $20.0 million and $13.5 million for the years ended December 31, 2013 and 2012, respectively;
increasing the amounts disclosed as selling, general and administrative expenses (“SG&A”) from Ocwen billings to Altisource by $1.7 million and $0.7 million for the years ended December 31, 2013 and 2012, respectively;
decreasing the amounts disclosed as SG&A from Altisource billings to Ocwen by $0.1 million and less than $0.1 million for the years ended December 31, 2013 and 2012, respectively; and
decreasing the amounts disclosed as SG&A from Altisource billings to AAMC by $0.5 million for the year ended December 31, 2013 (no adjustment for the year ended December 31, 2012).
Correcting these items on the face of the consolidated statements of operations resulted in the disclosure of related party cost of revenue of $20.0 million and $13.5 million for the years ended December 31, 2013 and 2012, respectively, and a decrease in previously disclosed related party SG&A by $2.4 million and $3.0 million for the years ended December 31, 2013 and 2012, respectively.
In accordance with the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) Topic 250, Accounting Changes and Error Corrections, the Company evaluated the effect of the disclosure and presentation errors on its previously issued annual and quarterly financial statements, both qualitatively and quantitatively, and concluded that the related party disclosures in the Company’s previously issued annual and quarterly financial statements are not materially misstated.
Factors
affecting comparabilityAffecting Comparability
The following
additional items may impact the comparability of our results:
·
The average number of loans serviced by Ocwen on REALServicing totaled 1.2was 2.2 million for the year ended December 31, 20132014 compared to 0.71.2 million and 0.50.7 million for the years ended December 31, 20122013 and 2011,2012, respectively. The average number of delinquent non-Government-Sponsored Enterprise (“non-GSE”)non-GSE loans serviced by Ocwen on REALServicing totaled 296was 352 thousand for the year ended December 31, 20132014 compared to 211296 thousand and 137211 thousand for the years ended December 31, 2013 and 2012, respectively;
On November 21, 2014, we acquired Owners.com, a leading self-directed online real estate marketplace, for an initial purchase price of $19.8 million plus contingent earn out consideration of up to an additional $7.0 million over two years, subject to Owners.com achieving annual performance targets;
In the fourth quarter of 2014, we discontinued our lender placed insurance brokerage line of business;
On September 12, 2014, we completed the acquisition of Mortgage Builder, a provider of mortgage loan origination and
2011, respectively;·servicing software systems, for an initial purchase price of $15.7 million plus contingent earn out consideration of up to an additional $7.0 million over three years, subject to Mortgage Builder achieving annual performance targets;
Bad debt expense increased during 2014, driven primarily from the default management services business. A change in our customers’ business model and fourth quarter 2014 discussions with these customers led us to believe that a portion of the accounts receivable balance is no longer collectible;
On November 15, 2013, we acquired Equator for an initial purchase price of $63.4 million plus contingent
earn out consideration of up to an additional $80 million over three years, subject to Equator achieving annual performance
targets;·On March 29, 2013, we completedtargets. During 2014, the acquisitionfair value of the Homeward fee-based businesses from Ocwen forEquator contingent consideration was reduced by $37.9 million with a corresponding increase in earnings. As a result of the adjustment in the fair value of the Equator contingent consideration, we determined that the Equator goodwill was impaired and recorded an aggregate purchase priceestimated impairment loss of $75.8$37.5 million in 2014. The net impact on earnings was an increase of $0.5 million;
·
On April 12, 2013, we completed the
ResCapResidential Capital, LLC (“ResCap”) fee-based business transaction with Ocwen for an aggregate purchase price of $128.8 million;
·
On March 29, 2013, we completed the acquisition of the Homeward Residential Capital, Inc. (“Homeward”) fee-based businesses from Ocwen for an aggregate purchase price of $75.8 million; and
In November 2012, we borrowed
$200$200.0 million under a senior secured term loan agreement and increased our borrowings to
$400$400.0 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.
On August 1, 2014, we amended our senior secured term loan agreement and increased our borrowings by $200.0 million to $594.5 million. Interest expense totaled
$20.3$23.4 million for the year ended December 31,
20132014 compared to
$20.3 million and $1.2 million for
the year ended December 31, 2012 (no comparative amount in 2011);·We repurchased 1.2 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, 2013 and 2012, and 2011, respectively;
·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 and
·In July 2011, we acquired the assembled workforce of Tracmail, a sub-contractor in India that performs asset recovery services.
26
respectively.
CONSOLIDATED RESULTS OF OPERATIONS
Summary Consolidated Results
Following is a discussion of our consolidated results of operations for the years ended December 31, 2014, 2013 2012 and 2011.2012. 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 on our results of operations for the years ended December 31:
(in thousands, except per share data) | | 2013 | | % Increase
(decrease) | | 2012 | | % Increase
(decrease) | | 2011 | |
| | | | | | | | | | | |
Service revenue | | | | | | | | | | | |
Mortgage Services | | $ | 490,333 | | 39 | | $ | 351,908 | | 56 | | $ | 224,942 | |
Financial Services | | 92,479 | | 45 | | 63,979 | | (8 | ) | 69,231 | |
Technology Services | | 103,891 | | 40 | | 74,189 | | 32 | | 56,094 | |
Eliminations | | (24,644 | ) | (6 | ) | (23,147 | ) | (49 | ) | (15,509 | ) |
| | 662,059 | | 42 | | 466,929 | | 39 | | 334,758 | |
Reimbursable expenses | | 102,478 | | 7 | | 96,147 | | 17 | | 82,074 | |
Non-controlling interests | | 3,820 | | (28 | ) | 5,284 | | (23 | ) | 6,855 | |
Total revenue | | 768,357 | | 35 | | 568,360 | | 34 | | 423,687 | |
Cost of revenue | | 492,480 | | 34 | | 366,201 | | 33 | | 275,849 | |
Gross profit | | 275,877 | | 36 | | 202,159 | | 37 | | 147,838 | |
Selling, general and administrative expenses | | 113,810 | | 52 | | 74,712 | | 20 | | 62,131 | |
Income from operations | | 162,067 | | 27 | | 127,447 | | 49 | | 85,707 | |
Other income (expense), net: | | | | | | | | | | | |
Interest expense | | (20,291 | ) | N/M | | (1,210 | ) | N/M | | (85 | ) |
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 | | 142,333 | | 14 | | 124,649 | | 45 | | 85,910 | |
Income tax provision | | (8,540 | ) | 2 | | (8,738 | ) | (10 | ) | (7,943 | ) |
Net income | | 133,793 | | 15 | | 115,911 | | 49 | | 77,967 | |
Net income attributable to non-controlling interests | | (3,820 | ) | 28 | | (5,284 | ) | 23 | | (6,855 | ) |
| | | | | | | | | | | |
Net income attributable to Altisource | | $ | 129,973 | | 17 | | $ | 110,627 | | 56 | | $ | 71,112 | |
| | | | | | | | | | | |
Margins: | | | | | | | | | | | |
Gross profit/service revenue | | 42 | % | | | 43 | % | | | 44 | % |
Income from operations/service revenue | | 24 | % | | | 27 | % | | | 26 | % |
| | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | |
Basic | | $ | 5.63 | | 19 | | $ | 4.74 | | 62 | | $ | 2.92 | |
Diluted | | $ | 5.19 | | 17 | | $ | 4.43 | | 60 | | $ | 2.77 | |
|
| | | | | | | | | | | | | | | | | | |
| (in thousands, except per share data) | | 2014 | | % Increase (decrease) | | 2013 | | % Increase (decrease) | | 2012 |
| | | | | | | | | | | |
| Service revenue | | |
| | |
| | |
| | | | |
| Mortgage Services | | $ | 650,026 |
| | 33 |
| | $ | 490,333 |
| | 39 |
| | $ | 351,908 |
|
| Financial Services | | 98,312 |
| | 6 |
| | 92,479 |
| | 45 |
| | 63,979 |
|
| Technology Services | | 230,367 |
| | 122 |
| | 103,891 |
| | 40 |
| | 74,189 |
|
| Eliminations | | (40,026 | ) | | 62 |
| | (24,644 | ) | | 6 |
| | (23,147 | ) |
| | | 938,679 |
| | 42 |
| | 662,059 |
| | 42 |
| | 466,929 |
|
| Reimbursable expenses | | 137,634 |
| | 34 |
| | 102,478 |
| | 7 |
| | 96,147 |
|
| Non-controlling interests | | 2,603 |
| | (32 | ) | | 3,820 |
| | (28 | ) | | 5,284 |
|
| Total revenue | | 1,078,916 |
| | 40 |
| | 768,357 |
| | 35 |
| | 568,360 |
|
| Cost of revenue | | 707,180 |
| | 44 |
| | 492,480 |
| | 34 |
| | 366,201 |
|
| Gross profit | | 371,736 |
| | 35 |
| | 275,877 |
| | 36 |
| | 202,159 |
|
| Selling, general and administrative expenses | | 201,282 |
| | 77 |
| | 113,810 |
| | 52 |
| | 74,712 |
|
| Income from operations | | 170,454 |
| | 5 |
| | 162,067 |
| | 27 |
| | 127,447 |
|
| Other income (expense), net: | | | | | | | | | | |
| Interest expense | | (23,363 | ) | | 15 |
| | (20,291 | ) | | N/M |
| | (1,210 | ) |
| Other income (expense), net | | 174 |
| | (69 | ) | | 557 |
| | 135 |
| | (1,588 | ) |
| Total other income (expense), net | | (23,189 | ) | | 18 |
| | (19,734 | ) | | N/M |
| | (2,798 | ) |
| Income before income taxes and non-controlling interests | | 147,265 |
| | 3 |
| | 142,333 |
| | 14 |
| | 124,649 |
|
| Income tax provision | | (10,178 | ) | | 19 |
| | (8,540 | ) | | (2 | ) | | (8,738 | ) |
| Net income | | 137,087 |
| | 2 |
| | 133,793 |
| | 15 |
| | 115,911 |
|
| Net income attributable to non-controlling interests | | (2,603 | ) | | (32 | ) | | (3,820 | ) | | (28 | ) | | (5,284 | ) |
| | | | | | | | | | | |
| Net income attributable to Altisource | | $ | 134,484 |
| | 3 |
| | $ | 129,973 |
| | 17 |
| | $ | 110,627 |
|
| | | | | | | | | | | |
| Margins: | | |
| | |
| | |
| | | | |
| Gross profit/service revenue | | 40 | % | | |
| | 42 | % | | | | 43 | % |
| Income from operations/service revenue | | 18 | % | | |
| | 24 | % | | | | 27 | % |
| | | | | | | | | | | |
| Earnings per share: | | | | | | | | | | |
| Basic | | $ | 6.22 |
| | 10 |
| | $ | 5.63 |
| | 19 |
| | $ | 4.74 |
|
| Diluted | | $ | 5.69 |
| | 10 |
| | $ | 5.19 |
| | 17 |
| | $ | 4.43 |
|
We recognized service revenue of
$938.7 million, $662.1 million
$466.9 million and
$334.8$466.9 million for the years ended December 31,
2014, 2013
2012 and
2011,2012, respectively. The
continued growth in service revenue over the three year period was primarily driven by Ocwen’s
continued growth,
expansion of serviceshigher auction mix for houses sold on Hubzu, revenue from Equator which we
provide to the loansacquired in
Ocwen’s servicing portfolioNovember 2013 and growth in our Financial Services business from new customer relationship management
customerscustomers. These increases were partially offset by (1) a decline in the default management services business driven by lower levels of foreclosure starts and
in(2) the fourth quarter of 2013
expansionloss of
our charge-off mortgage collection services.27
an origination management services customer which eliminated its affinity relationship with Altisource and its other similar vendor partners.
The increase in revenue from reimbursable expenses during the three year period is due primarily to the growth of Ocwen’s loan servicing portfolio, although reimbursable expenses can vary significantly from
yearperiod to
yearperiod based on the mix of services ordered.
Certain of our revenues are impacted by seasonality. More specifically, Mortgage Services’ revenue is impacted by REO sales and lawn maintenance, which tend to be at their lowest level during the fall and winter months and highest during spring and summer months. Financial Services’ asset recovery management 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.
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 telecommunications expenses
as well asand depreciation and amortization of operating assets.
We recognized cost of revenue of $707.2 million, $492.5 million $366.2 million and $275.8$366.2 million for the years ended December 31, 2014, 2013 2012 and 2011,2012, respectively. The increase in cost of revenue during the three year period is primarily attributable to revenue growth during the growth in Ocwen’s loan servicing portfoliosame period and higher costs in our Technology Services segment as we continue to investthe increased investment in the development of our next generation technologytechnology. However, our 2014 cost structure is not in line with our current vision and infrastructureexpected growth. Recognizing that our business with Ocwen is not expected to support our growth. Additionally, we have been carrying excess staffgrow in the Mortgage Services segment since late 2012 in anticipationnear term due to challenges faced by Ocwen, we developed and are executing on a plan that includes eliminating certain non-revenue generating businesses, reducing vendor costs and eliminating staff to realign our expenses for this new reality.
Gross profit increased to $371.7 million, representing 40% of
service revenue, for the
ResCapyear ended December 31, 2014 compared to $275.9 million, representing 42% of service revenue, for the year ended December 31, 2013 and
Homeward non-GSE loans,$202.2 million, representing 43% of service revenue, for the
majority of which were boarded in 2013.year ended December 31, 2012. Gross profit as a percentage of service revenue declined in 2014 from a shift in revenue across segments with higher growth in the lower margin Technology Services segment. Margin expansion in the Mortgage Services segment was 42%, 43% and 44% for the years ended December 31, 2013, 2012 and 2011, respectively. Thepartially offset by margin decreases in the other segments. In the Mortgage Services segment, we expanded our gross profit margin percentages during this period areby fully utilizing employees that we were carrying in 2013 in anticipation of new business and performing certain services with our employees that were previously performed by outside vendors. In the Financial Services segment, the gross profit margin decline was driven by revenue mix as the higher margin mortgage charge-off collections business represented a lower percentage of revenue in the Financial Services segment in 2014. In the Technology Services segment, gross profit margin decreased primarily attributabledue to our continued investment in our technology to support our growth, partially offset by higher gross profit margin in the mix of service revenue, the timing of investments in new services and technology and the timing of boarding new loans.Equator business. In 2013, we experienced higher growth in the lower 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 continuedue to investinvesting in the development of our next generation technology to support our growth initiatives, partially offset by improved performance in our Financial Services segment from the growth of higher margin mortgage charge-off and customer relationship management services. In 2012, we reported higher costs in our 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,
compliance, human resources, vendor management, risk and operational effectiveness
and marketing roles. This category also includes occupancy costs, professional fees
and depreciation
on non-operating assets and amortization of intangible assets.
We recognized SG&A of
$201.3 million, $113.8 million
$74.7 million and
$62.1$74.7 million for the years ended December 31,
2014, 2013
2012 and
2011,2012, 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, andwas primarily driven by higher marketing costs
primarily related to
Hubzu. In 2013,Hubzu and increased amortization
expense was $23.1 million higher than 2012of intangible assets primarily from the
2013 Homeward, ResCap and Equator
transactions. In 2012, we reported higher professional services primarily from expenses incurred in connection with the Separation of the Residential Asset Businesses.Income from operations as a percentage of service revenue was 24%, 27%acquisitions which closed on March 29, 2013, April 12, 2013 and 26%November 15, 2013, respectively. Marketing costs were $24.1 million, $5.0 million and $2.5 million for the years ended December 31, 2014, 2013 and 2012, respectively. Amortization expense was $37.7 million, $28.2 million and 2011,$5.0 million for the years ended December 31, 2014, 2013 and 2012, respectively. IncomeSG&A also increased from operations ashigher compensation expense and related employee and occupancy costs from increased headcount to support growth and higher legal and compliance related costs. Bad debt expense increased for the year ended December 31, 2014 by $13.7 million, driven primarily from the default management services business. A change in our customers’ business model and fourth quarter 2014 discussions with these customers led us to believe that a percentageportion of service revenue declinedthe accounts receivable balance is no longer collectible.
The liability for contingent consideration is reflected at fair value and adjusted each reporting period with the change in 2013 comparedfair value recognized in earnings. During 2014, the fair value of the contingent consideration related to 2012 asthe Equator acquisition was reduced by $37.9 million with a corresponding increase in earnings based on management’s revised estimates that expected earnings of
Equator will be lower than projected at the time of acquisition. As a result of the mixadjustment in the fair value of the Equator contingent consideration and based on our goodwill assessment, we determined that the Equator goodwill was impaired and recorded an impairment loss of $37.5 million for the year ended December 31, 2014.
The following table presents the impact of the change in the fair value of the Equator contingent consideration (“Equator Earn Out”) and Equator goodwill impairment for the year ended December 31, 2014 and are included in SG&A in the consolidated statements of operations:
|
| | | | |
| (in thousands) | | |
| | | |
| Change in the fair value of Equator Earn Out | | $ | (37,924 | ) |
| Goodwill impairment | | 37,473 |
|
| | | |
| | | $ | (451 | ) |
Our 2014 cost structure is not in line with our current vision and expected growth. Recognizing that our business with Ocwen is not expected to grow in the near term due to challenges faced by Ocwen, we developed and are executing on a plan that includes reducing vendor costs and eliminating staff to realign our expenses for this new reality.
Income from operations increased to $170.5 million, representing 18% of service revenue,
for the year ended December 31, 2014 compared to $162.1 million, representing 24% of service revenue, for the year ended December 31, 2013 and $127.4 million, representing 27% of service revenue, for the year ended December 31, 2012. The decrease in operating income margin is primarily driven by higher growth in lower margin services, the timing of investments in new services,
and technology, the timing of boarding new loans,
andhigher Hubzu marketing costs, increases in
the amortization
expense fromof intangible assets recorded in connection with the Homeward,
ResCap and
ResCap fee-based businessEquator acquisitions and the
Equator acquisition. Income from operationsother increases in SG&A, as
a percentage of service revenue increased in 2012 compared to 2011 because SG&A grew at a slower pace than service revenue, partially offset by costs associated with the Separation of the Residential Asset Businesses.discussed above.
Other Income (Expense), net
Other income (expense), net principally includes interest expense and interest income. Interest expense for the year ended December 31,
2014 was $23.4 million, an increase of $3.1 million compared to the year ended December 31, 2013
increasedresulting from the additional $200.0 million senior secured term loan borrowings on August 1, 2014 and the additional $200.0 million senior secured term loan borrowings on May 7, 2013, partially offset by
lower interest rates from the senior secured term loan refinancing on December 9, 2013. Interest expense for the year ended December 31, 2013 was $20.3 million, an increase of $19.1 million compared to the year ended December 31, 2012
resulting from the
28
Table of Contents
initial senior secured term loan borrowedborrowing in the fourth quarter of 2012 (no comparative amount in 2011).and the additional $200.0 million senior secured term loan borrowings on May 7, 2013. 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, 2014. Additionally, we recognized interest income of $0.9 million and $0.2 million for the years ended December 31, 2013 and 2012, (no comparative amount in 2011)respectively, primarily from a fourth quarter 2012 $75.0 million loan to Ocwen. Ocwen, which was repaid the loan in February 2013.
We recognized an income tax provision of
$10.2 million, $8.5 million
$8.7 million and
$7.9$8.7 million for the years ended December 31,
in2014, 2013
2012 and
2011,2012, respectively. Our effective tax rate was
6.0%6.9%,
7.0%6.0% and
9.2%7.0% for the years ended December 31,
2014, 2013
2012 and
2011,2012, respectively. The effective tax rate in all three periods differs from the Luxembourg statutory tax rate (29.2% in
2014, 29.2% in 2013 and 28.8% in
2012 and 2011)2012) primarily
because ofdue to the effect of
certain deductions in Luxembourg from a
favorable tax ruling,
which expires in
Luxembourg2019 unless extended or renewed, and the mix of income and losses with varying tax rates in multiple taxing jurisdictions.
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.
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 and 2011.segments. Transactions between segments are accounted for as third party arrangements for purposes of presenting segment results of 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, weservices. We reflect these as service revenue in the Technology Services segment and technology and telecommunications expense within cost of revenue and SG&A in the segment receiving the services.
Consulting services are reflected in outside fees and services 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, 2013 | |
| | | | | | | | Corporate | | | |
| | Mortgage | | Financial | | Technology | | Items and | | Consolidated | |
(in thousands) | | Services | | Services | | Services | | Eliminations | | Altisource | |
| | | | | | | | | | | |
Revenue | | | | | | | | | | | |
Service revenue | | $ | 490,333 | | $ | 92,479 | | $ | 103,891 | | $ | (24,644 | ) | $ | 662,059 | |
Reimbursable expenses | | 101,999 | | 479 | | — | | — | | 102,478 | |
Non-controlling interests | | 3,820 | | — | | — | | — | | 3,820 | |
| | 596,152 | | 92,958 | | 103,891 | | (24,644 | ) | 768,357 | |
Cost of revenue | | 374,713 | | 55,328 | | 84,538 | | (22,099 | ) | 492,480 | |
Gross profit | | 221,439 | | 37,630 | | 19,353 | | (2,545 | ) | 275,877 | |
Selling, general and administrative expenses | | 46,515 | | 15,571 | | 12,442 | | 39,282 | | 113,810 | |
Income from operations | | 174,924 | | 22,059 | | 6,911 | | (41,827 | ) | 162,067 | |
Other income (expense), net | | (136 | ) | (10 | ) | 7 | | (19,595 | ) | (19,734 | ) |
Income before income taxes and non-controlling interests | | $ | 174,788 | | $ | 22,049 | | $ | 6,918 | | $ | (61,422 | ) | $ | 142,333 | |
| | | | | | | | | | | |
Margins: | | | | | | | | | | | |
Gross profit/service revenue | | 45 | % | 41 | % | 19 | % | N/M | | 42 | % |
Income from operations/service revenue | | 36 | % | 24 | % | 7 | % | N/M | | 24 | % |
| | | | | | | | | | | |
Transactions with related parties: | | | | | | | | | | | |
Revenue | | $ | 423,969 | | $ | 27,591 | | $ | 50,527 | | $ | — | | $ | 502,087 | |
Selling, general and administrative expenses | | 86 | | — | | — | | 2,835 | | 2,921 | |
Other income | | — | | — | | — | | 773 | | 773 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | For the year ended December 31, 2014 |
| (in thousands) | | Mortgage
Services | | Financial
Services | | Technology
Services | | Corporate
Items and
Eliminations | | Consolidated
Altisource |
| | | | | | | | | | | |
| Revenue | | |
| | |
| | |
| | |
| | |
|
| Service revenue | | $ | 650,026 |
| | $ | 98,312 |
| | $ | 230,367 |
| | $ | (40,026 | ) | | $ | 938,679 |
|
| Reimbursable expenses | | 137,447 |
| | 187 |
| | — |
| | — |
| | 137,634 |
|
| Non-controlling interests | | 2,603 |
| | — |
| | — |
| | — |
| | 2,603 |
|
| | | 790,076 |
| | 98,499 |
| | 230,367 |
| | (40,026 | ) | | 1,078,916 |
|
| Cost of revenue | | 484,512 |
| | 64,338 |
| | 194,301 |
| | (35,971 | ) | | 707,180 |
|
| Gross profit | | 305,564 |
| | 34,161 |
| | 36,066 |
| | (4,055 | ) | | 371,736 |
|
| Selling, general and administrative expenses | | 94,678 |
| | 18,791 |
| | 31,950 |
| | 55,863 |
| | 201,282 |
|
| Income from operations | | 210,886 |
| | 15,370 |
| | 4,116 |
| | (59,918 | ) | | 170,454 |
|
| Other income (expense), net | | 204 |
| | 62 |
| | (31 | ) | | (23,424 | ) | | (23,189 | ) |
| | | | | | | | | | | |
| Income before income taxes and non-controlling interests | | $ | 211,090 |
| | $ | 15,432 |
| | $ | 4,085 |
| | $ | (83,342 | ) | | $ | 147,265 |
|
| | | | | | | | | | | |
| Margins: | | | | | | | | | | |
| Gross profit/service revenue | | 47 | % | | 35 | % | | 16 | % | | N/M |
| | 40 | % |
| Income from operations/service revenue | | 32 | % | | 16 | % | | 2 | % | | N/M |
| | 18 | % |
| | | | | | | | | | | |
| Transactions with related parties: | | | | | | | | | | |
| Revenue | | $ | 544,255 |
| | $ | 27,064 |
| | $ | 95,481 |
| | $ | — |
| | $ | 666,800 |
|
| Cost of revenue | | 35,565 |
| | 188 |
| | 2,857 |
| | — |
| | 38,610 |
|
| Selling, general and administrative expenses | | 1,078 |
| | — |
| | 335 |
| | (1,681 | ) | | (268 | ) |
Table of Contents | | For the year ended December 31, 2012 | |
| | | | | | | | Corporate | | | |
| | Mortgage | | Financial | | Technology | | Items and | | Consolidated | |
(in thousands) | | Services | | Services | | Services | | Eliminations | | Altisource | |
| | | | | | | | | | | |
Revenue | | | | | | | | | | | |
Service revenue | | $ | 351,908 | | $ | 63,979 | | $ | 74,189 | | $ | (23,147 | ) | $ | 466,929 | |
Reimbursable expenses | | 95,604 | | 543 | | — | | — | | 96,147 | |
Non-controlling interests | | 5,284 | | — | | — | | — | | 5,284 | |
| | 452,796 | | 64,522 | | 74,189 | | (23,147 | ) | 568,360 | |
Cost of revenue | | 285,586 | | 46,737 | | 54,634 | | (20,756 | ) | 366,201 | |
Gross profit | | 167,210 | | 17,785 | | 19,555 | | (2,391 | ) | 202,159 | |
Selling, general and administrative expenses | | 25,099 | | 13,415 | | 8,888 | | 27,310 | | 74,712 | |
Income from operations | | 142,111 | | 4,370 | | 10,667 | | (29,701 | ) | 127,447 | |
Other 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 | |
| | | | | | | | | | | |
Margins: | | | | | | | | | | | |
Gross profit/service revenue | | 48 | % | 28 | % | 26 | % | N/M | | 43 | % |
Income from operations/service revenue | | 40 | % | 7 | % | 14 | % | N/M | | 27 | % |
| | | | | | | | | | | |
Transactions with related parties: | | | | | | | | | | | |
Revenue | | $ | 306,774 | | $ | 208 | | $ | 31,245 | | $ | — | | $ | 338,227 | |
Selling, general and administrative expenses | | 57 | | — | | — | | 2,373 | | 2,430 | |
Other income | | — | | — | | — | | 86 | | 86 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | For the year ended December 31, 2013 |
| (in thousands) | | Mortgage
Services | | Financial
Services | | Technology
Services | | Corporate
Items and
Eliminations | | Consolidated
Altisource |
| | | | | | | | | | | |
| Revenue | | |
| | |
| | |
| | |
| | |
|
| Service revenue | | $ | 490,333 |
| | $ | 92,479 |
| | $ | 103,891 |
| | $ | (24,644 | ) | | $ | 662,059 |
|
| Reimbursable expenses | | 101,999 |
| | 479 |
| | — |
| | — |
| | 102,478 |
|
| Non-controlling interests | | 3,820 |
| | — |
| | — |
| | — |
| | 3,820 |
|
| | | 596,152 |
| | 92,958 |
| | 103,891 |
| | (24,644 | ) | | 768,357 |
|
| Cost of revenue | | 374,713 |
| | 55,328 |
| | 84,538 |
| | (22,099 | ) | | 492,480 |
|
| Gross profit | | 221,439 |
| | 37,630 |
| | 19,353 |
| | (2,545 | ) | | 275,877 |
|
| Selling, general and administrative expenses | | 46,515 |
| | 15,571 |
| | 12,442 |
| | 39,282 |
| | 113,810 |
|
| Income from operations | | 174,924 |
| | 22,059 |
| | 6,911 |
| | (41,827 | ) | | 162,067 |
|
| Other income (expense), net | | (136 | ) | | (10 | ) | | 7 |
| | (19,595 | ) | | (19,734 | ) |
| | | | | | | | | | | |
| Income before income taxes and non-controlling interests | | $ | 174,788 |
| | $ | 22,049 |
| | $ | 6,918 |
| | $ | (61,422 | ) | | $ | 142,333 |
|
| | | | | | | | | | | |
| Margins: | | | | | | | | | | |
| Gross profit/service revenue | | 45 | % | | 41 | % | | 19 | % | | N/M |
| | 42 | % |
| Income from operations/service revenue | | 36 | % | | 24 | % | | 7 | % | | N/M |
| | 24 | % |
| | | | | | | | | | | |
| Transactions with related parties: | | | | | | | | | | |
| Revenue | | $ | 423,969 |
| | $ | 27,591 |
| | $ | 50,527 |
| | $ | — |
| | $ | 502,087 |
|
| Cost of revenue | | 19,049 |
| | 826 |
| | 108 |
| | — |
| | 19,983 |
|
| Selling, general and administrative expenses | | 391 |
| | — |
| | 244 |
| | (66 | ) | | 569 |
|
| Interest income | | — |
| | — |
| | — |
| | 773 |
| | 773 |
|
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 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | For the year ended December 31, 2012 |
| (in thousands) | | Mortgage
Services | | Financial
Services | | Technology
Services | | Corporate
Items and
Eliminations | | Consolidated
Altisource |
| | | | | | | | | | | |
| Revenue | | |
| | |
| | |
| | |
| | |
|
| Service revenue | | $ | 351,908 |
| | $ | 63,979 |
| | $ | 74,189 |
| | $ | (23,147 | ) | | $ | 466,929 |
|
| Reimbursable expenses | | 95,604 |
| | 543 |
| | — |
| | — |
| | 96,147 |
|
| Non-controlling interests | | 5,284 |
| | — |
| | — |
| | — |
| | 5,284 |
|
| | | 452,796 |
| | 64,522 |
| | 74,189 |
| | (23,147 | ) | | 568,360 |
|
| Cost of revenue | | 285,586 |
| | 46,737 |
| | 54,634 |
| | (20,756 | ) | | 366,201 |
|
| Gross profit | | 167,210 |
| | 17,785 |
| | 19,555 |
| | (2,391 | ) | | 202,159 |
|
| Selling, general and administrative expenses | | 25,099 |
| | 13,415 |
| | 8,888 |
| | 27,310 |
| | 74,712 |
|
| Income from operations | | 142,111 |
| | 4,370 |
| | 10,667 |
| | (29,701 | ) | | 127,447 |
|
| Other 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 |
|
| | | | | | | | | | | |
| Margins: | | | | | | | | | | |
| Gross profit/service revenue | | 48 | % | | 28 | % | | 26 | % | | N/M |
| | 43 | % |
| Income from operations/service revenue | | 40 | % | | 7 | % | | 14 | % | | N/M |
| | 27 | % |
| | | | | | | | | | | |
| Transactions with related parties: | | | | | | | | | | |
| Revenue | | $ | 306,774 |
| | $ | 208 |
| | $ | 31,245 |
| | $ | — |
| | $ | 338,227 |
|
| Cost of revenue | | 13,330 |
| | 88 |
| | 51 |
| | — |
| | 13,469 |
|
| Selling, general and administrative expenses | | 84 |
| | — |
| | 370 |
| | (996 | ) | | (542 | ) |
| Interest income | | — |
| | — |
| | — |
| | 86 |
| | 86 |
|
Revenue by service line was as follows for the years ended December 31:
(in thousands) | | 2013 | | % Increase
(decrease) | | 2012 | | % Increase
(decrease) | | 2011 | |
| | | | | | | | | | | |
Service revenue | | | | | | | | | | | |
Asset management services | | $ | 197,999 | | 84 | | $ | 107,480 | | 65 | | $ | 64,975 | |
Insurance services | | 119,835 | | 40 | | 85,601 | | 52 | | 56,496 | |
Residential property valuation | | 103,300 | | 29 | | 80,322 | | 55 | | 51,785 | |
Default management services | | 41,812 | | (17 | ) | 50,224 | | 52 | | 32,975 | |
Origination management services | | 27,387 | | (3 | ) | 28,281 | | 51 | | 18,711 | |
Total service revenue | | 490,333 | | 39 | | 351,908 | | 56 | | 224,942 | |
| | | | | | | | | | | |
Reimbursable expenses: | | | | | | | | | | | |
Asset management services | | 96,944 | | 4 | | 92,992 | | 22 | | 76,511 | |
Default management services | | 3,177 | | N/M | | 426 | | (88 | ) | 3,497 | |
Insurance services | | 1,647 | | (25 | ) | 2,186 | | N/M | | 116 | |
Origination management services | | 231 | | N/M | | — | | N/M | | — | |
Total reimbursable expenses | | 101,999 | | 7 | | 95,604 | | 19 | | 80,124 | |
| | | | | | | | | | | |
Non-controlling interests | | 3,820 | | (28 | ) | 5,284 | | (23 | ) | 6,855 | |
| | | | | | | | | | | |
Total revenue | | $ | 596,152 | | 32 | | $ | 452,796 | | 45 | | $ | 311,921 | |
| | | | | | | | | | | |
Transactions with related parties: | | | | | | | | | | | |
Asset management services | | $ | 264,350 | | 45 | | $ | 181,948 | | 33 | | $ | 136,685 | |
Residential property valuation | | 98,959 | | 35 | | 73,406 | | 51 | | 48,734 | |
Insurance services | | 42,483 | | 12 | | 37,849 | | 42 | | 26,733 | |
Default management services | | 16,452 | | 21 | | 13,548 | | 23 | | 11,032 | |
Origination management services | | 1,725 | | N/M | | 23 | | N/M | | — | |
| | | | | | | | | | | |
Total | | $ | 423,969 | | 38 | | $ | 306,774 | | 37 | | $ | 223,184 | |
|
| | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2014 | | % Increase (decrease) | | 2013 | | % Increase (decrease) | | 2012 |
| | | | | | | | | | | |
| Service revenue: | | |
| | |
| | | | | | |
| Asset management services | | $ | 356,433 |
| | 80 |
| | $ | 197,999 |
| | 84 |
| | $ | 107,480 |
|
| Insurance services | | 154,830 |
| | 29 |
| | 119,835 |
| | 40 |
| | 85,601 |
|
| Residential property valuation | | 101,173 |
| | (2 | ) | | 103,300 |
| | 29 |
| | 80,322 |
|
| Default management services | | 22,728 |
| | (46 | ) | | 41,812 |
| | (17 | ) | | 50,224 |
|
| Origination management services | | 14,862 |
| | (46 | ) | | 27,387 |
| | (3 | ) | | 28,281 |
|
| Total service revenue | | 650,026 |
| | 33 |
| | 490,333 |
| | 39 |
| | 351,908 |
|
| | | | | | | | | | | |
| Reimbursable expenses: | | | | | | | | | | |
| Asset management services | | 130,864 |
| | 35 |
| | 96,944 |
| | 4 |
| | 92,992 |
|
| Insurance services | | 4,408 |
| | 168 |
| | 1,647 |
| | (25 | ) | | 2,186 |
|
| Default management services | | 2,032 |
| | (36 | ) | | 3,177 |
| | N/M |
| | 426 |
|
| Origination management services | | 143 |
| | (38 | ) | | 231 |
| | N/M |
| | — |
|
| Total reimbursable expenses | | 137,447 |
| | 35 |
| | 101,999 |
| | 7 |
| | 95,604 |
|
| | | | | | | | | | | |
| Non-controlling interests | | 2,603 |
| | (32 | ) | | 3,820 |
| | (28 | ) | | 5,284 |
|
| | | | | | | | | | | |
| Total revenue | | $ | 790,076 |
| | 33 |
| | $ | 596,152 |
| | 32 |
| | $ | 452,796 |
|
| | | | | | | | | | | |
| Revenue from related parties: | | | | | | | | | | |
| Asset management services | | $ | 374,495 |
| | 42 |
| | $ | 264,350 |
| | 45 |
| | $ | 181,948 |
|
Insurance services
| | 54,979 |
| | 29 |
| | 42,483 |
| | 12 |
| | 37,849 |
|
Residential property valuation
| | 97,448 |
| | (2 | ) | | 98,959 |
| | 35 |
| | 73,406 |
|
| Default management services | | 15,339 |
| | (7 | ) | | 16,452 |
| | 21 |
| | 13,548 |
|
| Origination management services | | 1,994 |
| | 16 |
| | 1,725 |
| | N/M |
| | 23 |
|
| | | | | | | | | | | |
| Total revenue from related parties | | $ | 544,255 |
| | 28 |
| | $ | 423,969 |
| | 38 |
| | $ | 306,774 |
|
We recognized service revenue of $650.0 million for the year ended December 31, 2014, a 33% increase compared to the year ended December 31, 2013. The growth in asset management services and insurance services was primarily due to Ocwen’s growth as loans from its servicing acquisitions are boarded on REALServicing. The growth in asset management services is also from the higher auction mix of houses sold on Hubzu. Growth in the insurance services business was partially offset by the discontinuation of the lender placed insurance brokerage line of business in the fourth quarter of 2014. The decline in default management services revenue was driven primarily by lower levels of foreclosure starts. The lower origination management services revenue was primarily due to the loss of a customer in the fourth quarter of 2013 who eliminated its affinity relationship with Altisource and its other similar vendor partners along with a close to 40% decline in U.S. origination volume.
We 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.
TheThis growth in all
of the business lines, except default management services and origination management services,
is primarilywas driven by Ocwen’s growth as loans from its servicing platform acquisitions
arewere boarded on REALServicing. During 2013, we assisted Ocwen with the boarding of 1.1 million loans onto REALServicing from Ocwen’s acquisitions of Homeward
ResCapand ResCap’s platforms and OneWest Bank
FSBFSB’s servicing rights.
Typically, the initial services ordered immediately following loan boardings areThe lower margin property inspection and preservation services, which
isimmediately follow loan boarding, were a significant driver of the 84% growth
ofin 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
reflectsreflected Ocwen’s larger loan portfolio, but
doesn’t yetdid not reflect the normalized referral volume we
expectexpected from the new portfolios. Default management services revenue was lower as one of Ocwen’s subservicing customers
is continuingcontinued 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
arewere being placed on hold for modification
31
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, was driven by the growth in Ocwen’s loan servicing portfolio and expansion in services provided. A portion of the growth is from a higher capture rate of REO sales on Hubzu sold through auction resulting in a higher percentage commission and an increase in the average REO sales price. The higher origination management services revenue in 2012 is due 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 were 271 members, 241 members and 214 members, respectively.
Certain of our 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:
(in thousands) | | 2013 | | % Increase
(decrease) | | 2012 | | % Increase
(decrease) | | 2011 | |
| | | | | | | | | | | |
Compensation and benefits | | $ | 64,644 | | 20 | | $ | 53,842 | | 44 | | $ | 37,264 | |
Outside fees and services | | 187,139 | | 61 | | 116,323 | | 57 | | 73,888 | |
Reimbursable expenses | | 101,999 | | 7 | | 95,604 | | 19 | | 80,124 | |
Technology and telecommunications | | 19,150 | | 3 | | 18,509 | | 82 | | 10,150 | |
Depreciation and amortization | | 1,781 | | 36 | | 1,308 | | 115 | | 609 | |
| | | | | | | | | | | |
Cost of revenue | | $ | 374,713 | | 31 | | $ | 285,586 | | 41 | | $ | 202,035 | |
|
| | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2014 | | % Increase (decrease) | | 2013 | | % Increase (decrease) | | 2012 |
| | | | | | | | | | | |
| Compensation and benefits | | $ | 76,125 |
| | 18 |
| | $ | 64,644 |
| | 20 |
| | $ | 53,842 |
|
| Outside fees and services | | 238,195 |
| | 27 |
| | 187,139 |
| | 61 |
| | 116,323 |
|
| Reimbursable expenses | | 137,447 |
| | 35 |
| | 101,999 |
| | 7 |
| | 95,604 |
|
| Technology and telecommunications | | 30,305 |
| | 58 |
| | 19,150 |
| | 3 |
| | 18,509 |
|
| Depreciation and amortization | | 2,440 |
| | 37 |
| | 1,781 |
| | 36 |
| | 1,308 |
|
| | | | | | | | | | | |
| Cost of revenue | | $ | 484,512 |
| | 29 |
| | $ | 374,713 |
| | 31 |
| | $ | 285,586 |
|
Cost of revenue for the year ended December 31, 2014 of $484.5 million increased by 29% compared to the year ended December 31, 2013, primarily driven by the growth of Ocwen's loan servicing portfolio on REALServicing. The overall increase in cost of revenue was consistent with the increase in service revenue. However, compensation and benefits cost and outside fees and services expense as a percentage of service revenue decreased as we experienced the benefit of our workforce efficiency initiatives on higher referral volumes and transitioned the performance of certain services to lower cost geographies as well as vendor cost initiatives.
Cost of revenue for the year ended December 31, 2013 of $374.7 million increased by 31% compared to the year ended December 31, 2012, driven primarily by the growth of Ocwen’s loan servicing
portfolio.portfolio on REALServicing. 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
Gross profit increased to $305.6 million, representing 47% of
service revenue, for the year ended December 31,
20122014 compared to $221.4 million, representing 45% of
$285.6 million increased by 41% compared toservice revenue, for the year ended December 31,
2011,2013 and $167.2 million, representing 48% of service revenue, for the year ended December 31, 2012. We expanded our gross profit margin in 2014 by fully utilizing employees that we were carrying in 2013 in anticipation of new business and performing certain services with our employees that were previously performed by outside vendors. The increase in gross profit margin was also driven
primarily by the
growthimpact of
Ocwen’s loan servicing portfoliorevenue mix, partially offset by higher staff levels in our origination and
the development of closing and title services in 2011, new origination related services in 2012 and new rental property management
servicesbusinesses in
2012.Gross profit as a percentage of service revenue was 45%, 48% and 49%preparation for anticipated growth. In 2013, the years ended December 31, 2013, 2012 and 2011, respectively. The decreasesdecrease in gross margin percentages during this period arepercentage compared to 2012 was primarily attributable to revenue mix of services delivered and the timing of boarding new loans. In 2013, weWe 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
32
Table of Contents
service revenue were the mix of services provided, including growth of the lower margin origination related appraisals. We also incurred costs in 2012 to develop the rental property management business, including the Separation of the Residential Asset Businesses.
Our margins can vary substantially depending upon service revenue mix and when Ocwen acquires and boards servicing rights are acquired and boarded to REALServicing by Ocwen.onto REALServicing. Typically, compensation and benefits will increase in anticipation of a boarding as we hire and train personnel to deliver services in advance of the actual boarding of loans. Subsequently,Over time, these costs as a percentage of service revenue decline as we generate revenue with no increased costs and as we experience benefits from our workforce efficiency initiatives. When new loans are boarded by Ocwen onto REALServicing, for the initial months post-boarding, we tend to deliver an elevated level of lower margin valuationsresidential property valuation and property inspection and preservation services.
Selling, General and Administrative Expenses and Income from Operations
We recognized
SG&A expenses consist of $46.5 million, $25.1 million and $15.3 millionthe following for the years ended December 31:
|
| | | | | | | | | | | | | | | | | |
| (in thousands) | | 2014 | | % Increase (decrease) | | 2013 | | % Increase (decrease) | | 2012 |
| | | | | | | | | | | |
| Compensation and benefits | | $ | 1,726 |
| | 126 | | $ | 765 |
| | N/M |
| | $ | 77 |
|
| Professional services | | 8,295 |
| | N/M | | 1,661 |
| | (65 | ) | | 4,799 |
|
| Occupancy related costs | | 10,085 |
| | 8 | | 9,304 |
| | 3 |
| | 9,046 |
|
| Amortization of intangible assets | | 27,770 |
| | 32 | | 21,058 |
| | N/M |
| | 2,684 |
|
| Depreciation and amortization | | 2,031 |
| | 104 | | 994 |
| | 134 |
| | 425 |
|
| Marketing costs | | 23,777 |
| | N/M | | 4,907 |
| | 97 |
| | 2,489 |
|
| Other | | 20,994 |
| | 168 | | 7,826 |
| | 40 |
| | 5,579 |
|
| | |
| | | | | | | | |
| Selling, general and administrative expenses | | $ | 94,678 |
| | 104 | | $ | 46,515 |
| | 85 |
| | $ | 25,099 |
|
N/M — not meaningful.
SG&A for the year ended December 31, 2014 of $94.7 million increased by 104% compared to the year ended December 31, 2013, 2012primarily driven by marketing costs largely related to Hubzu, higher legal costs and 2011, respectively. The increasebad debt expense in 2014 and increased amortization of intangible assets recorded in connection with the acquisition of the Homeward and ResCap fee-based businesses. Bad debt expense increased in 2014 by $12.0 million, driven primarily from the default management services business. A change in our customers’ business model and fourth quarter 2014 discussions with these customers led us to believe that a portion of the accounts receivable balance is no longer collectible. SG&A fromfor the year ended December 31, 2013 of $46.5 million increased by 85% compared to the year ended December 31, 2012, to 2013 primarily relates to an $18.4 milliondriven by the increase in amortization expense from the 2013 acquisitions of the Homeward and ResCap fee-based businesses. In 2012, we incurredbusinesses partially offset by higher professional services costs primarily as a result of the Separation of the Residential Asset Businesses.Income from operations as a percentage of service revenue was 36%, 40% and 42% for the years ended December 31, 2013,incurred in 2012 and 2011, respectively. Income from operations as a percentage of service revenue declined in 2013 as a result of lower gross margins and higher amortization expense from the 2013 Homeward and ResCap fee-based business acquisitions. In 2012, income from operations as a percentage of service revenue declined as gross margins declined and SG&A grew at a higher pace than service revenue due to the 2012 costs associatedconnection with the Separation of the Residential Asset Businesses.
Income from operations increased to $210.9 million, representing 32% of service revenue, for the year ended December 31, 2014 compared to $174.9 million, representing 36% of service revenue, for the year ended December 31, 2013 and $142.1 million, representing 40% of service revenue, for the year ended December 31, 2012. The decrease in operating income margin is primarily driven by higher Hubzu marketing costs and increases in the amortization of intangible assets recorded in connection with the Homeward and ResCap fee-based business acquisitions and the other increases in SG&A, as discussed above. In 2014, the decrease in operating income margin was partially offset by the higher gross profit margin, as discussed above. In 2013, the operating income margin was impacted by lower gross profit margins and higher amortization expense.
Revenue by service line was as follows for the years ended December 31:
| | | | % Increase | | | | % Increase | | | |
(in thousands) | | 2013 | | (decrease) | | 2012 | | (decrease) | | 2011 | |
| | | | | | | | | | | |
Service revenue | | | | | | | | | | | |
Asset recovery management | | $ | 46,799 | | 58 | | $ | 29,582 | | (21 | ) | $ | 37,371 | |
Customer relationship management | | 45,680 | | 33 | | 34,397 | | 8 | | 31,860 | |
Total service revenue | | 92,479 | | 45 | | 63,979 | | (8 | ) | 69,231 | |
| | | | | | | | | | | |
Reimbursable expenses: | | | | | | | | | | | |
Asset recovery management | | 479 | | (12 | ) | 543 | | (72 | ) | 1,950 | |
Total reimbursable expenses | | 479 | | (12 | ) | 543 | | (72 | ) | 1,950 | |
| | | | | | | | | | | |
Total revenue | | $ | 92,958 | | 44 | | $ | 64,522 | | (9 | ) | $ | 71,181 | |
| | | | | | | | | | | |
Transactions with related parties: | | | | | | | | | | | |
Asset recovery management | | $ | 27,591 | | N/M | | $ | 208 | | (22 | ) | $ | 266 | |
|
| | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2014 | | % Increase
(decrease) | | 2013 | | % Increase
(decrease) | | 2012 |
| | | | | | | | | | | |
| Service revenue: | | |
| | |
| | | | | | |
| Customer relationship management | | $ | 51,411 |
| | 13 |
| | $ | 45,680 |
| | 33 |
| | $ | 34,397 |
|
| Asset recovery management | | 46,901 |
| | — |
| | 46,799 |
| | 58 |
| | 29,582 |
|
| Total service revenue | | 98,312 |
| | 6 |
| | 92,479 |
| | 45 |
| | 63,979 |
|
| | | | | | | | | | | |
| Reimbursable expenses: | | |
| | |
| | | | | | |
| Asset recovery management | | 187 |
| | (61 | ) | | 479 |
| | (12 | ) | | 543 |
|
| Total reimbursable expenses | | 187 |
| | (61 | ) | | 479 |
| | (12 | ) | | 543 |
|
| | | | | | | | | | | |
| Total revenue | | $ | 98,499 |
| | 6 |
| | $ | 92,958 |
| | 44 |
| | $ | 64,522 |
|
| | | | | | | | | | | |
| Revenue from related parties: | | |
| | |
| | | | | | |
| Asset recovery management | | $ | 27,064 |
| | (2 | ) | | $ | 27,591 |
| | N/M |
| | $ | 208 |
|
We recognized service revenue of $98.3 million for the year ended December 31, 2014, a 6% increase compared to the year ended December 31, 2013, primarily due to growth in the customer relationship management business from the addition of new clients and expansion of services provided to existing clients.
We recognized service revenue of $92.5 million for the year ended December 31, 2013, a 45% increase compared to the year ended December 31, 2012, primarily due to increased
mortgage 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
33
Table of Contents
from the continuing record low credit card delinquency rates. With respect to the mortgage 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.
AssetRevenue in the asset recovery management
revenuebusiness tends to be higher in the first quarter,
of each year as borrowers
may utilize tax refunds and bonuses to pay
debts.debts, and generally declines throughout the rest of the year.
Cost of Revenue and Gross Profit
Cost of revenue consists of the following for the years ended December 31:
| | | | % 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.
|
| | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2014 | | % Increase
(decrease) | | 2013 | | % Increase
(decrease) | | 2012 |
| | | | | | | | | | | |
| Compensation and benefits | | $ | 47,063 |
| | 13 |
| | $ | 41,800 |
| | 28 |
| | $ | 32,700 |
|
| Outside fees and services | | 3,361 |
| | (24 | ) | | 4,401 |
| | (21 | ) | | 5,598 |
|
| Reimbursable expenses | | 187 |
| | (61 | ) | | 479 |
| | (12 | ) | | 543 |
|
| Technology and telecommunications | | 12,277 |
| | 59 |
| | 7,704 |
| | 7 |
| | 7,221 |
|
| Depreciation and amortization | | 1,450 |
| | 54 |
| | 944 |
| | 40 |
| | 675 |
|
| | | | | | | | | | | |
| Cost of revenue | | $ | 64,338 |
| | 16 |
| | $ | 55,328 |
| | 18 |
| | $ | 46,737 |
|
Cost of revenue for the year ended December 31, 2014 of $64.3 million increased by 16% compared to the year ended December 31, 2013 primarily due to higher compensation and benefits costs and higher technology and telecommunications expense from investments in our IT infrastructure to support revenue growth. 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
compensation cost from an increase in the number of employees in the mortgage charge-off and customer relationship management
employeesbusinesses to support revenue growth. These increases in
connection with new business. These increasesboth years were partially offset by lower outside fees and
services.Costservices as we experienced the benefit of our vendor cost reduction initiatives.
Gross profit decreased to $34.2 million, representing 35% of service revenue, for the year ended December 31,
20122014 compared to $37.6 million, representing 41% of
$46.7 million decreased by 9% compared toservice revenue, for the year ended December 31,
2011, driven primarily by lower outside fees2013 and
services$17.8 million, representing 28% of service revenue, for the year ended December 31, 2012. In 2014, gross profit margin decreased 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. Subsequent to the acquisition, these costs have been recorded according to the nature of the expenses and are included in compensation and benefits andhigher technology and telecommunications
expenses (includedexpense from investments in
cost ofour IT infrastructure and an increase in employee costs due to increases in headcount to support revenue
) or occupancy related costsgrowth and
other (includeda slight shift in
SG&A).Gross profit as a percentage of service revenue was 41%, 28% and 29% for the years ended December 31, 2013, 2012 and 2011, respectively.mix. In 2013, gross profit as a percentage of service revenue increased due to growth of the higher margin mortgage charge-off and customer relationship management services. In 2012, gross profit as a percentage of service revenue remained flat compared to 2011 as we actively worked to manage our cost structure in that period of declining 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.
34
Selling, General and Administrative Expenses and Income from Operations
We recognized
SG&A expenses consist of $15.6 million, $13.4 million and $15.6 millionthe following for the years ended December 31, 2013, 2012 and 2011, respectively. 31: |
| | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2014 | | % Increase (decrease) | | 2013 | | % Increase (decrease) | | 2012 |
| | | | | | | | | | | |
| Compensation and benefits | | $ | 672 |
| | (38 | ) | | $ | 1,078 |
| | (9 | ) | | $ | 1,188 |
|
| Professional services | | 988 |
| | N/M |
| | 273 |
| | (80 | ) | | 1,374 |
|
| Occupancy related costs | | 7,193 |
| | 38 |
| | 5,220 |
| | (3 | ) | | 5,364 |
|
| Amortization of intangible assets | | 5,355 |
| | (9 | ) | | 5,889 |
| | 151 |
| | 2,346 |
|
| Depreciation and amortization | | 1,870 |
| | 126 |
| | 826 |
| | 34 |
| | 617 |
|
| Other | | 2,713 |
| | 19 |
| | 2,285 |
| | (10 | ) | | 2,526 |
|
| | | | | | | | | | | |
| Selling, general and administrative expenses | | $ | 18,791 |
| | 21 |
| | $ | 15,571 |
| | 16 |
| | $ | 13,415 |
|
N/M — not meaningful.
SG&A for the year ended December 31, 2014 of $18.8 millionincreased inby 21% compared to the year ended December 31, 2013, principally from a $3.8higher occupancy related costs driven by higher headcount and facility relocations. SG&A for the year ended December 31, 2013 of $15.6 million increase in increased by 16% compared to the year ended December 31, 2012, primarily driven by higher amortization expense from the 2013 acquisition of the ResCap fee-based businesses. In 2012, SG&A expenses decreased principally from lower costs as a result of shifting work in our global delivery platform and from lower depreciation and amortization expense related to assets no longer utilized by Financial Services.business.
Income from operations
was $15.4 million, representing 16% of service revenue, for the year ended December 31, 2014 compared to $22.1 million, representing 24% of service revenue, for the year ended December 31, 2013 and $4.4 million, representing 7% of service revenue, for the year ended December 31, 2012. The decrease in operating income as a percentage of service revenue
was 24%, 7%in 2014 is the result of lower gross profit margins and
6% for the years ended December 31, 2013, 2012 and 2011, respectively.an increase in SG&A as a percentage of service revenue, as discussed above. Income from operations as a percentage of service revenue increased in 2013
compared to 2012 due to higher gross margins and slower SG&A growth, despite the increase in amortization expense from the acquisition of the ResCap fee-based business.
In 2012, income from operations as a percentage of service revenue increased as lower SG&A more than offset decreased gross margins.
Revenue by service line was as follows for the years ended December 31:
| | | | % Increase | | | | % Increase | | | |
(in thousands) | | 2013 | | (decrease) | | 2012 | | (decrease) | | 2011 | |
| | | | | | | | | | | |
Revenue: | | | | | | | | | | | |
REALSuite and Equator | | $ | 67,319 | | 41 | | $ | 47,773 | | 25 | | $ | 38,336 | |
IT infrastructure services | | 36,572 | | 38 | | 26,416 | | 49 | | 17,758 | |
| | | | | | | | | | | |
Total revenue | | $ | 103,891 | | 40 | | $ | 74,189 | | 32 | | $ | 56,094 | |
| | | | | | | | | | | |
Transactions with related parties: | | | | | | | | | | | |
REALSuite and Equator | | $ | 34,032 | | 63 | | $ | 20,894 | | 38 | | $ | 15,165 | |
IT infrastructure services | | 16,495 | | 59 | | 10,351 | | 56 | | 6,647 | |
| | | | | | | | | | | |
Total | | $ | 50,527 | | 62 | | $ | 31,245 | | 43 | | $ | 21,812 | |
|
| | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2014 | | % Increase
(decrease) | | 2013 | | % Increase (decrease) | | 2012 |
| | | | | | | | | | | |
| Service revenue: | | |
| | |
| | | | |
| | |
| Software services | | $ | 154,402 |
| | 129 |
| | $ | 67,319 |
| | 41 |
| | $ | 47,773 |
|
| IT infrastructure services | | 75,965 |
| | 108 |
| | 36,572 |
| | 38 |
| | 26,416 |
|
| | | | | | | | | | | |
| Total revenue | | $ | 230,367 |
| | 122 |
| | $ | 103,891 |
| | 40 |
| | $ | 74,189 |
|
| | | | | | | | | | | |
| Revenue from related parties: | | | | | | | | | | |
Software services
| | $ | 53,114 |
| | 56 |
| | $ | 34,032 |
| | 63 |
| | $ | 20,894 |
|
| IT infrastructure services | | 42,367 |
| | 157 |
| | 16,495 |
| | 59 |
| | 10,351 |
|
| | | | | | | | | | | |
| Total | | $ | 95,481 |
| | 89 |
| | $ | 50,527 |
| | 62 |
| | $ | 31,245 |
|
We recognized service revenue of $230.4 million for the year ended December 31, 2014, a 122% increase compared to the year ended December 31, 2013, primarily driven by increases in software services as a result of the acquisition of Equator in November 2013, including recognition of acquisition related deferred revenues, increased licensing revenue from REALDoc and growth in Ocwen’s residential loan servicing portfolio on REALServicing. IT infrastructure services revenue also increased in 2014 due to an increase in headcount and costs at both Ocwen and Altisource, which are typically billed on a cost plus basis.
We recognized service revenue of $103.9 million for the year ended December 31, 2013, a 40% increase compared to the year ended December 31, 2012, primarily due to growth in software services related to Ocwen’s loan servicing portfolio on REALServicing. Revenue also increased in software services 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 the Technology Services segment. IT infrastructure
services revenue increased in 2013 due to an increase in costcosts to support strategic initiatives and headcount growth at both Ocwen and Altisource. IT infrastructure
For segment presentation purposes, revenue from 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 theprovided by 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 IT infrastructure services revenue in 2012 reflects the growth experienced by our Mortgage Services segment and by Ocwen.
Services provided to our other reportable segments areis eliminated in consolidation but areconsolidation. This inter-segment revenue is included as revenue in the Technology Services segment and as technology and telecommunications expense, a component of cost of revenue and SG&A, in our other reportable segments.
35
Cost of revenue consists of the following for the years ended December 31:
| | | | % Increase | | | | % Increase | | | |
(in thousands) | | 2013 | | (decrease) | | 2012 | | (decrease) | | 2011 | |
| | | | | | | | | | | |
Compensation and benefits | | $ | 50,368 | | 89 | | $ | 26,602 | | 71 | | $ | 15,519 | |
Outside fees and services | | 1,926 | | 14 | | 1,690 | | 132 | | 727 | |
Technology and telecommunications | | 20,546 | | 13 | | 18,159 | | 21 | | 14,994 | |
Depreciation and amortization | | 11,698 | | 43 | | 8,183 | | 45 | | 5,634 | |
| | | | | | | | | | | |
Cost of revenue | | $ | 84,538 | | 55 | | $ | 54,634 | | 48 | | $ | 36,874 | |
|
| | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2014 | | % Increase
(decrease) | | 2013 | | % Increase (decrease) | | 2012 |
| | | | | | | | | | | |
| Compensation and benefits | | $ | 132,701 |
| | 163 |
| | $ | 50,368 |
| | 89 |
| | $ | 26,602 |
|
| Outside fees and services | | 1,875 |
| | (3 | ) | | 1,926 |
| | 14 |
| | 1,690 |
|
| Technology and telecommunications | | 42,117 |
| | 105 |
| | 20,546 |
| | 13 |
| | 18,159 |
|
| Depreciation and amortization | | 17,608 |
| | 51 |
| | 11,698 |
| | 43 |
| | 8,183 |
|
| | | | | | | | | | | |
| Cost of revenue | | $ | 194,301 |
| | 130 |
| | $ | 84,538 |
| | 55 |
| | $ | 54,634 |
|
Cost of revenue for the year ended December 31, 2014 of $194.3 million increased by 130% compared to the year ended December 31, 2013, primarily due to the acquisition of Equator and the hiring of more and higher cost personnel to support the development of our next generation technologies. Technology and telecommunications costs were higher primarily as a result of the acquisition of Equator, the increase in employee headcount and the expansion of facilities. Depreciation and amortization increased as a result of deploying new hardware and software applications as well as the acquisition of Equator.
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
also 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.technologies. In addition, we acquired Equator
onin 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
Gross profit was $36.1 million, representing 16% of
service revenue, for the year ended December 31,
20122014 compared to $19.4 million, representing 19% of
$54.6 million increased by 48% compared toservice revenue, for the year ended December 31,
2011, driven primarily by hiring more2013 and
higher cost personnel to support the development of our next generation REALSuite software, increased technology and telecommunications costs from the addition of new facilities and the expansion of existing facilities. Outside fees and services increased in 2012 as a result of the increase in flood certification services provided to Lenders One members. Technology and telecommunications costs increased principally due to the addition of new facilities, expansion of existing facilities and increased licensing fees for software to support our growth.Gross profit as a percentage$19.6 million, representing 26% of service revenue, was 19%, 26% and 34% for the yearsyear ended December 31, 2013, 20122012. In 2014 and 2011, respectively. In 2013, gross profit as a percentage of service revenue declined as wedecreased due to our continued to investinvestment in the development of our next generation technologies. Gross profit as a percentagetechnology, partially offset by the acquisition of service revenue declined in 2012 as we experienced faster growth in the lowerhigher 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.
Equator business.
Selling, General and Administrative Expenses and Income from Operations
We recognized
SG&A expenses consist of $12.4 million, $8.9 million and $4.9 millionthe following for the years ended December 31:
|
| | | | | | | | | | | | | | | | | |
| (in thousands) | | 2014 | | % Increase (decrease) | | 2013 | | % Increase (decrease) | | 2012 |
| | | | | | | | | | | |
| Compensation and benefits | | $ | 5,938 |
| | N/M | | $ | 1,871 |
| | 76 |
| | $ | 1,062 |
|
| Professional services | | 686 |
| | 70 | | 404 |
| | 33 |
| | 304 |
|
| Occupancy related costs | | 12,250 |
| | 118 | | 5,610 |
| | 25 |
| | 4,495 |
|
| Amortization of intangible assets | | 4,555 |
| | N/M | | 1,229 |
| | N/M |
| | — |
|
| Depreciation and amortization | | 1,205 |
| | 58 | | 763 |
| | 167 |
| | 286 |
|
| Change in the fair value of Equator Earn Out | | (37,924 | ) | | N/M | | — |
| | N/M |
| | — |
|
| Goodwill impairment | | 37,473 |
| | N/M | | — |
| | N/M |
| | — |
|
| Other | | 7,767 |
| | N/M | | 2,565 |
| | (6 | ) | | 2,741 |
|
| | | | | | | | | | | |
| Selling, general and administrative expenses | | $ | 31,950 |
| | 157 | | $ | 12,442 |
| | 40 |
| | $ | 8,888 |
|
N/M — not meaningful.
SG&A for the year ended December 31, 2014 of $32.0 million increased by 157% compared to the year ended December 31, 2013, 2012primarily due to the acquisition of Equator, higher administrative employee costs and 2011, respectively. increased occupancy related costs driven by higher headcount and facility relocations as well as increased intangible asset amortization related to the Homeward and ResCap
fee-based business acquisitions and the Equator acquisition. The liability for contingent consideration is reflected at fair value and adjusted each reporting period with the change in fair value recognized in earnings. During 2014, the fair value of the contingent consideration related to the Equator acquisition was reduced by $37.9 million with a corresponding increase in earnings based on management’s revised estimates that expected earnings of Equator will be lower than projected at the time of acquisition. As a result of the adjustment in the fair value of the Equator contingent consideration and based on our goodwill assessment, we determined that the Equator goodwill was impaired and recorded an impairment loss of $37.5 million for the year ended December 31, 2014.
SG&A for the year ended December 31, 2013 of $12.4 millionincreased in 2013 principally from a $1.0 millionby 40% compared to the year ended December 31, 2012, primarily due to an 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 primarily due to an increase in occupancy costs.related costs driven by higher headcount.
Income from operations
as a percentagewas $4.1 million, representing 2% of service revenue,
was 7%, 14% and 26% for the
yearsyear ended December 31, 2014 compared to $6.9 million, representing 7% of service revenue, for the year ended December 31, 2013
2012 and
2011, respectively.$10.7 million, representing 14% of service revenue, for the year ended December 31, 2012. Income from operations as a percentage of service revenue decreased in
20132014 and
20122013 due to
lowerincreased employee and occupancy related costs and intangible asset amortization related to the Homeward and ResCap fee-based business acquisitions and the Equator acquisition and the impact of the decline in gross
profit margins,
and higher SG&A as
describeddiscussed above.
36
Corporate Items and Eliminations include
interest expense and costs
recognized by us related to corporate support functions including executive, finance, legal,
compliance, human resources, vendor management, risk
and operational effectiveness and
interest expense.marketing. It also includes eliminations of transactions between the
reportingreportable segments.
Corporate costs consist of the following for the years ended December 31: |
| | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2014 | | % Increase (decrease) | | 2013 | | % Increase (decrease) | | 2012 |
| | | | | | | | | | | |
| Compensation and benefits | | $ | 36,762 |
| | 52 |
| | $ | 24,150 |
| | 28 |
| | $ | 18,839 |
|
| Professional services | | 8,629 |
| | 52 |
| | 5,684 |
| | 68 |
| | 3,387 |
|
| Occupancy related costs | | 8,734 |
| | 5 |
| | 8,290 |
| | 61 |
| | 5,136 |
|
| Depreciation and amortization | | 2,442 |
| | 19 |
| | 2,050 |
| | 60 |
| | 1,281 |
|
| Other | | (704 | ) | | (21 | ) | | (892 | ) | | (33 | ) | | (1,333 | ) |
| | | | | | | | | | | |
| Selling, general and administrative expenses | | 55,863 |
| | 42 |
| | 39,282 |
| | 44 |
| | 27,310 |
|
| | | | | | | | | | | |
| Other expense, net | | 23,424 |
| | 20 |
| | 19,595 |
| | N/M |
| | 1,033 |
|
| | | | | | | | | | | |
| Total corporate costs | | $ | 79,287 |
| | 35 |
| | $ | 58,877 |
| | 108 |
| | $ | 28,343 |
|
N/M — not meaningful.
Corporate costs for the year ended December 31, 2014 of $79.3 million increased by 35% compared to the year ended December 31, 2013, primarily due to higher compensation and employee related costs, legal and compliance related costs and interest expense. We incurred higher compensation and employee related costs as we are expanding certain corporate functions to support our continued growth.
Corporate costs for the year ended December 31, 2013 of $58.9 millionincreased by 108% compared to the year ended December 31, 2012, primarily due to higher compensation and employee-relatedemployee related costs, consulting expenses, depreciation and amortization expenses, lease costs and interest expense. We incurred higher compensation and employee-relatedemployee 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 continued expansion. We reflect initial lease and other facility-relatedfacility related costs in our Corporate segment until the facilities are approximately 40% occupied by the business units,unit(s), at which time the cost is reflected in the respective segment’ssegment or segments’ financial statements.Corporate costs increased
Interest expense for the year ended December 31,
20122014 was $23.4 million, an increase of $3.1 million compared to the year ended December 31,
2011 primarily as a result of2013 resulting from the
build-out of new facilities to support our growth.additional $200.0 million senior secured term loan borrowings on August 1, 2014 and the additional $200.0 million senior secured term loan borrowings on May 7, 2013, partially offset by lower interest rates from the senior secured term loan refinancing on December 9, 2013. Interest expense for the year ended December 31, 2013 increased bywas $20.3 million, an increase of $19.1 million compared to the year ended December 31, 2012 resulting from the $200 millioninitial senior secured term loan borrowedborrowing in the fourth quarter of 2012 and increased to $400the additional $200.0 million senior secured term loan borrowings on May 7, 2013. Interest expense in 2012 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 $0.1 million for the year ended December 31, 2014. Additionally, we recognized interest income of $0.9 million and $0.2 million for the years ended December 31, 2013 and 2012, (no comparative amount in 2011)respectively, primarily from a fourth quarter 2012 $75.0 million loan to Ocwen. Ocwen, which was repaid the loan in February 2013.
The amount of intercompany
Intercompany revenue
that is eliminated in consolidation increased
overfor the
three year
periodended December 31, 2014 compared to the years ended December 31, 2013
due to growth in our operations over the same period.and 2012. These intercompany transactions primarily consisted 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.services. While the expenses are recognized in the Mortgage Services and Financial Services segments above, the elimination of these expenses
areis reflected in Corporate Items and Eliminations.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
LiquidityOur 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 develop complementary services and businesses that we believe will generate attractive margins in line with our core capabilities. Further,capabilities and strategy. We may consider business acquisitions and other opportunities that may arise from time to time. During January 2015, we evaluate potential acquisitionsused $4.0 million to repurchase Altisource common stock. Our relationship with Ocwen is subject to a number of risks and uncertainties that are aligned withcould result in changes to our visionrelationship and can accelerate the achievementhave an adverse effect on our liquidity. See Item 1A of our strategic objectives.Part I, “Risk Factors.” We also intend to use excessclosely monitor the Ocwen related uncertainties and to modify our business plan as needed in response. As a result of these uncertainties, we intend to increase our cash and cash equivalents position throughout 2015. However, we will continue to repurchase shares ofmonitor market conditions, and may, at some point in the future, consider repurchasing our common stock.
stock and/or our debt if conditions are favorable.
On November 27, 2012, we entered into a
seven-yearseven year senior secured term loan agreement with Bank of America, N.A.
, as administrative agent,
and certain lenders, pursuant to which we borrowed
$200$200.0 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$200.0 million and to
provide additional share repurchase capacity, among other changes. Underincrease the
termsmaximum permitted amount of
Restricted Junior Payments (as defined in the senior secured term loan
as amended, we haveagreement), including increasing the
ability to borrow an additional $200 million under an accordion provision.amount of Company share repurchases permitted, among other changes. 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
37
Table of Contents
later than the prior year 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 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 inPayments. On August 1, 2014, we entered into Amendment No. 3 (“Third Amendment”) to the senior secured term loan agreement), including share repurchases byagreement to increase the Company.
The refinancedprincipal amount of the term loansloan commitments under the senior secured term loan agreement by $200.0 million and, among other changes, increase the maximum amount of permitted Restricted Junior Payments by $200.0 million. Under the terms of the senior secured term loan, as amended, we have the ability to request to borrow up to $200.0 million of additional debt under an accordion provision. The lenders of the senior secured term loan, as amended, have no obligation to provide any such additional debt under the accordion provision.
After giving effect to the Third Amendment, the Refinancing Debt must be repaid in equal consecutive quarterly principal installments of $1.0$1.5 million, commencingwhich commenced on December 31, 2013,September 30, 2014, with the balance due at maturity. After giving effect to the Second Amendment, allAll 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. However, if leverage ratios, as defined in the senior secured term loan agreement, exceed 2.753.00 to 1.00, a percentage of cash flowflows must be used to repay
principal. No mandatory prepayments were
owed forrequired during 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 the prepaid term loan will be incurred. Interest payments are due monthly. The interest rate as of December 31,
20132014 was 4.50%.
The debt covenants in the senior secured term loan agreement limit, among other things, our ability to incur additional debt, pay dividends and repurchase stock. In the event we require additional liquidity, our ability to obtain it may be limited by the senior secured term loan.
The following table presents our cash flows for the years ended December 31:
| | | | % | | | | % | | | |
| | | | Increase | | | | Increase | | | |
(dollars in thousands) | | 2013 | | (decrease) | | 2012 | | (decrease) | | 2011 | |
| | | | | | | | | | | |
Net income adjusted for non-cash items | | $ | 190,655 | | 31 | | $ | 145,672 | | 51 | | $ | 96,657 | |
Working capital | | (5,181 | ) | 82 | | (29,143 | ) | N/M | | 14,954 | |
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 | | 24,822 | | (66 | ) | 73,377 | | N/M | | 9,991 | |
Cash and cash equivalents at beginning of period | | 105,502 | | 228 | | 32,125 | | 45 | | 22,134 | |
| | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 130,324 | | 24 | | $ | 105,502 | | 228 | | $ | 32,125 | |
|
| | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2014 | | % Increase (decrease) | | 2013 | | % Increase (decrease) | | 2012 |
| | | | | | | | | | | |
| Net income adjusted for non-cash items | | $ | 224,673 |
| | 18 |
| | $ | 190,655 |
| | 31 |
| | $ | 145,672 |
|
| Changes in operating assets and liabilities | | (27,180 | ) | | N/M |
| | (5,181 | ) | | (82 | ) | | (29,143 | ) |
| Net cash flows provided by operating activities | | 197,493 |
| | 6 |
| | 185,474 |
| | 59 |
| | 116,529 |
|
| Net cash flows used in investing activities | | (101,268 | ) | | (53 | ) | | (215,944 | ) | | 95 |
| | (110,563 | ) |
| Net cash flows (used in) provided by financing activities | | (65,188 | ) | | (218 | ) | | 55,292 |
| | (18 | ) | | 67,411 |
|
| Increase in cash and cash equivalents | | 31,037 |
| | 25 |
| | 24,822 |
| | (66 | ) | | 73,377 |
|
| Cash and cash equivalents at beginning of period | | 130,324 |
| | 24 |
| | 105,502 |
| | 228 |
| | 32,125 |
|
| | | | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 161,361 |
| | 24 |
| | $ | 130,324 |
| | 24 |
| | $ | 105,502 |
|
Cash Flows from Operating Activities
Cash flows from operating activities generally consist of the cash effects of transactions and events that
factorenter into the determination of net income. For the year ended December 31,
2013,2014, we generated
$185.5 million of cash flows from
operations,operating activities of $197.5 million, or approximately $0.21 for every dollar of service revenue compared to cash flows from operating activities of $185.5 million, or approximately $0.28 for every dollar of service revenue
compared tofor the year ended December 31, 2013 and $116.5 million of cash flows from operations, or approximately $0.25 per dollar of service revenue
for the year ended December 31, 2012. The increase in
2012 and $111.6 million of cash flows from operations
or approximately $0.33during 2014 compared to 2013 is principally driven by the increase in net income after adding back depreciation and amortization, including the amortization of intangible assets, partially offset by unfavorable working capital changes. Changes in working capital were principally due to higher accounts receivable from revenue growth and the timing of collections. The decrease in cash flows from operating activities per dollar of service revenue
is primarily the result of lower operating income as a percentage of service revenue and, to a lesser extent, timing differences in
2011.converting accounts receivables to cash. The increase in cash flows from operating activities during 2013 compared to 2012
iswas 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 tocapital, particularly the
increase in net income, after adding back depreciation and amortization, substantially offset by a decline in working capital principally due to highercollection of accounts receivable.
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Table of Contents
In periods of growth, operating cash flows 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.(e.g., the foreclosure is complete, the REO asset is sold, etc.). As we continue to grow, our receivables will also grow and our cash flows from operations may be negatively impacted when comparing one period to another.
Cash
Flows from Investing ActivitiesCash flows from investing activities include capital expenditures of $64.8 million, $34.1 million and $35.6 million for the years ended December 31, 2014, 2013 and 2012, respectively, primarily related to facility build-outs and investments in IT infrastructure, the Equator integration and the development of our next generation technologies.
On November 21, 2014, we acquired Owners.com for $19.8 million plus contingent consideration of up to $7.0 million. On September 12, 2014, we acquired Mortgage Builder for $14.9 million, net of acquired cash of $0.7 million, plus contingent consideration of up to $7.0 million.
On March 29, 2013, we acquired the Homeward fee-based business from Ocwen for $75.8 million, after a working capital and pre-acquisition net income adjustment.adjustment payment by Ocwen totaling $11.1 million, which we received in September 2013. 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 connection with Ocwen’s acquisition of certain mortgage servicing platform assets of ResCap. The cash consideration paid by Altisource to Ocwen under the ResCap
agreementagreements totaled $128.8 million. On November 15, 2013, we acquired Equator for initial consideration of $63.4 million,
and upbefore a working capital adjustment payment made by us to
$80 millionthe sellers 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 also included investments in a disaster recovery center that continued, to a lesser degree, in 2013.
2014. On March 31, 2013, we sold our 49% interest in Correspondent One S.A. (“Correspondent One”) to Ocwen for $12.6 million. During 2011,On February 15, 2013, Ocwen repaid the $75.0 million loan that it borrowed from us in December 2012.
Cash Flows from Financing Activities
Cash flows from financing activities for the year ended December 31, 2014 primarily include activity associated with debt proceeds, share repurchases, stock option exercises and payments to non-controlling interests. On August 1, 2014, we
invested $15.0borrowed $200.0 million in
Correspondent One.Cash Flows from Financing Activities
connection with amending our senior secured term loan agreement, and received $198.0 million of cash proceeds net of a $2.0 million original issue discount. For the year ended December 31, 2014, we incurred debt issuance costs of $2.6 million, in connection with the debt issuances. For the year ended December 31, 2014, we spent $255.7 million to repurchase our common stock. Stock option exercises provided proceeds of $2.7 million. During 2014, we repaid $5.0 million of the borrowings under the senior secured term loan and distributed $2.6 million to non-controlling interests.
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$200.0 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
$0.2 million of capital lease obligations 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$200.0 million senior secured term loan, which included an original issue discount of $2.0 million, and incurred related debt issuance 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.
Cash flows from financing activities for the year ended December 31, 2011 primarily included activity associated with share repurchases, 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.
39
In November
15, 2013, we completed the acquisition of
Equator 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”) providesEquator. The purchase agreement provided for the payment of up to $80 million in potential additional consideration determined based on
EquatorEquator’s Adjusted EBITA (as defined in the
Purchase Agreement)purchase agreement) in the three consecutive 12-month periods following closing. Up to $22.5 million of this potential additional consideration
cancould be earned in each of the first two 12-month periods, and up to $35.0 million
cancould be earned in the third 12-month period. Any amounts earned upon the achievement of Adjusted EBITA thresholds are payable through 2017. We may,
inat our discretion, pay up to 20% of each payment of any of this potential additional consideration in shares of Company restricted stock, with the balance to be paid in cash.
As of December 31, 2014, we estimated the fair value of the potential additional consideration related to the Equator acquisition to be $8.1 million. No payment was earned during the initial 12-month period. The amount ultimately paid will depend on Equator’s actual Adjusted EBITA in the three consecutive 12-month periods following closing.
On September 12, 2014, we acquired Mortgage Builder. The Mortgage Builder purchase agreement provides for the payment of up to $7.0 million in potential additional consideration based on Adjusted Revenue (as defined in the purchase agreement). We have estimated the fair value of the Mortgage Builder potential additional consideration to be $1.6 million as of December 31, 2014. The amount ultimately paid will depend on Mortgage Builder’s Adjusted Revenue (as defined in the Purchase and Sale Agreement) in the three consecutive 12-month periods following closing.
On November 21, 2014, we acquired Owners.com. The Owners.com purchase agreement provides for a payment of up to $7.0 million of potential additional consideration based on revenue earned in the two consecutive 12-month periods following closing. We have estimated the fair value of the Owners.com contingent consideration to be $1.9 million as of December 31, 2014. The amount ultimately paid will depend on Owners.com’s revenue earned in the two consecutive 12-month periods following closing.
During the first quarter of
2014,2015, we expect to distribute
$0.7$0.6 million to the Lenders One members representing non-controlling
interests.Management is not awareinterests, repay $1.5 million 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, Commitmentsoutstanding principal under the senior secured term loan and Contingencies” below).
pay $6.7 million of interest expense under the senior secured term loan.
We believe that we will generate sufficient cash flows
from operations to fund
operations, capital expenditures
and required debt
and interest
and Earn Out payments. Were we to need additional capital, we believe that we have adequate access to both debt and equity capital markets.payments for the next 12 months.
CRITICAL ACCOUNTING POLICIES,
ESTIMATES AND RECENT ACCOUNTING
PRONOUNCEMENTSPRONOUNCEMENT
We prepare our consolidated financial statements in accordance with GAAP.accounting principles generally accepted in the United States of America. In applying many of these accounting principles, we need to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses in our consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates and judgments, however, are often subjective. Actual results may be negatively affected negatively based on changing circumstances. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known.
We have identified the critical accounting policies and estimates addressed below. We also have other key accounting policies, which involve the use of assumptions, estimates and judgments 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 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.
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.At
In the Mortgage Services
segment, we recognize revenue for the majority of the services we provide
in this segment on completion ofwhen the
service to our customers.services have been performed. 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 ofupon recording the related foreclosure
filingdeed 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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AtIn the Financial Services segment, 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-person, per-call per-person or per-minute basis as the related services are performed.
AtIn the Technology Services segment, 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.
For Mortgage Builder software applications, we recognize subscription revenues ratably over the contract term, beginning on the commencement date of each contract. Revenues for usage-based transactions are generally recognized as the usage occurs, as that is the point when the fee becomes fixed or determinable. Mortgage Builder generally invoices customers on a monthly basis. We provide IT infrastructure services to Ocwen, HLSS, Residential and AAMC and charge for these services primarily on a cost plus basis, based on the number of employees that are using the applicable systems and the number and type of licensed platforms used by Ocwen, HLSS, Residential and AAMC. We record revenue associated with implementation services upon completion of the services and we record revenue from maintenance activity ratably over the related service period.
Significant areas of judgment include the period over which we recognize property preservation revenue
and 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 party objective evidence on a periodic basis in determining the appropriate revenue recognition.revenue.
Goodwill and Identifiable Intangible Assets
We evaluate goodwill for impairment annually during the fourth quarter or more frequently when an event occurs or circumstances change
in a manner 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.
The discounted cash flow method is based on the present value of projected cash flows. Forecasts of future cash flows are based on our estimate of future sales and operating expenses, based primarily on 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 with limited financial history and developing revenue models.
Based The estimated cash flows are discounted using a rate that represents our weighted average cost of capital.
During 2014, as a result of the decline in fair value of the Equator Earn Out, management evaluated and determined that Equator goodwill should be tested for impairment. The decline in fair value of the Equator Earn Out was based on management’s estimate that the fourth quarter 2013, 2012 and 2011 qualitative andexpected earnings of Equator would be lower than those projected at the time of acquisition. Consequently, we initiated a quantitative analyses, management concluded notwo-step goodwill impairment was indicated giventest by comparing the carrying value of the net assets of Equator to its fair value based on a discounted cash flow analysis. We determined, based on this assessment, that the fair value forof Equator was less than its carrying value and the associatedresulting Equator goodwill impairment was approximately $37.5 million, which is reflected as a component of SG&A in the consolidated statements of operations (see Note 18).
Because we recorded an impairment of goodwill during an interim period in 2014, we elected to bypass the initial analysis of qualitative factors and perform a quantitative two-step goodwill impairment test of all of our reporting units
was substantiallyduring our annual testing in
excessthe fourth quarter of 2014. For purposes of the
bookannual goodwill impairment assessment, our reporting units are our reportable segments. We calculated the fair value
and no impairments of goodwill were recorded for the years endedeach of our reporting units by using a discounted cash flow analysis. As of December 31, 2014, the fair value of the Mortgage Services, Financial Services and Technology Services reporting units exceeded their carrying values by a significant margin. Consequently, we determined that no further goodwill impairment existed as of December 31, 2014. There were no goodwill impairments in 2013 2012 and 2011.or 2012.
Identifiable Intangible Assets
Identified intangible assets consist primarily of customer relationships, acquired trade names and trademarks. 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. Based on the
fourth quarter2014, 2013
2012 and
20112012 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,
2014, 2013
2012 and
2011.2012.
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 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
statutoryeffective tax rates and higher than anticipated earnings in countries where we have higher
statutoryeffective tax 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 audits in various taxing jurisdictions, and such jurisdictions may assess additional income tax during an examination. Although we believe our
recorded tax
balancesliabilities 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 a New Accounting Pronouncement
In July 2013, theMay 2014, FASB issued guidance onAccounting Standards Update No. 2014-09, Revenue from Contracts with Customers. This standard establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The core principle of the disclosure requirementsnew standard is an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for unrecognized tax benefits,those goods or a portion of an unrecognized tax benefit.services. 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 isstandard will be effective for fiscal years, and interimannual reporting periods within those years, beginning after December 15, 2013. We do2016, including interim periods within that reporting period. Early adoption is not anticipate a materialpermitted. The Company is currently evaluating the impact this new guidance may have on our consolidatedits results of operations and financial statements as a resultposition.
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 and are not included in the accompanying consolidated balance sheets. Amounts held in escrow and trust accounts were
$71.8$62.5 million and
$47.2$71.8 million at December 31,
2014 and 2013,
and 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,
2013: | | Payments due by period | |
(in thousands) | | Total | | Less than
1 year | | 1-3 years | | 3-5 years | | More than
5 years | |
| | | | | | | | | | | |
Non-cancelable operating lease obligations | | $ | 34,408 | | $ | 9,142 | | $ | 15,594 | | $ | 9,534 | | $ | 138 | |
Long-term debt | | 396,503 | | 3,975 | | 7,950 | | 7,950 | | 376,628 | |
Contractual interest payments(1) | | 119,702 | | 17,776 | | 35,014 | | 34,299 | | 32,613 | |
| | | | | | | | | | | |
Total | | $ | 550,613 | | $ | 30,893 | | $ | 58,558 | | $ | 51,783 | | $ | 409,379 | |
(1)Represents estimated future interest payments on our senior secured term loan based on applicable interest rates as of December 31, 2013.
|
| | | | | | | | | | | | | | | | | | | | |
| | | Payments due by period
|
| (in thousands) | | Total | | Less than
1 year | | 1-3 years | | 3-5 years | | More than
5 years |
| | | | | | | | | | | |
| Non-cancelable operating lease obligations | | $ | 63,478 |
| | $ | 17,924 |
| | $ | 27,198 |
| | $ | 13,001 |
| | $ | 5,355 |
|
| Long-term debt | | 591,543 |
| | 5,945 |
| | 11,890 |
| | 11,890 |
| | 561,818 |
|
Contractual interest payments(1) | | 153,639 |
| | 26,519 |
| | 52,236 |
| | 51,166 |
| | 23,718 |
|
| | | | | | | | | | | |
| Total | | $ | 808,660 |
| | $ | 50,388 |
| | $ | 91,324 |
| | $ | 76,057 |
| | $ | 590,891 |
|
| |
(1) | Represents estimated future interest payments on our senior secured term loan based on applicable interest rates as of December 31, 2014. |
For further information, see Notes
1314 and
2122 to the consolidated financial statements.
43
For the years ended December 31,
2014, 2013
2012 and
2011,2012, we generated Mortgage Services segment revenue from Ocwen
and its subsidiaries of
$424.0$528.3 million,
$306.8$421.3 million and
$223.2$306.5 million, respectively. For the years ended December 31,
2014, 2013
2012 and
2011,2012, we generated Financial Services segment revenue from Ocwen
and its subsidiaries of
$27.1 million, $27.6 million
$0.2 million and
$0.3$0.2 million, respectively. Also, for the years ended December 31,
2014, 2013
2012 and
2011,2012, we generated Technology Services segment revenue from Ocwen
and its subsidiaries of
$95.4 million, $50.5 million
$31.2 million and
$21.8$31.2 million, respectively. Services provided to Ocwen
and its subsidiaries during this period included residential property valuation, real estate asset management and sales, trustee management services, property inspection and preservation, insurance services, charge-off mortgage collections,
core technology back office supportIT infrastructure management services and
multiple business technologiessoftware applications including our
REALSuite of products.software platforms. We provided all services at rates we believe to be comparable to market rates.
We earn additional revenue on the portfolios serviced by Ocwen that is not considered related party revenue when a party other than Ocwen selects Altisource as the service provider. For the years ended December 31, 2014, 2013 and 2012, and 2011, we billed Ocwen and its subsidiaries $2.6recognized revenue of $256.0 million, $2.7$161.9 million and $2.6$125.4 million, respectively, on the portfolios serviced by Ocwen that are not considered related party revenue.
For the years ended December 31, 2014, 2013 and 2012, Ocwen and its subsidiaries billed us $2.9$38.6 million, $2.4$20.0 million and $1.9$13.5 million, respectively, for support services such as human resources, vendor management, corporate services, operational effectiveness, quality assurance, quantitative analyticsdata access fees and treasury. Seecontractor and/or employee costs under agreements described in Note 4 to the consolidated financial statements for further information.statements. These amounts are reflected as componentsa component of cost of revenue in the consolidated statements of operations. On December 31, 2014, we notified Ocwen that we are canceling the Data Access and Services Agreement, effective March 31, 2015.
For the years ended December 31, 2014, 2013 and 2012, we billed Ocwen $4.5 million, $2.8 million and $2.7 million, respectively, and Ocwen billed us $6.1 million, $4.6 million and $3.2 million, respectively, for other services provided under the agreements described in Note 4 to the consolidated financial statements. These amounts are reflected as a component of SG&A in the consolidated statements of operations.
On December 27, 2012, we entered into a senior unsecured term loan agreement with Ocwen
pursuant tounder which we loaned $75.0 million to Ocwen.
Interest income relatedPayments of interest were due quarterly at a rate per annum equal to
this loan for the
years ended December 31, 2013 and 2012Eurodollar Rate (as defined in the agreement) plus 6.75%, provided that the Eurodollar Rate was
$0.8 million and $0.1 million, respectively (no comparative amount in 2011)not less than 1.50%. On February 15, 2013, Ocwen repaid the
entire outstanding principal amount of this loan
plusand all accrued and unpaid interest and the term loan was terminated.
The interest rate atInterest income related to this loan was $0.8 million and $0.1 million for the years ended December 31,
2013 and 2012,
was 8.25%. See Note 4 to the consolidated financial statementsrespectively (no comparative amount for
further information.2014).
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.(see Note 5 to the consolidated financial statements). 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-basedfee- based businesses
and paid Ocwen $128.8 million for the ResCap fee-based businesses. See(see Note 5 to the consolidated financial
statements for further information.statements).
Correspondent One and HLSS
In July 2011, we acquired an equity interest in Correspondent One.
Correspondent 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. For the years ended December 31, 2013
2012 and
2011,2012, we billed Correspondent One less than $0.1 million
and $0.4 million,
and $0.1 million, respectively.respectively (no comparative amount for 2014). These amounts are reflected as a component of SG&A in the consolidated statements of operations. 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, for these services (no comparative amount
in 2011)for 2014).
HLSS is a publicly traded company whose primary objective is the acquisition of mortgage servicing rights and related servicing advances, loans held for investment and other residential mortgage related assets. Under a support services agreement, we provide HLSS certain finance, human resources, tax and facilities services. For the years ended December 31,
2014, 2013 and 2012, we billed HLSS
$0.9 million, $0.7 million and $0.6 million,
respectively (no comparative amount in 2011) for services under a support services agreement.respectively. These amounts are reflected as a component of SG&A in the consolidated statements of operations.
Residential and AAMC were established, capitalizedspun-off on December 21, 2012 and their equity was distributed to our shareholders on December 21,24, 2012 and they are each are separate publicly traded companies (the “Separationcompanies. Residential is focused on acquiring and managing single family rental properties by acquiring sub-performing and non-performing residential mortgage loans as well as single family homes at or following the foreclosure sale throughout the United States. AAMC is an asset management company providing portfolio management and corporate governance services to Residential.
For purposes of thegoverning certain ongoing relationships between Altisource, Residential Asset Businesses”). and AAMC, we entered into certain agreements with Residential and AAMC. We 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 services such as finance, human resources, facilities, technology and insurance risk management. Further, we have separate agreements for certain services related to income tax matters, trademark licenses and technology services.
For the
yearyears ended December 31,
2014 and 2013, we billed Residential
$16.0 million and $2.6 million,
respectively (no comparative amount for 2012). This excludes revenue where we are retained by Ocwen to provide services to Residential’s loans serviced by Ocwen. That revenue is included in related party revenue from Ocwen. For the years ended December 31, 2014 and
2013, we billed AAMC
$0.1 million and less than $0.1 million,
respectively, under
services and supportthe services agreements
described in Note 4 to the consolidated financial statements (no comparative
amount for 2012). These amounts
are reflected in
2012revenue in the consolidated statements of operations. In addition, for the years ended December 31, 2014 and
2011)2013, we billed AAMC $0.9 million and $0.5 million, respectively, under the services agreements described in Note 4 to the consolidated financial statements (no comparative amount for 2012).
44
These amounts are reflected as a component of SG&A in the consolidated statements of operations.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
| |
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our financial market risk consists primarily of interest rate risk and foreign currency exchange risk.
As of December 31,
2013,2014, the interest rate charged on the senior secured term loan was 4.50%. The interest rate is calculated based on the Adjusted Eurodollar Rate (as defined in the senior secured term loan agreement) with a minimum floor of 1.00% plus
3.5%3.50%.
Based on the principal amount outstanding at December 31,
2013,2014, a
1one percentage point increase in the Eurodollar rate would increase our annual interest expense by approximately
$0.7$1.4 million, based on the December 31,
20132014 Adjusted Eurodollar Rate.
There would be no change in our annual interest expense if there was a one percentage point decrease in the Eurodollar Rate.
Foreign Currency Exchange Risk
We are exposed to currency risk from potential changes in currency values of our foreign currency denominated
expenses, assets, liabilities and cash flows. Our most significant foreign currency
exposures relateexposure relates to the
Euro and Indian
Rupee; however, the balancesRupee. Based on expenses incurred in
Euros and Indian Rupees
onduring 2014, a one percentage point increase or decrease in value of the Indian Rupee in relation to the United States dollar would increase or decrease our
consolidated balance sheets are immaterial.45
annual expenses by $1.0 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
StockholdersShareholders 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,
20132014 and
2012,2013, 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,
2013.2014. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements
and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on
thesethe financial statements
and financial statement schedule 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,
20132014 and
2012,2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31,
2013,2014, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 4 to the consolidated financial statements,
the Company has entered into significant transactions with Ocwen Financial Corporation
("Ocwen"), a related
party.party, is the Company's largest customer. As discussed in Note 22 to the consolidated financial statements, Ocwen has been and is subject to a number of pending federal and state regulatory matters and is subject to other challenges and uncertainties that could have significant adverse effects on Ocwen's business. Note 22 also discusses the potential implications of these uncertainties to the Company including those associated with the possible cessation of the continuing relationship with Ocwen.
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, 2013,2014, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 13, 2014March 2, 2015 expressed an unqualified opinion on the Company’s internal control over financial reporting./s/ Deloitte & Touche LLP
| |
Atlanta, Georgia
| |
February 13, 2014
| |
47
/s/ Deloitte & Touche LLP
Atlanta, Georgia
March 2, 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
StockholdersShareholders 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, 2013,2014, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting for the businesses and certain assets acquired and certain liabilities assumed of Mortgage Builder Software, Inc. and Owners Advantage, LLC which were acquired on September 12, 2014 and November 21, 2014, respectively, and whose combined financial statements constitute 5% of total assets and less than 1% of revenues and net income attributable to Altisource as reflected in the consolidated financial statement amounts as of and for the year ended December 31, 2014. Accordingly, our audit did not include the internal control over financial reporting for the businesses and certain assets acquired and certain liabilities assumed of Mortgage Builder Software, Inc. and Owners Advantage, LLC. 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, 2013,2014, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements
and financial statement schedule as of and for the year ended December 31,
20132014 of the Company and our report dated
February 13, 2014March 2, 2015 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding significant transactions with Ocwen Financial Corporation
(“Ocwen”), a related
party./s/ Deloitte & Touche LLP
| |
Atlanta, Georgia
| |
February 13, 2014
| |
48
party and an emphasis of a matter related to Ocwen uncertainty.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
March 2, 2015
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Consolidated Balance Sheets
(in thousands, except per share data)
| | December 31, | |
| | 2013 | | 2012 | |
ASSETS | |
Current assets: | | | | | |
Cash and cash equivalents | | $ | 130,324 | | $ | 105,502 | |
Accounts receivable, net | | 101,297 | | 88,955 | |
Prepaid expenses and other current assets | | 11,389 | | 7,618 | |
Deferred tax assets, net | | 2,837 | | 1,775 | |
Total current assets | | 245,847 | | 203,850 | |
| | | | | |
Premises and equipment, net | | 87,252 | | 50,399 | |
Deferred tax assets, net | | 622 | | 4,073 | |
Intangible assets, net | | 276,162 | | 56,586 | |
Goodwill | | 97,375 | | 14,915 | |
Investment in Correspondent One | | — | | 12,729 | |
Loan to Ocwen | | — | | 75,000 | |
Other assets | | 17,580 | | 11,674 | |
| | | | | |
Total assets | | $ | 724,838 | | $ | 429,226 | |
| | | | | |
LIABILITIES AND EQUITY | |
Current liabilities: | | | | | |
Accounts payable and accrued expenses | | $ | 79,492 | | $ | 58,976 | |
Current portion of long-term debt | | 3,975 | | 2,000 | |
Current portion of capital lease obligations | | — | | 233 | |
Deferred revenue | | 36,742 | | 2,482 | |
Other current liabilities | | 10,131 | | 7,941 | |
Total current liabilities | | 130,340 | | 71,632 | |
| | | | | |
Long-term debt, less current portion | | 391,281 | | 196,027 | |
Other non-current liabilities | | 45,476 | | 1,738 | |
| | | | | |
Commitments and contingencies (Note 21) | | | | | |
| | | | | |
Equity: | | | | | |
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 | | 89,273 | | 86,873 | |
Retained earnings | | 239,561 | | 124,127 | |
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 | | 156,699 | | 158,459 | |
| | | | | |
Non-controlling interests | | 1,042 | | 1,370 | |
Total equity | | 157,741 | | 159,829 | |
| | | | | |
Total liabilities and equity | | $ | 724,838 | | $ | 429,226 | |
|
| | | | | | | | |
| | | December 31, |
| | | 2014 | | 2013 |
| ASSETS |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 161,361 |
| | $ | 130,324 |
|
| Accounts receivable, net | | 112,183 |
| | 104,787 |
|
| Prepaid expenses and other current assets | | 23,567 |
| | 10,996 |
|
| Deferred tax assets, net | | 4,987 |
| | 2,837 |
|
| Total current assets | | 302,098 |
| | 248,944 |
|
| | | | | |
| Premises and equipment, net | | 127,759 |
| | 87,252 |
|
| Deferred tax assets, net | | — |
| | 622 |
|
| Goodwill | | 90,851 |
| | 99,414 |
|
| Intangible assets, net | | 245,246 |
| | 276,162 |
|
| Other assets | | 22,267 |
| | 17,658 |
|
| | | | | |
| Total assets | | $ | 788,221 |
| | $ | 730,052 |
|
| | | | | |
| LIABILITIES AND EQUITY |
| Current liabilities: | | | | |
| Accounts payable and accrued expenses | | $ | 111,766 |
| | $ | 84,706 |
|
| Current portion of long-term debt | | 5,945 |
| | 3,975 |
|
| Deferred revenue | | 9,829 |
| | 36,742 |
|
| Other current liabilities | | 13,227 |
| | 10,131 |
|
| Total current liabilities | | 140,767 |
| | 135,554 |
|
| | | | | |
| Long-term debt, less current portion | | 582,669 |
| | 391,281 |
|
| Deferred tax liabilities, net | | 2,694 |
| | — |
|
| Other non-current liabilities | | 20,648 |
| | 45,476 |
|
| | | | | |
| Commitments, contingencies and regulatory matters (Note 22) | |
|
| |
|
|
| | | | | |
| Equity: | | | | |
| Common stock ($1.00 par value; 25,413 shares authorized and issued, and 20,279 outstanding, as of December 31, 2014; 100,000 shares authorized, 25,413 issued and 22,629 outstanding as of December 31, 2013) | | 25,413 |
| | 25,413 |
|
| Additional paid-in capital | | 91,509 |
| | 89,273 |
|
| Retained earnings | | 367,967 |
| | 239,561 |
|
| Treasury stock, at cost (5,134 shares as of December 31, 2014 and 2,784 shares as of December 31, 2013) | | (444,495 | ) | | (197,548 | ) |
| Altisource equity | | 40,394 |
| | 156,699 |
|
| | | | | |
| Non-controlling interests | | 1,049 |
| | 1,042 |
|
| Total equity | | 41,443 |
| | 157,741 |
|
| | | | | |
| Total liabilities and equity | | $ | 788,221 |
| | $ | 730,052 |
|
See accompanying notes to consolidated financial statements.statements49.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Consolidated Statements of Operations
(in thousands, except per share data)
| | For the years ended December 31, | |
| | 2013 | | 2012 | | 2011 | |
| | | | | | | |
Revenue | | $ | 768,357 | | $ | 568,360 | | $ | 423,687 | |
Cost of revenue | | 492,480 | | 366,201 | | 275,849 | |
| | | | | | | |
Gross profit | | 275,877 | | 202,159 | | 147,838 | |
Selling, general and administrative expenses | | 113,810 | | 74,712 | | 62,131 | |
| | | | | | | |
Income from operations | | 162,067 | | 127,447 | | 85,707 | |
Other income (expense), net: | | | | | | | |
Interest expense | | (20,291 | ) | (1,210 | ) | (85 | ) |
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 | | 142,333 | | 124,649 | | 85,910 | |
Income tax provision | | (8,540 | ) | (8,738 | ) | (7,943 | ) |
| | | | | | | |
Net income | | 133,793 | | 115,911 | | 77,967 | |
Net income attributable to non-controlling interests | | (3,820 | ) | (5,284 | ) | (6,855 | ) |
| | | | | | | |
Net income attributable to Altisource | | $ | 129,973 | | $ | 110,627 | | $ | 71,112 | |
| | | | | | | |
Earnings per share: | | | | | | | |
Basic | | $ | 5.63 | | $ | 4.74 | | $ | 2.92 | |
Diluted | | $ | 5.19 | | $ | 4.43 | | $ | 2.77 | |
| | | | | | | |
Weighted average shares outstanding: | | | | | | | |
Basic | | 23,072 | | 23,358 | | 24,373 | |
Diluted | | 25,053 | | 24,962 | | 25,685 | |
| | | | | | | |
Transactions with related parties included above: | | | | | | | |
Revenue | | $ | 502,087 | | $ | 338,227 | | $ | 245,262 | |
Selling, general and administrative expenses | | 2,921 | | 2,430 | | 1,893 | |
Other income | | 773 | | 86 | | — | |
|
| | | | | | | | | | | | |
| | | For the years ended December 31, |
| | | 2014 | | 2013 | | 2012 |
| | | | | | | |
| Revenue | | $ | 1,078,916 |
| | $ | 768,357 |
| | $ | 568,360 |
|
| Cost of revenue | | 707,180 |
| | 492,480 |
| | 366,201 |
|
| | | | | | | |
| Gross profit | | 371,736 |
| | 275,877 |
| | 202,159 |
|
| Selling, general and administrative expenses | | 201,282 |
| | 113,810 |
| | 74,712 |
|
| | | | | | | |
| Income from operations | | 170,454 |
| | 162,067 |
| | 127,447 |
|
| Other income (expense), net: | | | | | | |
| Interest expense | | (23,363 | ) | | (20,291 | ) | | (1,210 | ) |
| Other income (expense), net | | 174 |
| | 557 |
| | (1,588 | ) |
| Total other income (expense), net | | (23,189 | ) | | (19,734 | ) | | (2,798 | ) |
| | | | | | | |
| Income before income taxes and non-controlling interests | | 147,265 |
| | 142,333 |
| | 124,649 |
|
| Income tax provision | | (10,178 | ) | | (8,540 | ) | | (8,738 | ) |
| | | | | | | |
| Net income | | 137,087 |
| | 133,793 |
| | 115,911 |
|
| Net income attributable to non-controlling interests | | (2,603 | ) | | (3,820 | ) | | (5,284 | ) |
| | | | | | | |
| Net income attributable to Altisource | | $ | 134,484 |
| | $ | 129,973 |
| | $ | 110,627 |
|
| | | | | | | |
| Earnings per share: | | | | | | |
| Basic | | $ | 6.22 |
| | $ | 5.63 |
| | $ | 4.74 |
|
| Diluted | | $ | 5.69 |
| | $ | 5.19 |
| | $ | 4.43 |
|
| | | | | | | |
| Weighted average shares outstanding: | | | | | | |
| Basic | | 21,625 |
| | 23,072 |
| | 23,358 |
|
| Diluted | | 23,634 |
| | 25,053 |
| | 24,962 |
|
| | | | | | | |
| Transactions with related parties included above: | | | | | | |
| Revenue | | $ | 666,800 |
| | $ | 502,087 |
| | $ | 338,227 |
|
| Cost of revenue | | 38,610 |
| | 19,983 |
| | 13,469 |
|
| Selling, general and administrative expenses | | (268 | ) | | 569 |
| | (542 | ) |
| Other income | | — |
| | 773 |
| | 86 |
|
See accompanying notes to consolidated financial statements.statements50.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Consolidated Statements of Equity
(in thousands)
| | Common stock | | Additional
paid-in
capital | | Retained
earnings | | Treasury stock,
at cost | | Non-
controlling
interests | | Total | |
| | Shares | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
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 | |
Distributions to non-controlling interest holders | | — | | — | | — | | — | | — | | (6,776 | ) | (6,776 | ) |
Share-based compensation expense | | — | | — | | 3,932 | | — | | — | | — | | 3,932 | |
Exercise of stock options | | — | | — | | — | | (3,497 | ) | 4,521 | | — | | 1,024 | |
Repurchase of shares | | — | | — | | — | | — | | (62,151 | ) | — | | (62,151 | ) |
Balance, December 31, 2011 | | 25,413 | | 25,413 | | 83,229 | | 126,161 | | (72,048 | ) | 3,188 | | 165,943 | |
Net income | | — | | — | | — | | 110,627 | | — | | 5,284 | | 115,911 | |
Contributions from non-controlling interest holders | | — | | — | | — | | — | | — | | 43 | | 43 | |
Distributions to non-controlling interest holders | | — | | — | | — | | — | | — | | (7,145 | ) | (7,145 | ) |
Net assets distributed in connection with the Separation of the Residential Asset Businesses | | — | | — | | — | | (105,000 | ) | — | | — | | (105,000 | ) |
Share-based compensation expense | | — | | — | | 3,644 | | — | | — | | — | | 3,644 | |
Exercise of stock options | | — | | — | | — | | (7,661 | ) | 10,875 | | — | | 3,214 | |
Repurchase of shares | | — | | — | | — | | — | | (16,781 | ) | — | | (16,781 | ) |
Balance, December 31, 2012 | | 25,413 | | 25,413 | | 86,873 | | 124,127 | | (77,954 | ) | 1,370 | | 159,829 | |
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 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Altisource Equity | | Non-controlling interests | | |
| | Common stock | | Additional paid-in capital | | Retained earnings | | Treasury stock, at cost | | | Total |
| | Shares | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Balance, January 1, 2012
| 25,413 |
| | $ | 25,413 |
| | $ | 83,229 |
| | $ | 126,161 |
| | $ | (72,048 | ) | | $ | 3,188 |
| | $ | 165,943 |
|
| | | | | | | | | | | | | | |
Net income
| — |
| | — |
| | — |
| | 110,627 |
| | — |
| | 5,284 |
| | 115,911 |
|
Contributions from non-controlling interest holders
| — |
| | — |
| | — |
| | — |
| | — |
| | 43 |
| | 43 |
|
Distributions to non-controlling interest holders
| — |
| | — |
| | — |
| | — |
| | — |
| | (7,145 | ) | | (7,145 | ) |
| Net assets distributed in connection with the Separation of the Residential Asset Businesses | — |
| | — |
| | — |
| | (105,000 | ) | | — |
| | — |
| | (105,000 | ) |
Share-based compensation expense
| — |
| | — |
| | 3,644 |
| | — |
| | — |
| | — |
| | 3,644 |
|
Exercise of stock options
| — |
| | — |
| | — |
| | (7,661 | ) | | 10,875 |
| | — |
| | 3,214 |
|
Repurchase of shares
| — |
| | — |
| | — |
| | — |
| | (16,781 | ) | | — |
| | (16,781 | ) |
| | | | | | | | | | | | | | |
| Balance, December 31, 2012 | 25,413 |
| | 25,413 |
| | 86,873 |
| | 124,127 |
| | (77,954 | ) | | 1,370 |
| | 159,829 |
|
| | | | | | | | | | | | | | |
| 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 |
|
| | | | | | | | | | | | | | |
| Net income | — |
| | — |
| | — |
| | 134,484 |
| | — |
| | 2,603 |
| | 137,087 |
|
| Distributions to non-controlling interest holders | — |
| | — |
| | — |
| | — |
| | — |
| | (2,596 | ) | | (2,596 | ) |
| Share-based compensation expense | — |
| | — |
| | 2,236 |
| | — |
| | — |
| | — |
| | 2,236 |
|
| Exercise of stock options | — |
| | — |
| | — |
| | (6,078 | ) | | 8,766 |
| | — |
| | 2,688 |
|
| Repurchase of shares | — |
| | — |
| | — |
| | — |
| | (255,713 | ) | | — |
| | (255,713 | ) |
| | | | | | | | | | | | | | |
| Balance, December 31, 2014 | 25,413 |
| | $ | 25,413 |
| | $ | 91,509 |
| | $ | 367,967 |
| | $ | (444,495 | ) | | $ | 1,049 |
| | $ | 41,443 |
|
See accompanying notes to consolidated financial statements.statements51.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Consolidated Statements of Cash Flows
(in thousands) | | For the years ended December 31, | |
| | 2013 | | 2012 | | 2011 | |
Cash flows from operating activities: | | | | | | | |
Net income | | $ | 133,793 | | $ | 115,911 | | $ | 77,967 | |
Adjustments to reconcile net income to net cash provided by
operating activities: | | | | | | | |
Depreciation and amortization | | 19,056 | | 12,776 | | 8,351 | |
Amortization of intangible assets | | 28,176 | | 5,030 | | 5,291 | |
Share-based compensation expense | | 2,400 | | 3,644 | | 3,932 | |
Equity in losses of and impairment loss on investment in affiliate | | 176 | | 1,741 | | 530 | |
Bad debt expense | | 2,549 | | 3,049 | | 967 | |
Amortization of debt discount | | 223 | | 27 | | — | |
Amortization of debt issuance costs | | 958 | | 57 | | — | |
Deferred income taxes | | 2,015 | | 2,992 | | (381 | ) |
Loss on sale or disposal of fixed assets | | 1,309 | | 445 | | — | |
Changes in operating assets and liabilities, net of acquisitions: | | | | | | | |
Accounts receivable | | (5,602 | ) | (39,999 | ) | 812 | |
Prepaid expenses and other current assets | | (2,817 | ) | (2,616 | ) | 747 | |
Other assets | | (1,586 | ) | 2,172 | | (4,892 | ) |
Accounts payable and accrued expenses | | 7,381 | | 11,652 | | 14,760 | |
Other current and non-current liabilities | | (2,557 | ) | (352 | ) | 3,527 | |
Net cash flows provided by operating activities | | 185,474 | | 116,529 | | 111,611 | |
| | | | | | | |
Cash flows from investing activities: | | | | | | | |
Additions to premises and equipment | | (34,134 | ) | (35,563 | ) | (16,442 | ) |
Acquisition of businesses, net of cash acquired | | (267,946 | ) | — | | (2,515 | ) |
Investment in equity affiliate | | (50 | ) | — | | (15,000 | ) |
Proceeds from sale of equity affiliate | | 12,648 | | — | | — | |
Proceeds from loan to Ocwen | | 75,000 | | — | | — | |
Loan to Ocwen | | — | | (75,000 | ) | — | |
Change in restricted cash | | (1,462 | ) | — | | 887 | |
Net cash flows used in investing activities | | (215,944 | ) | (110,563 | ) | (33,070 | ) |
| | | | | | | |
Cash flows from financing activities: | | | | | | | |
Proceeds from issuance of long-term debt | | 200,502 | | 198,000 | | — | |
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 | | (3,200 | ) | (4,317 | ) | — | |
Principal payments on capital lease obligations | | (233 | ) | (603 | ) | (696 | ) |
Proceeds from stock option exercises | | 6,885 | | 3,214 | | 1,024 | |
Purchases of treasury stock | | (141,018 | ) | (16,781 | ) | (62,151 | ) |
Contributions from non-controlling interests | | 28 | | 43 | | 49 | |
Distributions to non-controlling interests | | (4,176 | ) | (7,145 | ) | (6,776 | ) |
Net cash flows provided by (used in) financing activities | | 55,292 | | 67,411 | | (68,550 | ) |
| | | | | | | |
Net increase in cash and cash equivalents | | 24,822 | | 73,377 | | 9,991 | |
Cash and cash equivalents at the beginning of the period | | 105,502 | | 32,125 | | 22,134 | |
| | | | | | | |
Cash and cash equivalents at the end of the period | | $ | 130,324 | | $ | 105,502 | | $ | 32,125 | |
| | | | | | | |
Supplemental cash flow information: | | | | | | | |
Interest paid | | $ | 19,325 | | $ | 1,134 | | $ | 83 | |
Income taxes paid (refunded), net | | 3,671 | | 4,912 | | (1,956 | ) |
| | | | | | | |
Non-cash investing and financing activities: | | | | | | | |
Amortization of tax-deductible goodwill | | — | | 3,334 | | 3,367 | |
Premises and equipment purchased on account | | 4,552 | | 2,457 | | — | |
|
| | | | | | | | | | | |
| | For the years ended December 31, |
| | 2014 | | 2013 | | 2012 |
| Cash flows from operating activities: | |
| | |
| | |
| Net income | $ | 137,087 |
| | $ | 133,793 |
| | $ | 115,911 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| | |
| Depreciation and amortization | 29,046 |
| | 19,056 |
| | 12,776 |
|
| Amortization of intangible assets | 37,680 |
| | 28,176 |
| | 5,030 |
|
| Change in the fair value of Equator Earn Out | (37,924 | ) | | — |
| | — |
|
| Goodwill impairment | 37,473 |
| | — |
| | — |
|
| Share-based compensation expense | 2,236 |
| | 2,400 |
| | 3,644 |
|
| Equity in losses of investment in affiliate | — |
| | 176 |
| | 1,741 |
|
| Bad debt expense | 16,257 |
| | 2,549 |
| | 3,049 |
|
| Amortization of debt discount | 317 |
| | 223 |
| | 27 |
|
| Amortization of debt issuance costs | 1,151 |
| | 958 |
| | 57 |
|
| Deferred income taxes | 1,166 |
| | 2,015 |
| | 2,992 |
|
| Loss on disposal of fixed assets | 184 |
| | 1,309 |
| | 445 |
|
| Changes in operating assets and liabilities, net of effects of acquisitions: | |
| | |
| | |
| Accounts receivable | (22,492 | ) | | (5,602 | ) | | (39,999 | ) |
| Prepaid expenses and other current assets | (12,501 | ) | | (2,817 | ) | | (2,616 | ) |
| Other assets | (1,750 | ) | | (1,586 | ) | | 2,172 |
|
| Accounts payable and accrued expenses | 24,285 |
| | 7,381 |
| | 11,652 |
|
| Other current and non-current liabilities | (14,722 | ) | | (2,557 | ) | | (352 | ) |
| Net cash provided by operating activities | 197,493 |
| | 185,474 |
| | 116,529 |
|
| | | | | | |
| Cash flows from investing activities: | |
| | |
| | |
| Additions to premises and equipment | (64,846 | ) | | (34,134 | ) | | (35,563 | ) |
| Acquisition of businesses, net of cash acquired | (34,720 | ) | | (267,946 | ) | | — |
|
| Loan to Ocwen | — |
| | — |
| | (75,000 | ) |
| Proceeds from loan to Ocwen | — |
| | 75,000 |
| | — |
|
| Proceeds from sale of equity affiliate | — |
| | 12,648 |
| | — |
|
| Other investing activities | (300 | ) | | (50 | ) | | — |
|
| Change in restricted cash | (1,402 | ) | | (1,462 | ) | | — |
|
| Net cash used in investing activities | (101,268 | ) | | (215,944 | ) | | (110,563 | ) |
| | | | | | |
| Cash flows from financing activities: | |
| | |
| | |
Repayment of long-term debt and payments on capital lease obligations
| (4,959 | ) | | (3,729 | ) | | (603 | ) |
| Proceeds from issuance of long-term debt | 198,000 |
| | 200,502 |
| | 198,000 |
|
Distribution of cash in connection with the Separation of the Residential Asset Businesses | — |
| | — |
| | (105,000 | ) |
| Debt issuance costs | (2,608 | ) | | (3,200 | ) | | (4,317 | ) |
| Proceeds from stock option exercises | 2,688 |
| | 6,885 |
| | 3,214 |
|
| Purchase of treasury stock | (255,713 | ) | | (141,018 | ) | | (16,781 | ) |
| Contributions from non-controlling interests | — |
| | 28 |
| | 43 |
|
| Distributions to non-controlling interests | (2,596 | ) | | (4,176 | ) | | (7,145 | ) |
| Net cash (used in) provided by financing activities | (65,188 | ) | | 55,292 |
| | 67,411 |
|
| | | | | | |
| Net increase in cash and cash equivalents | 31,037 |
| | 24,822 |
| | 73,377 |
|
| Cash and cash equivalents at the beginning of the period | 130,324 |
| | 105,502 |
| | 32,125 |
|
| |
|
| | | | |
| Cash and cash equivalents at the end of the period | $ | 161,361 |
| | $ | 130,324 |
| | $ | 105,502 |
|
| | | | | | |
| Supplemental cash flow information: | |
| | |
| | |
| Interest paid | $ | 21,829 |
| | $ | 19,325 |
| | $ | 1,134 |
|
| Income taxes paid, net | 13,340 |
| | 3,671 |
| | 4,912 |
|
| | | | | | |
| Non-cash investing and financing activities: | |
| | |
| | |
| (Decrease) increase in payables for purchases of premises and equipment | $ | (2,328 | ) | | $ | 4,552 |
| | $ | 2,457 |
|
| Decrease in acquisition of businesses from subsequent working capital true-ups | (3,711 | ) | | (2,039 | ) | | — |
|
| Amortization of tax-deductible goodwill | — |
| | — |
| | 3,334 |
|
See
accompanying notes to consolidated financial statements.
52
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements
NOTE 1 — ORGANIZATION
1.Description of Business ORGANIZATION AND BASIS OF PRESENTATION- Altisource Portfolio Solutions S.A., together with its subsidiaries (which may be referred to as “Altisource,” the “Company,” “we,” “us” or “our”), is a premier marketplace and transaction solutions provider for the real estate, mortgage and consumer debt industries offering both distribution and content. We leverage proprietary business process, vendor and electronic payment management software and behavioral science based analytics to improve outcomes for marketplace participants.
We conduct our operations through three
reportingreportable segments: Mortgage Services, Financial Services and Technology Services. In addition, we report our corporate related expenditures and eliminations
as a separate segmentseparately (see Note
2223 for a description of our business segments).
Basis of Presentation
NOTE 2 —
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.BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting and Presentation —- The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Intercompany and inter-segment transactions and accounts have been eliminated in consolidation.
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.
The Mortgage Partnership of America, 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 Mortgage Cooperative (“Lenders One”). MPA provides services to Lenders One under a management agreement that ends on December 31, 2025. MPA acts on behalf of Lenders One and its members principally to provide its members with education and training along with revenue enhancing, cost reducing and market share expanding opportunities. For providing these services, MPA receives payments from Lenders One, and in some instances the vendors, based
primarily upon the benefits achieved for the members. The management agreement provides MPA with broad powers such as recruiting members for Lenders One, collection of fees and other obligations from members of Lenders One, processing of all rebates owed to Lenders One
day-to-day operation of Lenders One and
negotiation ofnegotiating and executing contracts with vendors including
signingexecuting 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. AtAs of December 31, 2014, Lenders One had total assets of $7.7 million and total liabilities of $6.7 million. As of December 31, 2013, Lenders One had total assets of $4.6 million and total liabilities of $3.5 million. At
Correction of Immaterial Errors - As previously disclosed, during 2014 we determined that while we properly identified our related parties in previously issued financial statements, disclosures of certain immaterial related party expenses were omitted. We have corrected the previously presented disclosures of related party expenses in Note 4 - Transactions with Related Parties and on the face of the consolidated statements of operations for the years ended December 31, 2012, Lenders One2013 and 2012. The impact of correcting these items in the notes to the consolidated financial statements had total assetsthe effect of:
increasing the amounts disclosed as related party cost of $2.3revenue from Ocwen Financial Corporation and its subsidiaries (“Ocwen”) by $20.0 million and liabilities$13.5 million for the years ended December 31, 2013 and 2012, respectively;
increasing the amounts disclosed as selling, general and administrative expenses from Ocwen billings to Altisource by $1.7 million and $0.7 million for the years ended December 31, 2013 and 2012, respectively;
decreasing the amounts disclosed as selling, general and administrative expenses from Altisource billings to Ocwen by $0.1 million and less than $0.1 million for the years ended December 31, 2013 and 2012, respectively; and
decreasing the amounts disclosed as selling, general and administrative expenses from Altisource billings to Altisource Asset Management Corporation (“AAMC”) by $0.5 million for the year ended December 31, 2013 (no adjustment for the year ended December 31, 2012).
Correcting these items on the face of
$1.0 million.the consolidated statements of operations resulted in the disclosure of related party cost of revenue of $20.0 million and $13.5 million for the years ended December 31, 2013 and 2012, respectively, and a decrease in
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
previously disclosed related party selling, general and administrative expenses by $2.4 million and $3.0 million for the years ended December 31, 2013 and 2012, respectively.
In accordance with the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) Topic 250, Accounting Changes and Error Corrections, the Company evaluated the effect of the disclosure and presentation errors on its previously issued annual and quarterly financial statements, both qualitatively and quantitatively, and concluded that the related party disclosures in the Company’s previously issued annual and quarterly financial statements are not materially misstated.
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 share-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.53
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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 represents 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 these 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 | | 3-7 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 the 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 for the amount that the carrying value of the
assetsasset or asset group exceeds the fair value of the asset or asset group.
Computer software includes the fair value of software acquired in business combinations and purchased software. Purchased software is recorded at cost and amortized using the straight-line method over its estimated useful life. Software acquired in business combinations is recorded at its fair value and amortized using the straight-line method over its estimated useful
life, ranging from two to three years.life.
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”)ASC Topic 805, Business Combinations. The purchase price of an acquisition is allocated to the assets acquired and liabilities assumed using the fair values as of the acquisition date.
Investment in Equity Affiliates —- 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 losses of equity method investees in equity losses of affiliates, net which is included in other income (expense), net in the consolidated statements of operations. We review investments in equity affiliates for an other than temporary impairment whenever events or circumstances indicate that the carrying value is greater than the fair 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 during the fourth
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
quarter or more frequently when an event occurs or circumstances change that
indicate thatindicates 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
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.
The discounted cash flow method is based on present value of projected cash flows. Forecasts of future cash flows are based on our estimate of future sales and operating expenses, based primarily on estimated pricing, sales volumes, market segment share, cost trends and general economic conditions.
54
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notesdiscounted cash flows involve businesses with limited financial history and developing revenue models. The estimated cash flows are discounted using a rate that represents our weighted average cost of capital.
Because we recorded an impairment of goodwill during an interim period in 2014 (see Note 5), we elected to
Consolidated Financial Statements (Continued)We conductbypass the initial analysis of qualitative factors and perform a quantitative two-step goodwill impairment test of all of our reporting units during our annual assessment in the fourth quarter of 2014. For purposes of the annual goodwill impairment assessment, our reporting units are our reportable segments. We calculated the fair value of each of our reporting units by using a discounted cash flow analysis. As of December 31, 2014, the fair value of the Mortgage Services, Financial Services and Technology Services reporting units exceeded their carrying values by a significant margin. Consequently, we determined that no further goodwill impairment exists as of November 30 each year. No impairments of goodwill were recorded for the years ended December 31, 2014. There were no goodwill impairments in 2013 2012 and 2011.
or 2012.
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 in proportion to actual and expected customer revenues or 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. Based on the
fourth quarter2014, 2013
2012 and
20112012 cash flow analyses prepared by management for certain of the intangible assets, no
impairmentsimpairment of intangible assets
werewas recorded for the years ended December 31,
2014, 2013
2012 and
2011.2012.
Debt Issuance Costs —- Debt issuance costs are capitalized and amortized to interest expense through maturity of the related debt using the effective interest method.
Long-Term Debt —- Long-term debt is reported net of applicable discount.discount or premium. The debt discount or premium is amortized to interest expense through maturity of the related debt using the effective interest method.
Fair Value Measurements — Our financial- Fair value is defined as an exit price, representing the amount that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the methodologies of measuring fair value for assets and liabilities, primarily include cash and cash equivalents, restricted cash, long-term debt and acquisition-related contingent consideration. Cash and cash equivalents and restricted cash are carried at amounts that approximate their fair value due to the short-term nature of these instruments. The fair value was determined by levelis as follows:
Level 1 of the three level hierarchy established by ASC Topic 820, Fair Value Measurement, using quoted — Quoted prices in active markets for identical assets. The carrying amount of long-term debt approximates fair value due to the variable interest rate. The fair value was determined by levelassets and liabilities
Level 2 of the three level hierarchy in ASC Topic 820 using— Observable inputs other than quoted prices that are observable, either directly or indirectly.included in Level 1
Level 3 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— 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
Financial assets and
Sale Agreementfinancial liabilities are classified 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 elementlowest level of
consideration paid in connection with an acquisition, with any subsequent adjustments recognized in operating expenses in the consolidated statements of operations. The Company determinesinput that is significant to the fair value
measurements. Our assessment of
acquisition-related contingent consideration, and any subsequent changes in fair value, usingthe significance of 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 expectedparticular input 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
measurements requires judgment, and may affect the valuation of the
assets and liabilities
recorded inbeing measured and their placement within the
accompanying consolidated balance sheets and operating expenses in the consolidated statements of operations. As of December 31, 2013, the Company estimates thefair value
of the Equator acquisition-related contingent consideration required payments to be $46.0 million.hierarchy.
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-United
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
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 the55
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
measurement of monetary balance sheet items denominated in non-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 $0.9 million, $0.4 million $0.2and $0.2 million and $0.1 million for the years ended December 31, 2014, 2013 2012 and 2011,2012, respectively, related to our discretionary amounts contributed.
Share-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 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 segment: We recognize revenue for the majority of the services we provide in this segment on completion ofwhen the service to our customers.services have been performed. 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 ofupon recording the related foreclosure filingdeed 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$137.4 million, $95.6$102.0 million and $80.1$95.6 million incurred for the years ended December 31, 2014, 2013 2012 and 2011,2012, respectively, are included in revenue with an equal offsetting expense included in cost of 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 and the vendor relationship is with us, rather than with our customers.
Financial Services segment: 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-minute basis as the related services are performed.
Technology Services segment: 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 and its subsidiaries, HLSS, Residential and AAMC. We56
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
record revenue associated with implementation services upon completion and maintenance ratably over the related service period.
For Equator’sEquator, LLC’s (“Equator”) 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.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
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.
For Mortgage Builder Software, Inc. (“Mortgage Builder”) software applications, we recognize subscription revenues ratably over the contract term, beginning on the commencement date of each contract. Revenues for usage-based transactions are generally recognized as the usage occurs, as that is the point when the fee becomes fixed or determinable. Mortgage Builder generally invoices customers on a monthly basis.
We provide information technology (“IT”) infrastructure services to Ocwen, Home Loan Servicing Solutions, Ltd. (“HLSS”), Altisource Residential Corporation (“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 platforms used by Ocwen, HLSS, Residential and AAMC. We record revenue associated with implementation services upon completion and maintenance ratably over the related service period.
Income Taxes —- We account for certain income and expense items differently for financial purposes and income tax purposes. We recognize deferred income tax assets and liabilities for these differences between the financial reporting basis and the tax basis of our assets and liabilities as well as expected benefits of utilizing net operating loss and credit carryforwards. The most significant temporary differences relate to accrued compensation, amortization and loss and credit carryforwards. We measure deferred income tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we anticipate recovery or settlement 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(“ASC Topic 740”).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,May 2014, the Financial Accounting Standards Board issued guidance onAccounting Standards Update No. 2014-09, Revenue from Contractswith Customers. This standard establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The core principle of the disclosure requirementsnew standard is an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for unrecognized tax benefits,those goods or a portion of an unrecognized tax benefit.services. 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, a57
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
similar tax loss, or a tax credit carryforward, with some exceptions. This new guidance isstandard will be effective for fiscal years, and interimannual reporting periods within those years, beginning after December 15, 2013. We do2016, including interim periods within that reporting period. Early adoption is not anticipate a materialpermitted. The Company is currently evaluating the impact this new guidance may have on our consolidatedits results of operations and financial statements as a result of this guidance.
3.position.
NOTE 3 — SEPARATION OF RESIDENTIAL ASSET BUSINESSES
On December 21, 2012, we completed the spin-offs of two wholly-owned subsidiaries, AAMC and Residential, into separate publicly traded companies (the “Separation of the Residential Asset Businesses”).
On December 24, 2012, 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
heldheld; and
·received
cash in lieu of
fractional 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 were development stage companies and had not commenced operations
at the date of separation, these entities had no historical results of operations.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
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 for 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.segment (no comparative amounts for 2014 and 2013).
Impact on Share-Based Compensation
The exercise price of each outstanding stock option of Altisource was adjusted to reflect the value of Residential and AAMC common stock distributed to Altisource shareholders. On the separation date, all holders of Altisource stock options received the following:
·
stock options (issued by Residential and AAMC) to acquire the number of shares of Residential or AAMC common stock equal to the product of (a) the number of Altisource stock options held on the separation date and (b) the distribution ratio of
1one share of Residential common stock for every
3three shares of Altisource common stock and
1one share of AAMC stock for every
10ten shares of Altisource common
stockstock; and
·
an adjusted Altisource stock option, with a reduced exercise price per stock option.
4.
NOTE 4 — TRANSACTIONS WITH RELATED PARTIES
Ocwen
Through January 16, 2015, William C. Erbey served as our Chairman as well as the Executive Chairman of Ocwen together with its subsidiaries,and Chairman of each of HLSS, Residential and AAMC. Effective January 16, 2015, Mr. Erbey stepped down as the Executive Chairman of Ocwen and Chairman of each of Altisource, HLSS, Residential and AAMC and is no longer a member of the Board of Directors for any of these companies. As of December 31, 2014, Mr. Erbey owned or controlled approximately 29% of the common stock of Altisource, approximately 14% of the common stock of Ocwen, approximately 1% of the common stock of HLSS, approximately 4% of the common stock of Residential and approximately 28% of the common stock of AAMC. As of December 31, 2014, Mr. Erbey also held 873,501 options to purchase Altisource common stock (all of which were exercisable), 3,620,498 options to purchase Ocwen common stock (3,370,498 of which were exercisable) and 87,350 options to purchase AAMC common stock (all of which were exercisable). Accordingly, as a result of Mr. Erbey’s positions and the continuing common ownership, these companies have been and are related parties of Altisource.
Ocwen
Revenue
Ocwen is our largest customer.
Our Chairman is also the Chairman of Ocwen. Ocwen
is contractually obligated to purchasepurchases certain mortgage services and technology services from us
through August 2025 under the terms of
athe master services
agreementagreements and amendments to the master services
agreementagreements (collectively, the “Service Agreements”)
. with terms extending through August 2025. The Service Agreements, among other things, contain a “most favored nation” provision and the parties to the Service Agreements have the right to renegotiate pricing. In connection with our March 29, 2013 acquisition from58
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
Ocwen of the fee-based businesses of Homeward Residential, Inc. (“Homeward”) that closed on March 29, 2013 and the acquisition fromApril 12, 2013 transaction with Ocwen related to the fee-based businesses of Residential Capital, LLC (“ResCap”) that closed on April 12, 2013 (see Note 5), our Service Agreements with Ocwen were amended to extend the term from 2020 to 2025. Further, as part of the amendments, we are the exclusive provider of services to Ocwen with respect to the 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 ResCap businesses. During 2014, we agreed with Ocwen to apply a negligence standard with respect to indemnification obligations arising out of property preservation and inspection services. Previously, Altisource and Ocwen applied a gross negligence standard with respect to these indemnification obligations. The impact of changing the negligence standard did not have a material effect on our results of operations. In addition, Ocwen purchases certain origination services from Altisource under an agreement that extends through January 2017, subject to termination under certain conditions. 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.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
Related party revenue primarily consists of revenue earned directly from Ocwen and its subsidiaries and revenue earned from the loans serviced by Ocwen and its subsidiaries when Ocwen designates us as the service provider. Related party revenue from Ocwen as a percentage of segment and consolidated revenue was as follows for the years ended December 31:
|
| | | | | | |
| | | 2014 | | 2013 | | 2012 |
| | | | | | | |
| Mortgage Services | | 67% | | 71% | | 68% |
| Financial Services | | 27% | | 30% | | <1% |
| Technology Services | | 41% | | 49% | | 42% |
| Consolidated revenue | | 60% | | 65% | | 59% |
We record revenue we earn from Ocwen under the Service Agreements at rates we believe to be market rates as we believe they are consistent with the fees we charge to other customers for comparable services and/or fees charged by our competitors.
We earn additional revenue on the portfolios serviced by Ocwen
and its subsidiaries that
areis not considered related party revenue when a party other than Ocwen selects Altisource as the service provider.
Related party revenue as a percentage of segment and consolidated revenue was as follows forFor the years ended December
31: | | 2013 | | 2012 | | 2011 | |
| | | | | | | |
Mortgage Services | | 71% | | 68% | | 72% | |
Financial Services | | 30% | | < 1% | | < 1% | |
Technology Services | | 49% | | 42% | | 39% | |
Consolidated revenue | | 65% | | 60% | | 58% | |
31, 2014, 2013 and 2012, we recognized revenue of $256.0 million, $161.9 million and $125.4 million, respectively, on the portfolios serviced by Ocwen that are not considered related party revenue.
Cost of Revenue
At times, we use Ocwen’s contractors and/or employees to support Altisource related services. Ocwen generally bills us for these contractors and/or employees based on their fully-allocated cost. Additionally, we purchase certain data relating to Ocwen’s servicing portfolio in connection with a Data Access and Services Agreement. The Data Access and Services Agreement may be renegotiated and may be cancelled by either Altisource or Ocwen with 90 days prior written notice. Ocwen bills us a per asset fee for this data. For the years ended December 31, 2014, 2013 and 2012, Ocwen billed us $38.6 million, $20.0 million and $13.5 million, respectively. These amounts are reflected as a component of cost of revenue in the consolidated statements of operations. On December 31, 2014, we notified Ocwen that we are canceling the Data Access and Services Agreement, effective March 31, 2015.
Selling, General and Administrative Expenses
We
record revenue we earn fromprovided certain other services to Ocwen and
its subsidiaries under various long-term servicing contracts at rates we believeOcwen provided certain other services to
be market rates as they are consistentus in connection 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 and fees charged by our competitors.Support Services
We have support services agreements with Ocwen and its subsidiaries. Agreements. These services include such areas as human resources, vendor management, vendor oversight, corporate services, operational effectiveness, quality assurance, quantitative analytics, tax and treasury. PaymentThe Support Services Agreement with Ocwen Mortgage Servicing, Inc. extends through September 2018 with automatic one-year renewals thereafter. The Support Services Agreement with Ocwen Financial Corporation extends through October 2017 with automatic one-year renewals thereafter. Billings for thethese services provided iswere generally based on the fully-allocated cost of providing the service based on an estimate of the time and expense of providing the service.service or estimates thereof. For the years ended December 31, 2014, 2013 2012 and 2011,2012, we billed Ocwen and its subsidiaries $2.6$4.5 million, $2.7$2.8 million and $2.6$2.7 million, respectively, and Ocwen and its subsidiaries billed us $2.9$6.1 million, $2.4$4.6 million and $1.9$3.2 million, respectively, for services provided under these agreements.respectively. These amounts are reflected as a component of selling, general and administrative expenses in the consolidated statements of operations.
On December 27, 2012, we entered into a senior unsecured term loan agreement with Ocwen under which we loaned $75.0 million to Ocwen. Payments of interest were 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 bewas not less than 1.50%. On February 15, 2013, Ocwen repaid the outstanding principal amount of
$75.0 million, plusthis loan and 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)2014).
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
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
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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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
Correspondent One® and HLSS™
In July 2011, we acquired an equity interest in Correspondent One S.A. (“Correspondent One”)
(see Note 10). Correspondent 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,Prior to the sale to Ocwen, we provided Correspondent One certain finance, human resources, legal support, facilities, technology, vendor management and
insurance risk management
services.services under a support services agreement. For the years ended December 31, 2013
2012 and
2011,2012, we billed Correspondent One less than $0.1 million
and $0.4 million,
respectively (no comparative amount for 2014). These amounts are reflected as a component of selling, general and
$0.1 million, respectively.administrative expenses in the consolidated statements of operations. 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, for these services (no comparative amount
in 2011)for 2014).
HLSS is a publicly traded company whose primary objective is the acquisition of mortgage servicing rights and
advances. In connection with the February 2012 HLSS initial public offeringrelated servicing advances, loans held for investment and
subsequent thereto, HLSS acquiredother residential mortgage
servicing related
assets from Ocwen. Our Chairman is also the Chairman of HLSS.assets. Under a support services agreement, we provide HLSS certain finance, human resources,
tax and
legal supportfacilities services. For the years ended December 31,
2014, 2013 and 2012, we billed HLSS
$0.9 million, $0.7 million and $0.6 million,
respectively (no comparative amount in 2011).respectively. These amounts are reflected as a component of selling, general and administrative expenses in the consolidated statements of operations.
Residential and AAMC were
established, capitalizedspun-off on December 21, 2012 and their equity was distributed to our shareholders on December
21,24, 2012 and
they 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
as well as single family homes at or following the foreclosure sale 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 ongoing relationships between Altisource, Residential and AAMC, after the Separation of the Residential Asset Businesses, and to provide for an orderly transition, we entered into certain agreements with Residential and AAMC. We 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 insurance risk management. Further, we have separate agreements for certain services related to income tax matters, trademark licenses and technology products and services.
For the yearyears ended December 31, 2014 and 2013, we billed Residential $16.0 million and $2.6 million, respectively (no comparative amount for 2012). This excludes revenue where we are retained by Ocwen to provide services to Residential’s loans serviced by Ocwen. That revenue is included in related party revenue from Ocwen. For the years ended December 31, 2014 and 2013, we billed AAMC $0.1 million and less than $0.1 million, respectively, under thesethe services agreements (no comparative amount for 2012). These amounts are reflected in 2012revenue in the consolidated statements of operations. In addition, for the years ended December 31, 2014 and 2011)2013, we billed AAMC $0.9 million and $0.5 million, respectively, under the services agreements (no comparative amount for 2012). These amounts are reflected as a component of selling, general and administrative expenses in the consolidated statements of operations.
Homeward Fee-Based Businesses
On March 29, 2013, we acquired certain fee-based businesses associated with Ocwen’s acquisition of Homeward. As part of the acquisition, 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 agreementsService 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
pre-acquisition net income adjustment
payment by Ocwen of $11.1 million,
for the Homeward fee-based businesses. From the acquisition date through December 31, 2013,which we
recorded service revenue of $108.8 million and we estimate pre-tax income is $24.3 million related to these businesses.received in September 2013.
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 allocationreceived and
assessmentincreased current liabilities by $2.0 million based on a subsequent detailed analysis of
asset lives will continue to be revisedobligations payable as
additional60
of the closing date, which we paid in 2014. Consequently,
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)(information aboutContinued)
the Company retrospectively adjusted the fair value of
the assets
acquired and liabilities
becomes available. Such assessment must be completed within 12 months fromassumed in the
acquisition date.consolidated balance sheet as of December 31, 2013 as well as disclosed the corresponding amount of non-cash investing and financing activities in the consolidated statement of cash flows for the year ended December 31, 2013.
The
preliminaryfinal 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 | |
|
| | | | |
| (in thousands) | | |
| | | |
| Premises and equipment | | $ | 1,559 |
|
| Customer relationship | | 75,609 |
|
| Goodwill | | 2,039 |
|
| | | 79,207 |
|
| Accounts payable and accrued expenses | | (3,390 | ) |
| | | |
| Purchase price | | $ | 75,817 |
|
|
|
|
|
| | Estimated
life
(in years) |
|
| | | |
Premises &and 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 existing servicing arrangements between Altisource and Ocwen in connection with certain mortgage servicing platform assets of ResCap (the “ResCap Business”). The
Service Agreements provideagreement provides that (i) Altisource will be
the exclusivea provider
except as prohibited by applicable law, to Ocwen of certain services related to the 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) forto Ocwen in connection with 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.businesses agreement.
We acquired no tangible assets and assumed no liabilities in connection with the acquisition.ResCap transaction. However, certain employees as well as practices and processes developed to support the ResCap servicing portfolio were components of the transaction. We accounted for this transaction as a business combination in accordance with ASC Topic 805.805,
Business Combinations. Management prepared a final purchase price allocation and assigned associated asset lives based upon available information at the time of the agreement and
through the dateuntil finalized as of
filing.December 31, 2013. The agreement consideration of $128.8 million was fully allocated to the customer relationship intangible asset with an estimated average useful life of 7 years.
On November 15, 2013, we completed the acquisition of all of the outstanding limited liability company interests of Equator pursuant to the previously reporteda 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 cash (net of closing working capital adjustments), subject to certain post-closing adjustments based on current assets and current liabilities of Equator at closing,closing. After the acquisition date, management adjusted the purchase price allocation based upon information that has subsequently become available relating to be settled within 90 daysacquisition date working capital, resulting in an obligation of the closing date. Additionally,Company to pay the sellers an additional $3.7 million. Consequently, the Company retrospectively adjusted the fair value of the assets acquired and liabilities assumed in the consolidated balance sheet as of December 31, 2013 as well as disclosed the corresponding amount of non-cash investing and financing activities in the consolidated statement of cash flows for the year ended December 31, 2014.
The Purchase Agreement
providesalso provided for the payment of up to $80 million in potential additional consideration
(the “Earn(“Equator Earn Out”). The
Equator Earn Out
consideration iswill be determined based on
EquatorEquator’s Adjusted EBITA (as defined in the Purchase Agreement) in the three consecutive 12-month periods following closing. Up to $22.5 million of the
Equator Earn Out
consideration cancould be earned in each of the first two 12-month periods, and up to $35.0 million
cancould be earned in the third 12-month period.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
Any amounts earned upon the achievement of Adjusted EBITA thresholds are payable through 2017. We may, inat our discretion, pay up to 20% of each
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
payment of any
of the Equator Earn Out
consideration in shares of Company restricted stock, with the balance to be paid in cash.
FromAs of the
closing date, we estimated the fair value of the Equator Earn Out to be $46.0 million, determined based on the present value of future estimated Equator Earn Out payments at such date, which has subsequently been reduced to $8.1 million, as further described below. The acquisition date
through December 31, 2013, we recorded service revenuefair value of
$7.5 million, and pre-tax lossthe Equator Earn Out is
$1.0 million.included as a component of the purchase price of Equator.
The
preliminaryfinal adjusted allocation of the purchase price is
estimated as follows:
(in thousands) | | | |
| | | |
Accounts receivable | | $ | 9,293 | |
Prepaid expenses and other current assets | | 954 | |
Premises and equipment | | 16,974 | |
Customer relationships and trade names | | 43,393 | |
Goodwill | | 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 | ) |
| | | |
Purchase price | | $ | 109,395 | |
|
| | | | | | | | | | | | |
| | | Initial purchase price allocation | | Adjustments | | Adjusted purchase price allocation |
| (in thousands) | | | |
| | | | | | | |
| Accounts receivable | | $ | 9,293 |
| | $ | 3,490 |
| | $ | 12,783 |
|
| Prepaid expenses and other current assets | | 954 |
| | (393 | ) | | 561 |
|
| Premises and equipment | | 16,974 |
| | — |
| | 16,974 |
|
| Customer relationships, trademarks and trade names | | 43,393 |
| | — |
| | 43,393 |
|
| Goodwill | | 82,460 |
| | — |
| | 82,460 |
|
| Other non-current assets | | 242 |
| | 78 |
| | 320 |
|
| Assets acquired | | 153,316 |
| | 3,175 |
| | 156,491 |
|
| Accounts payable and accrued expenses | | (7,232 | ) | | 536 |
| | (6,696 | ) |
| Deferred revenue | | (36,689 | ) | | — |
| | (36,689 | ) |
| Liabilities assumed | | (43,921 | ) | | 536 |
| | (43,385 | ) |
| | | | | | | |
| Purchase price | | $ | 109,395 |
| | $ | 3,711 |
| | $ | 113,106 |
|
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.
|
|
|
|
| | Estimated
life
(in years) |
|
| | | |
Premises and equipment (excluding internally developed software) | | 3 - 5 | |
Internally developed software (included in premises and equipment) | | 7 | |
Customer relationships (weighted average) | | 7 - 15
| |
Trade names | | 4 | |
In accordance with ASC Topic 805, Business Combinations, the liability for contingent consideration is reflected at fair value and adjusted each reporting period with the change in fair value recognized in earnings. During 2014, the fair value of the contingent consideration related to the Equator acquisition was reduced by $37.9 million with a corresponding increase in earnings based on management’s revised estimates that expected earnings of Equator will be lower than projected at the time of acquisition. The reduction in fair value was recorded in 2014 and is reflected as a reduction of selling, general and administrative expenses in the consolidated statements of operations.
As a result of the decline in fair value of the Equator Earn Out, management evaluated and determined that Equator goodwill should be tested for impairment. Consequently, we initiated a quantitative two-step goodwill impairment test by comparing the carrying value of the net assets of Equator to its fair value based on a discounted cash flow analysis. In 2014, based on our goodwill assessment, we determined that the fair value of Equator was less than its carrying value and goodwill was impaired. Consequently, we recorded an impairment loss of $37.5 million, which is reflected as a component of selling, general and administrative expenses in the consolidated statements of operations (see Note 18).
The following table presents the impact of the change in the fair value of the Equator Earn Out and Equator goodwill impairment for the year ended December 31, 2014, which are included in selling, general and administrative expenses in the consolidated statements of operations:
|
| | | | |
| (in thousands) | | |
| | | |
| Change in the fair value of Equator Earn Out | | $ | (37,924 | ) |
| Goodwill impairment | | 37,473 |
|
| | | |
| | | $ | (451 | ) |
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
The following tables present the unaudited pro forma consolidated results of operations
for the years ended December 31, 2013 and 2012 as if the Homeward
fee-based business, ResCap
Businessfee-based business and Equator transactions had occurred at the beginning of the
earliest periodperiods 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 | |
| | | | | | | |
|
| | | | | | | | |
| | | 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 and the Homeward
fee-based business, ResCap
Businessfee-based business and
Equator transactions.Equator. The Homeward
fee-based business, ResCap
Businessfee-based business and Equator operating results were derived from their historical financial statements for the most comparable periods available. The results prior to the
62
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (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 fee-based business, ResCap Businessfee-based 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.
rate.
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
periodsperiod presented, nor is the pro forma data intended to be a projection of results that may be obtained in the future.
Mortgage Builder Acquisition
On September 12, 2014, we acquired certain assets and assumed certain liabilities of Mortgage Builder pursuant to a Purchase and Sale Agreement dated July 18, 2014 (the “Purchase and Sale Agreement”). Mortgage Builder is a provider of residential mortgage loan origination and servicing software systems. Pursuant to the terms of the Purchase and Sale Agreement, we paid $15.7 million at closing in cash (net of closing working capital adjustments). Additionally, the Purchase and Sale Agreement provides for the payment of up to $7.0 million in potential additional consideration (the “MB Earn Out”) based on Adjusted Revenue (as defined in the Purchase and Sale Agreement) in the three consecutive 12-month periods following closing. At closing, we estimated the fair value of the MB Earn Out to be $1.6 million, determined based on the present value of future estimated MB Earn Out payments. The Mortgage Builder acquisition is not material in relation to the Company’s results of operations or financial position.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
6.Notes to Consolidated Financial Statements (Continued)
The preliminary allocation of the purchase price is as follows:
|
| | | | |
| (in thousands) | | |
| | | |
| Cash | | $ | 726 |
|
| Accounts receivable, net | | 1,120 |
|
| Prepaid expenses | | 38 |
|
| Premises and equipment, net | | 553 |
|
| Software | | 1,509 |
|
| Trademarks and trade names | | 209 |
|
| Customer relationship | | 4,824 |
|
| Goodwill | | 9,135 |
|
| | | 18,114 |
|
| Accounts payable and accrued expenses | | (881 | ) |
| | | |
| Purchase price | | $ | 17,233 |
|
Owners.com Acquisition
On November 21, 2014, we acquired certain assets and assumed certain liabilities of Owners Advantage, LLC (“Owners.com”). Owners.com is a self-directed online real estate marketplace. We paid $19.8 million at closing in cash plus contingent consideration of up to an additional $7.0 million over two years (“Owners.com Earn Out”). At closing, we estimated the fair value of the Owners.com Earn Out to be $1.9 million determined based on the present value of future estimated Owners.com Earn Out payments. The Owners.com acquisition is not material in relation to the Company’s results of operations or financial position.
The preliminary allocation of the purchase price is as follows:
|
| | | | |
| (in thousands) | | |
| | | |
| Accounts receivable, net | | $ | 41 |
|
| Prepaid expenses | | 32 |
|
| Software | | 501 |
|
| Trademarks and trade names | | 1,431 |
|
| Goodwill | | 19,775 |
|
| | | 21,780 |
|
| Accounts payable | | (41 | ) |
| | | |
| Purchase price | | $ | 21,739 |
|
NOTE 6 — FAIR VALUE
Fair Value Measurements on a Recurring Basis
The Company had no assets carried at fair value and its liabilities carried at fair value consist of the acquisition related contingent consideration as of December 31, 2014 and 2013. The liabilities for acquisition related contingent consideration were recorded in connection with the acquisitions of Equator in 2013 and Mortgage Builder and Owners.com in 2014. The fair values of the liabilities for acquisition related contingent consideration were $11.6 million and $46.0 million as of December 31, 2014 and 2013, respectively. We measured the liabilities for acquisition related contingent consideration using Level 3 inputs as they are determined based on the present value of future estimated payments, which included sensitivities pertaining to discount rates and financial projections.
For the year ended December 31, 2014, the Company recorded acquisition related contingent consideration in connection with the acquisitions of Mortgage Builder and Owners.com of $1.9 million and $1.6 million, respectively (see Note 5). Additionally, the Company recorded a change in the fair value of the Equator acquisition related contingent consideration of $37.9 million (see Note 5), which is reflected as a reduction in selling, general and administrative expenses in the consolidated statements of operations.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
For the year ended December 31, 2013, the Company recorded acquisition related contingent consideration of $46.0 million related to the acquisition of Equator. There were no gains or losses from the valuation of this contingent consideration during the year ended December 31, 2013.
There were no transfers in or out of the Level 3 fair value hierarchy for the years ended December 31, 2014 and 2013. There were no comparative amounts in 2012.
Fair Value Measurements on a Nonrecurring Basis
The Company recorded a $37.5 million impairment of its goodwill balance during the year ended December 31, 2014 based on a fair value measurement. The goodwill impairment charge is included in selling, general and administrative expenses in the consolidated statements of operations. This fair value measurement was based on inputs classified as Level 3 in the valuation hierarchy. See Note 5.
Fair Value of Financial Instruments
The following table presents the carrying amount and estimated fair value of financial instruments held by the Company at December 31, 2014 and 2013 that are not carried at fair value. The fair values are estimated using market information and what the Company believes to be appropriate valuation methodologies under GAAP:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2014 | | December 31, 2013 |
| (in thousands) | | Carrying Amount | | Fair Value | | Carrying Amount
| | Fair Value |
| | | | | Level 1 | | Level 2 | | Level 3 | | | | Level 1 | | Level 2 | | Level 3
|
| | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 161,361 |
| | $ | 161,361 |
| | $ | — |
| | $ | — |
| | $ | 130,324 |
| | $ | 130,324 |
| | $ | — |
| | $ | — |
|
| Restricted cash | | 3,022 |
| | 3,022 |
| | — |
| | — |
| | 1,620 |
| | 1,620 |
| | — |
| | — |
|
| Long-term debt | | 591,543 |
| | — |
| | 467,319 |
| | — |
| | 396,503 |
| | — |
| | 396,503 |
| | — |
|
Our financial assets and liabilities primarily include cash and cash equivalents, restricted cash and long-term debt. Cash and cash equivalents and restricted cash are carried at amounts that approximate their fair value due to the short-term nature of these instruments. The fair value for cash and cash equivalents and restricted cash was measured using Level 1 inputs. The fair value of our long-term debt as of December 31, 2014 is based on quoted market prices. However, we do not believe that there is an active market for our debt, based on the frequency of trading; therefore, the quoted prices are considered Level 2 inputs. Our prior year long-term debt was refinanced on December 9, 2013 (see Note 14), and therefore, represents fair value at December 31, 2013.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
NOTE 7 — ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consists of the following as of December 31:
(in thousands) | | 2013 | | 2012 | |
| | | | | |
Billed | | | | | |
Non-related parties | | $ | 39,588 | | $ | 25,950 | |
Ocwen | | 11,410 | | 19,817 | |
Correspondent One | | — | | 27 | |
HLSS | | 83 | | 163 | |
AAMC | | 1,347 | | 14 | |
Residential | | 547 | | — | |
Other receivables | | 1,642 | | 353 | |
| | 54,617 | | 46,324 | |
Unbilled | | | | | |
Non-related parties | | 42,284 | | 39,496 | |
Ocwen | | 10,027 | | 6,377 | |
Correspondent One | | — | | 32 | |
| | 106,928 | | 92,229 | |
Allowance for doubtful accounts | | (5,631 | ) | (3,274 | ) |
| | | | | |
Total | | $ | 101,297 | | $ | 88,955 | |
|
| | | | | | | | |
| (in thousands) | | 2014 | | 2013 (1) |
| | | | | |
| Billed | | |
| | |
|
| Non-related parties | | $ | 37,576 |
| | $ | 41,011 |
|
| Ocwen | | 22,831 |
| | 11,658 |
|
| HLSS | | 86 |
| | 83 |
|
| AAMC | | 129 |
| | 1,347 |
|
| Residential | | 11,320 |
| | 547 |
|
| Other receivables | | 1,590 |
| | 1,643 |
|
| | | 73,532 |
| | 56,289 |
|
| Unbilled | | | | |
| Non-related parties | | 46,775 |
| | 44,102 |
|
| Ocwen | | 14,551 |
| | 10,027 |
|
| | | 134,858 |
| | 110,418 |
|
| Less: allowance for doubtful accounts | | (22,675 | ) | | (5,631 | ) |
| | | | | |
| Total | | $ | 112,183 |
| | $ | 104,787 |
|
(1) December 31, 2013 accounts receivable has been revised to reflect a purchase accounting measurement period adjustment related to the Equator acquisition. See Note 5.
Unbilled
feesreceivables 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.
63
We also include in unbilled receivables amounts that are earned during a month and billed in the following month.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
NotesBad debt expense amounted to Consolidated Financial Statements (Continued)
A summary of the allowance$16.3 million, $2.5 million and $3.0 million for doubtful accounts, net of recoveries, for the years ended December 31, 2014, 2013 and 2012, respectively, and 2011 is as follows:
| | (in thousands) | |
| | | |
Balance, January 1, 2011 | | $ | 2,132 | |
Bad debt expense | | 967 | |
Recoveries | | (54 | ) |
Write-offs | | (998 | ) |
Balance, December 31, 2011 | | | 2,047 | |
Bad debt expense | | 3,049 | |
Recoveries | | (21 | ) |
Write-offs | | (1,801 | ) |
Balance, December 31, 2012 | | | 3,274 | |
Bad debt expense | | 2,549 | |
Recoveries | | (21 | ) |
Write-offs | | (171 | ) |
| | | |
Balance, December 31, 2013 | | $ | 5,631 | |
7.included in selling, general and administrative expenses in the consolidated statements of operations. Bad debt expense increased during 2014 driven primarily from the default management services business. A change in our customers’ business model and fourth quarter 2014 discussions with those customers led us to believe that a portion of the accounts receivable balance is no longer collectible.
NOTE 8 — PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following as of December 31:
(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 | |
|
| | | | | | | | |
| (in thousands) | | 2014 | |
2013 (1) |
| | | | | |
| Maintenance agreements, current portion | | $ | 6,367 |
| | $ | 4,600 |
|
| Income taxes receivable | | 5,258 |
| | 1,645 |
|
| Prepaid expenses | | 6,989 |
| | 3,672 |
|
| Other current assets | | 4,953 |
| | 1,079 |
|
| | | | | |
| Total | | $ | 23,567 |
| | $ | 10,996 |
|
8.(1) December 31, 2013 prepaid expenses and other current assets have been revised to reflect a purchase accounting measurement period adjustment related to the Equator acquisition. See Note 5.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
NOTE 9 — 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) | | 2013 | | 2012 | |
| | | | | |
Computer hardware and software | | $ | 103,400 | | $ | 68,329 | |
Office equipment and other | | 28,057 | | 15,592 | |
Furniture and fixtures | | 8,391 | | 5,344 | |
Leasehold improvements | | 17,574 | | 12,982 | |
| | 157,422 | | 102,247 | |
Less: Accumulated depreciation and amortization | | (70,170 | ) | (51,848 | ) |
| | | | | |
Total | | $ | 87,252 | | $ | 50,399 | |
|
| | | | | | | | |
| (in thousands) | | 2014 | | 2013 |
| | | | | |
| Computer hardware and software | | $ | 140,799 |
| | $ | 103,400 |
|
| Office equipment and other | | 36,032 |
| | 28,057 |
|
| Furniture and fixtures | | 12,231 |
| | 8,391 |
|
| Leasehold improvements | | 34,069 |
| | 17,574 |
|
| | | 223,131 |
| | 157,422 |
|
| Less: accumulated depreciation and amortization | | (95,372 | ) | | (70,170 | ) |
| | | | | |
| Total | | $ | 127,759 |
| | $ | 87,252 |
|
Depreciation and amortization expense, inclusive of capital
lease obligations,leases, amounted to
$29.0 million, $19.1 million
$12.8 million and
$8.4$12.8 million for the years ended December 31,
2014, 2013
2012 and
2011,2012, 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.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
9.NOTE 10 — GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill primarily relates to the acquisitions of Equator,
MPA,Owners.com and Mortgage Builder, discussed in Note 5, Springhouse, LLC and
Tracmail.Tracmail acquired in 2011 and MPA acquired in 2010. Changes in goodwill during the years ended December 31,
20132014 and
20122013 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 | |
|
| | | | | | | | | | | | | | | | |
| (in thousands) | | Mortgage Services | | Financial Services | | Technology Services | | Total |
| | | | | | | | | |
| Balance, January 1, 2013 | | $ | 10,919 |
| | $ | 2,378 |
| | $ | 1,618 |
| | $ | 14,915 |
|
| Acquisition of Equator | | — |
| | — |
| | 82,460 |
| | 82,460 |
|
Acquisition of Homeward(1) | | 2,039 |
| | — |
| | — |
| | 2,039 |
|
| Balance, December 31, 2013 | | 12,958 |
| | 2,378 |
| | 84,078 |
| | 99,414 |
|
| Acquisition of Mortgage Builder | | — |
| | — |
| | 9,135 |
| | 9,135 |
|
| Acquisition of Owners.com | | 19,775 |
| | — |
| | — |
| | 19,775 |
|
Impairment of Equator goodwill(2) | | — |
| | — |
| | (37,473 | ) | | (37,473 | ) |
| | | | | | | | | |
| Balance, December 31, 2014 | | $ | 32,733 |
| | $ | 2,378 |
| | $ | 55,740 |
| | $ | 90,851 |
|
(1) December 31, 2013 goodwill has been revised to reflect a purchase accounting measurement period adjustment related to the
Homeward acquisition. See Note 5.
(2) See Note 5 for a discussion of the Equator goodwill impairment.
Intangible assets relate to our acquisitions of the Homeward and ResCap fee-based businesses, Equator,
Mortgage Builder, Owners.com, MPA and Nationwide Credit, Inc. (“NCI”)
(see Note 5). No impairment charges were taken during the periods presented.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
Intangible assets, net consist of the following as of December 31,
20132014 and
2012: | | Weighted | | | | | | | | | | | | | |
| | average | | | | | | | | | | | | | |
| | estimated | | | | | | Accumulated | | | | | |
| | useful life | | Gross carrying amount | | amortization | | Net book value | |
(dollars in thousands) | | (years) | | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | |
| | | | | | | | | | | | | | | |
Definite lived intangible assets | | | | | | | | | | | | | | | |
Trademarks | | 14 | | $ | 12,249 | | $ | 10,614 | | $ | (4,534 | ) | $ | (4,060 | ) | $ | 7,715 | | $ | 6,554 | |
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 | | (6,854 | ) | (5,104 | ) | 28,146 | | 29,896 | |
Non-compete agreement | | 4 | | 1,300 | | 1,300 | | (1,275 | ) | (963 | ) | 25 | | 337 | |
| | | | | | | | | | | | | | | |
Total | | | | $ | 333,033 | | $ | 85,280 | | $ | (56,871 | ) | $ | (28,694 | ) | $ | 276,162 | | $ | 56,586 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Weighted
average
estimated useful life (in years) | | Gross carrying amount | | Accumulated amortization | | Net book value |
| (in thousands) | | | 2014 | | 2013 | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | | | | |
| Definite lived intangible assets: | | | | | | | | | | | | | | |
| Trademarks and trade names | | 13 | | $ | 13,889 |
| | $ | 12,249 |
| | $ | (5,016 | ) | | $ | (4,534 | ) | | $ | 8,873 |
| | $ | 7,715 |
|
| Customer related intangible assets | | 10 | | 289,308 |
| | 284,484 |
| | (79,606 | ) | | (44,208 | ) | | 209,702 |
| | 240,276 |
|
| Operating agreement | | 20 | | 35,000 |
| | 35,000 |
| | (8,604 | ) | | (6,854 | ) | | 26,396 |
| | 28,146 |
|
| Non-compete agreement | | 4 | | — |
| | 1,300 |
| | — |
| | (1,275 | ) | | — |
| | 25 |
|
| Intellectual property | | 10 | | 300 |
| | — |
| | (25 | ) | | — |
| | 275 |
| | — |
|
| | | | | | | | | | | | | | | |
| Total | | | | $ | 338,497 |
| | $ | 333,033 |
| | $ | (93,251 | ) | | $ | (56,871 | ) | | $ | 245,246 |
| | $ | 276,162 |
|
(a)Prior to our acquisition of NCI in 2007, NCI completed an acquisition which created tax-deductible goodwill that amortizes for tax purposes over time. When we acquired NCI in 2007, we recorded a lesser amount of goodwill for financial reporting purposes than what had previously been recorded at NCI for tax purposes. This difference between the amount of goodwill recorded for financial reporting purposes and the amount recorded for taxes is referred to as “Component 2” goodwill and resulted in our recording periodic reductions first to our book goodwill balance in our consolidated financial statements. As our book goodwill balance was fully written off at December 31, 2010, we continued to amortize the remaining Component 2 goodwill for United States tax purposes by reducing certain intangible assets by the remaining tax benefits of the Component 2 goodwill as they are realized in our tax returns. The reduction in intangible assets was $3.3 million and $3.4 million for 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 $37.7 million, $28.2 million $5.0 million and $5.3$5.0 million for the years ended December 31, 2014, 2013 and 2012, and 2011, respectively. respectively. Expected annual definite lived intangible asset amortization for 20142015 through 2018,2019 is $44.2$39.4 million, $40.3$34.2 million, $34.4$30.0 million, $29.1$26.1 million and $24.0$23.0 million, respectively.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
10.NOTE 11 — INVESTMENT IN EQUITY AFFILIATES
AFFILIATE
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
net loss
inon this investment using the equity
affiliatesmethod was $0.2 million
$1.2 million and
$0.5$1.2 million for the years ended December 31, 2013
and 2012,
and 2011, respectively.In the first quarter of 2013, we anticipated entering into an agreement to sell all of our equity interest in Correspondent One to Ocwenrespectively (no comparative amount 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 was included within loss in equity affiliates in other income (expense), net in the consolidated statements of operations.
11.2014).
Other assets consist of the following as of December 31:
|
| | | | | | | | |
| (in thousands) | | 2014 | | 2013 (1) |
| | | | | |
| Security deposits, net | | $ | 7,277 |
| | $ | 7,314 |
|
| Debt issuance costs, net | | 8,099 |
| | 6,687 |
|
| Maintenance agreements, non-current portion | | 3,324 |
| | 1,465 |
|
| Restricted cash | | 3,022 |
| | 1,620 |
|
| Other | | 545 |
| | 572 |
|
| | | | | |
| Total | | $ | 22,267 |
| | $ | 17,658 |
|
(1) (in thousands) | | 2013 | | 2012 | |
| | | | | |
Security deposits, net | | $ | 7,291 | | $ | 5,019 | |
Debt issuance costs, net | | 6,687 | | 4,260 | |
Maintenance agreements, non-current portion | | 1,465 | | 1,614 | |
Restricted cash | | 1,620 | | 158 | |
Other | | 517 | | 623 | |
| | | | | |
Total | | $ | 17,580 | | $ | 11,674 | |
December 31, 2013 security deposits, net and other assets have been revised to reflect a purchase accounting measurement period adjustment related to the Equator acquisition. See Note 5.
Debt issuance costs of $3.2$2.6 million and $4.3$3.2 million were capitalized for the years ended December 31, 20132014 and 2012,2013, respectively, in connection with issuing and refinancing our long-term debt (see Note 13)14).In connection with the acquisition
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
12.Notes to Consolidated Financial Statements (Continued)
NOTE 13 — ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts payable and accrued expenses consist of the following as of December 31:
(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 | |
66
|
| | | | | | | | |
| (in thousands) | | 2014 | | 2013 (1) |
| | | | | |
| Accounts payable | | $ | 22,880 |
| | $ | 15,171 |
|
| Accrued expenses - general | | 25,500 |
| | 20,945 |
|
| Accrued salaries and benefits | | 44,150 |
| | 30,011 |
|
| Accrued expenses - Ocwen | | 6,193 |
| | — |
|
| Income taxes payable | | 7,643 |
| | 11,211 |
|
| Payable to Ocwen | | 5,400 |
| | 7,361 |
|
| Payable to AAMC | | — |
| | 7 |
|
| | | | | |
| Total | | $ | 111,766 |
| | $ | 84,706 |
|
Table of Contents(1) ALTISOURCE PORTFOLIO SOLUTIONS S.A.
NotesDecember 31, 2013 payables have been revised to Consolidated Financial Statements (Continued)reflect purchase accounting measurement period adjustments related to the Homeward and Equator acquisitions. See Note 5.
Other current liabilities consist of the following as of December 31:
(in thousands) | | 2013 | | 2012 | |
| | | | | |
Book overdrafts | | $ | 4,232 | | $ | 5,229 | |
Other | | 5,899 | | 2,712 | |
| | | | | |
Total | | $ | 10,131 | | $ | 7,941 | |
13.
|
| | | | | | | | |
| (in thousands) | | 2014 | | 2013 |
| | | | | |
| Book overdrafts | | $ | 4,788 |
| | $ | 4,232 |
|
| Other | | 8,439 |
| | 5,899 |
|
| | | | | |
| Total | | $ | 13,227 |
| | $ | 10,131 |
|
Long-term debt consists of the following as of December 31:
(in thousands) | | 2013 | | 2012 | |
| | | | | |
Senior secured term loan | | $ | 396,503 | | $ | 200,000 | |
Less: unamortized discount, net | | (1,247 | ) | (1,973 | ) |
Net long-term debt | | 395,256 | | 198,027 | |
Less: current portion | | (3,975 | ) | (2,000 | ) |
| | | | | |
Long-term debt, less current portion | | $ | 391,281 | | $ | 196,027 | |
|
| | | | | | | | |
| (in thousands) | | 2014 | | 2013 |
| | | | | |
| Senior secured term loan | | $ | 591,543 |
| | $ | 396,503 |
|
| Less: unamortized discount, net | | (2,929 | ) | | (1,247 | ) |
| Net long-term debt | | 588,614 |
| | 395,256 |
|
| Less: current portion | | (5,945 | ) | | (3,975 | ) |
| | | | | |
| Long-term debt, less current portion | | $ | 582,669 |
| | $ | 391,281 |
|
On November 27, 2012,
weAltisource Solutions S.à r.l., a wholly-owned subsidiary of the Company, entered into a senior secured term loan agreement, as subsequently amended, with Bank of America, N.A., as administrative agent, and certain lenders, pursuant to which we borrowed
$200$200.0 million. The senior secured term loan was issued with
a 1.0%an original issue discount of $2.0 million, resulting in net proceeds of $198.0 million,
(the “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 (see Note 3), and also to pay certain fees, commissions and expenses in connection with the senior secured term loan agreement. The Initial Proceeds were also used for general corporate purposes, including acquisitions and investments permitted under the 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$200.0 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$200.0 million incremental term loan facility accordion borrowings and increase the maximum amount of Restricted Junior Payments (as defined in the senior secured term loan)loan agreement) that may be made by us, including increasing the amount of Company share repurchases permitted.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
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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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
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 inincluding share repurchases by the Company.
On August 1, 2014, we entered into Amendment No. 3 (“Third Amendment”) to the senior secured term loan
agreement), including share repurchases byagreement to increase the
Company.The refinancedprincipal amount of the term loansloan under the senior secured term loan agreement by $200.0 million, which was issued with a $2.0 million original issue discount, resulting in gross proceeds to the Company of $198.0 million. Additionally, the Third Amendment modified the senior secured term loan agreement to, among other changes, to re-establish the $200.0 million incremental term loan facility accordion and increase the maximum amount of permitted Restricted Junior Payments, including share repurchases, by $200.0 million.
After giving effect to the Third Amendment, the Refinancing Debt must be repaid in equal consecutive quarterly principal installments of
$1.0$1.5 million,
commencingwhich commenced on
December 31, 2013,September 30, 2014, with the balance due at maturity.
After giving effect to the Second Amendment, allAll 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
RefinancedRefinancing 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
2.753.00 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
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,
20132014 was 4.50%.
Payments under the senior 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 agreement includes covenants that restrict or limit, among other things, our ability to: create liens and encumbrances; incur additional indebtedness; sell, transfer or dispose of assets;
make Restricted Junior Payments including share repurchases; change lines of business; amend material debt agreements or other material contracts; engage in certain transactions with affiliates; enter into sale/leaseback transactions; grant negative pledges or agree to such other restrictions relating to subsidiary dividends and distributions; make changes to its fiscal year and engage in mergers and consolidations.
The senior secured term loan 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 senior secured term loan agreement within
5five 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 $40.0 million when due, (v) default on any other debt that equals or exceeds $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
inof Control (as defined in the senior secured term loan agreement), (vii) bankruptcy and insolvency events (as defined in the senior secured term loan agreement), (viii) entry by a court of one or more judgments against us (as defined in the senior secured term loan agreement) in an amount in excess of $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 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 senior secured term loan agreement or waived, all loans and other obligations could become due and immediately payable and the facility could be terminated.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
At December 31, 2014, debt issuance costs were $8.1 million, net of $2.2 million of accumulated amortization. At December 31, 2013, debt issuance costs were $6.7 million, net of $1.0
million of accumulated amortization. At December 31, 2012, debt issuance costs were $4.3 million, net of $0.1 million of accumulated amortization. Debt issuance costs are included in other assets in the accompanying consolidated balance sheets.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
Interest expense on the term loans, including amortization of debt issuance costs and the net debt discount, totaled $23.4 million, $20.3 million and $1.2 million for the years ended December 31, 2014, 2013 and 2012, respectively (no comparative amount in 2011).
respectively.
Maturities of our long-term debt are as follows:
(in thousands) | | | |
| | | |
2014 | | $ | 3,975 | |
2015 | | 3,975 | |
2016 | | 3,975 | |
2017 | | 3,975 | |
2018 | | 3,975 | |
Thereafter | | 376,628 | |
| | 396,503 | |
Less: current portion | | (3,975 | ) |
| | | |
| | $ | 392,528 | |
14.
|
| | | | |
| (in thousands) | | |
| | | |
| 2015 | | $ | 5,945 |
|
| 2016 | | 5,945 |
|
| 2017 | | 5,945 |
|
| 2018 | | 5,945 |
|
| 2019 | | 5,945 |
|
| Thereafter | | 561,818 |
|
| | | |
| | | $ | 591,543 |
|
NOTE 15 — 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’
|
| | | | | | | | |
| (in thousands) | | 2014 | | 2013 |
| | | | | |
| Acquisition related contingent consideration | | $ | 11,616 |
| | $ | 42,946 |
|
| Other non-current liabilities | | 9,032 |
| | 2,530 |
|
| | | | | |
| Total | | $ | 20,648 |
| | $ | 45,476 |
|
NOTE 16 — SHAREHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION
At December 31, 2014, we had 25.4 million shares authorized and issued, and 20.3 million shares of common stock outstanding. As of December 31, 2013, the Board of Directors
hashad 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, 2013,exchanges, and we had 100.0 million shares
authorized. At December 31, 2013, we hadauthorized, 25.4 million shares issued and 22.6 million shares
outstanding. In 2014, this authorization to the Board of
common stock outstanding.Directors expired. 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 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
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
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,
2013,2014, 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 common stock. Expired and forfeited awards are available for reissuance. Vesting and exercise of share-based awards are generally contingent on continued employment.
Stock Repurchase Plan
On February 28, 2014, our shareholders approved a new stock repurchase program, which replaced the previous stock repurchase program. Under the new program, we are authorized to purchase up to 3.4 million shares of our common stock, based on a limit of 15% of the outstanding shares of common stock on the date of approval, in the open market, at a minimum price of $1.00 per share and a maximum price of $500.00 per share. This is in addition to amounts previously purchased under the prior programs. From authorization of the previous programs through December 31, 2014, we have purchased approximately 6.2 million shares
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
of our common stock in the open market at an average price of $79.16 per share. We purchased 2.5 million shares of common stock at an average price of $103.67 per share during the year ended December 31, 2014 and 1.2 million shares at an average price of $116.99 per share during the year ended December 31, 2013. As of December 31, 2014, approximately 1.1 million shares of common stock remain available for repurchase under the new program. Our senior secured term loan limits the amount we can spend on share repurchases in any year and may prevent repurchases in certain circumstances. As of December 31, 2014, approximately $225 million was available to repurchase our common stock under our senior secured term loan.
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
$2.2 million, $2.4 million
$3.6 million and
$3.9$3.6 million for the years ended December 31,
2014, 2013
and 2012,
and 2011, respectively.
The amount for the year ended December 31, 2012 includes the reversal of $0.8 million of share-based compensation expense related to the departure of an executive officer in March 2012.Outstanding share-based compensation currently consists primarily of stock option grants that are a combination of service-based and market-based options.
Service-Based OptionsOptions. . 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 0.8 million service-based awards were outstanding at December 31, 2013.2014.
Market-Based Options. These option grants have two components, each of which vestvests 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. 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. 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 1.8 million market-based awards were outstanding at December 31, 2013.2014.
The Company granted 0.1 million stock options (at a weighted average exercise price of $84.61 per share), less than 0.1 million stock options (at a weighted average exercise price of $104.84$104.84 per share), and 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) during the years ended December 31, 2014, 2013 and 2012, and 2011, respectively.70
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
The fair value of the service-based options was determined using the Black-Scholes 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 | |
|
| | | | | | | | | | | | | | | | | | |
| | | 2014 | | 2013 | | 2012 |
| | | Black-Scholes | | Binomial | | Black-Scholes | | Binomial | | Black-Scholes
| | Binomial
|
| | | | | | | | | | | | | |
Risk-free interest rate (%) | | 1.80 – 1.91 |
| | 0.01 – 2.49 |
| | 1.02 – 1.81 |
| | 0.01 – 2.71 |
| | 0.87 – 1.17 |
| | 0.08 – 2.04 |
|
| Expected stock price volatility (%) | | 37.57 – 45.15 |
| | 38.38 – 45.15 |
| | 36.35 – 36.76 |
| | 36.40 – 36.80 |
| | 34.22 – 34.65 |
| | 34.20 – 34.60 |
|
| Expected dividend yield | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Expected option life (in years) | | 6.25 |
| | — |
| | 6.25 |
| | — |
| | 6.25 |
| | — |
|
| Contractual life (in years) | | — |
| | 14 |
| | — |
| | 14 |
| | — |
| | 14 |
|
| Fair value | | $15.54 – $41.79 |
| | $12.66 – $33.62 |
| | $31.33 – $49.14 |
| | $16.12 – $41.72 |
| | $19.25 – $29.80 |
| | $9.98 – $22.76 |
|
The following table summarizes the
weighted-averageweighted average fair value of stock options granted,
and the total intrinsic value of stock options exercised
forand the grant date fair value of stock options vested during the years ended December 31:
| | | | 2013 | | 2012 | | 2011 | |
| | | | | | | | | |
Weighted average fair value at date of grant | | | | $ | 32.59 | | $ | 20.77 | | $ | 17.66 | |
Intrinsic value of options exercised | | (in thousands) | | 40,761 | | 17,598 | | 4,966 | |
Fair value of options vested | | (in thousands) | | 3,156 | | 2,790 | | 3,536 | |
| | | | | | | | | | | | |
Stock-based
|
| | | | | | | | | | | | |
| (in thousands, except per share amounts) | | 2014 | | 2013 | | 2012 |
| | | | | | | |
| Weighted average fair value at grant date per share | | $ | 26.92 |
| | $ | 32.59 |
| | $ | 20.77 |
|
| Intrinsic value of options exercised | | 10,250 |
| | 40,761 |
| | 17,598 |
|
| Grant date fair value of options vested during the period | | 2,641 |
| | 3,156 |
| | 2,790 |
|
Share-based compensation expense is recorded net of estimated forfeiture rates ranging from 1% to 10%.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
As of December 31,
2013,2014, estimated unrecognized compensation costs related to share-based payments amounted to
$2.5$3.4 million, which we expect to recognize over a weighted average remaining requisite service period of approximately
2.93.3 years.
The following table summarizes
the activity
ofrelated to 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, 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 | |
| | | | | | | | | | | |
71
|
| | | | | | | | | | | | |
| | Number of options | | Weighted average exercise price | | Weighted average contractual term (in years) | | Aggregate intrinsic value (in thousands) |
| | | | | | | | |
| Outstanding at December 31, 2013 | 2,589,343 |
| | $ | 18.33 |
| | 5.20 | | $ | 363,293 |
|
| Granted | 137,000 |
| | 84.61 |
| | | | |
| Exercised | (108,450 | ) | | 24.82 |
| | | | |
|
| Forfeited | (16,001 | ) | | 73.14 |
| | | | |
|
| | | | | | | | |
| Outstanding at December 31, 2014 | 2,601,892 |
| | 21.21 |
| | 4.44 | | 47,805 |
|
| | | | | | | | |
| Exercisable at December 31, 2014 | 2,279,555 |
| | 13.82 |
| | 3.91 | | 47,430 |
|
Table of Contents
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
The following table summarizes information about stock options outstanding and exercisable at December 31,
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) | | 1,700,112 | | 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 | | | | | |
| | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | | 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) | | 1,647,654 |
| | 3.49 | | $ | 9.14 |
| | 1,647,654 |
| | 3.49 |
| | $ | 9.14 |
|
$10.01 — $20.00(a) | | 97,737 |
| | 1.80 | | 12.45 |
| | 97,737 |
| | 1.80 |
| | 12.45 |
|
$20.01 — $30.00(a) | | 477,061 |
| | 5.31 | | 23.18 |
| | 443,624 |
| | 5.31 |
| | 23.19 |
|
$30.01 — $40.00(a) | | 48,309 |
| | 6.27 | | 33.31 |
| | 28,319 |
| | 6.37 |
| | 33.10 |
|
$40.01 — $50.00(a)
| | 15,000 |
| | 9.94 | | 49.06 |
| | — |
| | — |
| | — |
|
$50.01 — $60.00(a) | | 10,000 |
| | 7.37 | | 53.00 |
| | 6,250 |
| | 7.37 |
| | 53.00 |
|
$60.01 — $70.00(a) | | 122,250 |
| | 7.19 | | 60.68 |
| | 48,001 |
| | 7.19 |
| | 60.70 |
|
$70.01 — $80.00(a)
| | 25,600 |
| | 9.86 | | 72.78 |
| | — |
| | — |
| | — |
|
$80.01 — $90.00(a) | | 40,000 |
| | 9.04 | | 85.63 |
| | 4,688 |
| | 8.12 |
| | 83.86 |
|
$90.01 — $100.00(a) | | 73,281 |
| | 9.31 | | 94.32 |
| | 1,407 |
| | 8.16 |
| | 93.88 |
|
$100.01 — $110.00(a)
| | 15,000 |
| | 9.37 | | 105.11 |
| | — |
| | — |
| | — |
|
$120.01 — $130.00(a) | | 30,000 |
| | 8.62 | | 125.98 |
| | 1,875 |
| | 8.62 |
| | 125.98 |
|
| | | | | | | | | | | | | |
| | | 2,601,892 |
| | | | | | 2,279,555 |
| | | | |
(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 | |
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 | |
| | | | | | | |
|
| | | | | | | | |
| | | Market-based options |
| Vesting price | | Ordinary performance | | Extraordinary performance |
| | | | | |
| $170.01 — $180.00 | | 12,500 |
| | — |
|
$180.01 — $190.00
| | 12,500 |
| | 40,875 |
|
| Over $190.00 | | 37,500 |
| | 37,650 |
|
| | | | | |
| Total | | 62,500 |
| | 78,525 |
|
| | | | | |
| Weighted average share price | | $ | 100.37 |
| | $ | 78.56 |
|
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
16.Notes to Consolidated Financial Statements (Continued)
NOTE 17 — 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
the provision of services, reimbursable expenses, technology and telecommunications 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) | | 2013 | | 2012 | | 2011 | |
| | | | | | | |
Compensation and benefits | | $ | 156,812 | | $ | 113,145 | | $ | 82,548 | |
Outside fees and services | | 193,233 | | 123,338 | | 86,201 | |
Reimbursable expenses | | 102,478 | | 96,147 | | 82,074 | |
Technology and telecommunications | | 25,534 | | 23,404 | | 18,772 | |
Depreciation and amortization | | 14,423 | | 10,167 | | 6,254 | |
| | | | | | | |
Total | | $ | 492,480 | | $ | 366,201 | | $ | 275,849 | |
72
|
| | | | | | | | | | | | |
| (in thousands) | | 2014 | | 2013 | | 2012 |
| | | | | | | |
| Compensation and benefits | | $ | 255,889 |
| | $ | 156,812 |
| | $ | 113,145 |
|
| Outside fees and services | | 243,325 |
| | 193,233 |
| | 123,338 |
|
| Reimbursable expenses | | 137,634 |
| | 102,478 |
| | 96,147 |
|
| Technology and telecommunications | | 48,834 |
| | 25,534 |
| | 23,404 |
|
| Depreciation and amortization | | 21,498 |
| | 14,423 |
| | 10,167 |
|
| | | | | | | |
| Total | | $ | 707,180 |
| | $ | 492,480 |
| | $ | 366,201 |
|
Table of Contents
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
17.NOTE 18 — SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include payroll for personnel employed in executive, finance, legal,
compliance, human resources, vendor management, risk and operational 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) | | 2013 | | 2012 | | 2011 | |
| | | | | | | |
Compensation and benefits | | $ | 27,864 | | $ | 21,166 | | $ | 22,327 | |
Professional services | | 8,022 | | 9,864 | | 6,658 | |
Occupancy related costs | | 28,424 | | 24,041 | | 17,824 | |
Amortization of intangible assets | | 28,176 | | 5,030 | | 5,291 | |
Depreciation and amortization | | 4,633 | | 2,609 | | 2,097 | |
Other | | 16,691 | | 12,002 | | 7,934 | |
| | | | | | | |
Total | | $ | 113,810 | | $ | 74,712 | | $ | 62,131 | |
18.
|
| | | | | | | | | | | | |
| (in thousands) | | 2014 | | 2013 | | 2012 |
| | | | | | | |
| Compensation and benefits | | $ | 45,098 |
| | $ | 27,864 |
| | $ | 21,166 |
|
| Professional services | | 18,598 |
| | 8,022 |
| | 9,864 |
|
| Occupancy related costs | | 38,262 |
| | 28,424 |
| | 24,041 |
|
| Amortization of intangible assets | | 37,680 |
| | 28,176 |
| | 5,030 |
|
| Depreciation and amortization | | 7,548 |
| | 4,633 |
| | 2,609 |
|
| Change in the fair value of Equator Earn Out | | (37,924 | ) | | — |
| | — |
|
| Goodwill impairment | | 37,473 |
| | — |
| | — |
|
| Marketing costs | | 24,130 |
| | 5,028 |
| | 2,500 |
|
| Other | | 30,417 |
| | 11,663 |
| | 9,502 |
|
| | | | | | | |
| Total | | $ | 201,282 |
| | $ | 113,810 |
| | $ | 74,712 |
|
NOTE 19 — OTHER INCOME (EXPENSE), NET
Other income (expense), net consists of the following for the years ended December 31:
(in thousands) | | 2013 | | 2012 | | 2011 | |
| | | | | | | |
Loss in equity affiliates, including impairment loss | | $ | (176 | ) | $ | (1,741 | ) | $ | (530 | ) |
Interest income | | 899 | | 222 | | 32 | |
Change in fair value of put option | | — | | — | | 732 | |
Other, net | | (166 | ) | (69 | ) | 54 | |
| | | | | | | |
Total | | $ | 557 | | $ | (1,588 | ) | $ | 288 | |
|
| | | | | | | | | | | | |
| (in thousands) | | 2014 | | 2013 | | 2012 |
| | | | | | | |
| Loss in equity affiliate, including impairment loss | | $ | — |
| | $ | (176 | ) | | $ | (1,741 | ) |
| Interest income | | 103 |
| | 899 |
| | 222 |
|
| Other, net | | 71 |
| | (166 | ) | | (69 | ) |
| | | | | | | |
| Total | | $ | 174 |
| | $ | 557 |
| | $ | (1,588 | ) |
Loss in equity affiliates primarily represents our proportional share of the losses in Correspondent One and impairment loss on the investment (see Note
10)11).
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.
73
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)(19.Continued)
The components of income before income taxes and non-controlling interests consist of the following for the year ended December 31:
|
| | | | | | | | | | | | |
| (in thousands) | | 2014 | | 2013 | | 2012 |
| | | | | | | |
| Domestic - Luxembourg | | $ | 124,181 |
| | $ | 122,722 |
| | $ | 107,498 |
|
| Foreign - U.S. | | 9,575 |
| | 11,125 |
| | 4,915 |
|
| Foreign - Non-U.S. | | 13,509 |
| | 8,486 |
| | 12,236 |
|
| | | | | | | |
| Total | | $ | 147,265 |
| | $ | 142,333 |
| | $ | 124,649 |
|
The income tax provision consists of the following for the years ended December 31:
(in thousands) | | 2013 | | 2012 | | 2011 | |
| | | | | | | |
Current: | | | | | | | |
Domestic - Luxembourg | | $ | 2,516 | | $ | 2,841 | | $ | 2,300 | |
Foreign - U.S. Federal | | 6 | | — | | — | |
Foreign - U.S. State | | 403 | | 353 | | 119 | |
Foreign - Non U.S. | | 3,600 | | 2,552 | | 2,891 | |
| | | | | | | |
| | $ | 6,525 | | $ | 5,746 | | $ | 5,310 | |
Deferred: | | | | | | | |
Domestic - Luxembourg | | $ | — | | $ | 388 | | $ | (387 | ) |
Foreign - U.S. Federal | | 2,506 | | 2,419 | | 3,216 | |
Foreign - U.S. State | | 84 | | (23 | ) | (22 | ) |
Foreign - Non U.S. | | (575 | ) | 208 | | (174 | ) |
| | 2,015 | | 2,992 | | 2,633 | |
| | | | | | | |
Total | | $ | 8,540 | | $ | 8,738 | | $ | 7,943 | |
|
| | | | | | | | | | | | |
| (in thousands) | | 2014 | | 2013 | | 2012 |
| | | | | | | |
| Current: | | | | | | |
| Domestic - Luxembourg | | $ | 4,415 |
| | $ | 2,516 |
| | $ | 2,841 |
|
| Foreign - U.S. Federal | | 75 |
| | 6 |
| | — |
|
| Foreign - U.S. State | | 476 |
| | 403 |
| | 353 |
|
| Foreign - Non-U.S. | | 4,046 |
| | 3,600 |
| | 2,552 |
|
| | | | | | | |
| | | $ | 9,012 |
| | $ | 6,525 |
| | $ | 5,746 |
|
| Deferred: | | | | | | |
| Domestic - Luxembourg | | $ | — |
| | $ | — |
| | $ | 388 |
|
| Foreign - U.S. Federal | | 1,756 |
| | 2,506 |
| | 2,419 |
|
| Foreign - U.S. State | | (281 | ) | | 84 |
| | (23 | ) |
| Foreign - Non-U.S. | | (309 | ) | | (575 | ) | | 208 |
|
| | | | | | | |
| | | $ | 1,166 |
| | $ | 2,015 |
| | $ | 2,992 |
|
| | | | | | | |
| Total | | $ | 10,178 |
| | $ | 8,540 |
| | $ | 8,738 |
|
We received a
favorabletax ruling in June 2010 regarding the treatment of certain intangibles that exist for purposes of determining the Company’s taxable
income.income, which expires in 2019 unless extended or renewed. This ruling does not have a material impact on our deferred tax assets or liabilities. Income tax computed by applying the Luxembourg statutory income tax rate of 29.22% differs from income tax computed at the effective tax rate primarily because of the effect of the
favorable tax ruling
and differing tax rates in multiple
jurisdictions, changes in valuation allowance and minority interest.jurisdictions.
We operate under tax holidays in certain geographies in India and 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
$0.9 million ($0.04 per diluted share), $0.2 million ($0.01 per diluted share)
, and $1.5 million ($0.06
per diluted share), and $0.6 million ($0.02 per diluted share) for the years ended December 31,
2013, 2012 and 2011, respectively. The Philippines tax holiday commenced in2014, 2013 and
had no impact on taxes for the year ended December 31, 2013.2012, respectively.
The Company accounts for certain income and expense items differently for financial purposes and income tax purposes. We recognize deferred income tax assets and liabilities for these differences between the financial reporting basis and the tax basis of our assets and liabilities as well as expected benefits of utilizing net operating loss and credit carryforwards. We measure deferred income tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those temporary differences.
74
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
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) | | 2013 | | 2012 | |
| | | | | |
Current deferred tax assets: | | | | | |
Allowance for doubtful accounts and other reserves | | $ | 43 | | $ | 40 | |
Accrued expenses | | 3,183 | | 1,940 | |
Current deferred tax liabilities: | | | | | |
Prepaid expenses | | (389 | ) | (205 | ) |
| | | | | |
Current deferred tax assets, net | | $ | 2,837 | | $ | 1,775 | |
| | | | | |
Non-current deferred tax assets: | | | | | |
Net operating loss carryforwards | | $ | 12,439 | | $ | 14,342 | |
Non-U.S. deferred tax assets | | 1,471 | | 895 | |
Share-based compensation | | 784 | | 956 | |
Other | | 7 | | 7 | |
Non-current deferred tax liabilities: | | | | | |
Intangible assets | | (6,035 | ) | (6,869 | ) |
Depreciation | | (4,855 | ) | (2,845 | ) |
| | 3,811 | | 6,486 | |
Valuation allowance | | (3,189 | ) | (2,413 | ) |
| | | | | |
Non-current deferred tax assets, net | | $ | 622 | | $ | 4,073 | |
| | | | | |
Net deferred tax assets | | $ | 3,459 | | $ | 5,848 | |
|
| | | | | | | | |
| (in thousands) | | 2014 | | 2013 |
| | | | | |
| Current deferred tax assets: | | | | |
| Allowance for doubtful accounts and other reserves | | $ | 72 |
| | $ | 43 |
|
| Accrued expenses | | 5,165 |
| | 3,183 |
|
| Current deferred tax liabilities: | | | | |
| Prepaid expenses | | (250 | ) | | (389 | ) |
| | | | | |
| Current deferred tax assets, net | | $ | 4,987 |
| | $ | 2,837 |
|
| | | | | |
| Non-current deferred tax assets: | | | | |
| Net operating loss carryforwards | | $ | 13,940 |
| | $ | 12,439 |
|
| U.S. federal and state tax credits | | 1,202 |
| | — |
|
| Non-U.S. deferred tax assets | | 1,780 |
| | 1,471 |
|
| Share-based compensation | | 856 |
| | 784 |
|
| Other | | — |
| | 7 |
|
| Non-current deferred tax liabilities: | | | | |
| Intangible assets | | (5,302 | ) | | (6,035 | ) |
| Depreciation | | (11,878 | ) | | (4,855 | ) |
| Other | | (177 | ) | | — |
|
| | | 421 |
| | 3,811 |
|
| Valuation allowance | | (3,115 | ) | | (3,189 | ) |
| | | | | |
| Non-current deferred tax assets, net | | $ | — |
| | $ | 622 |
|
| | | | | |
| Non-current deferred tax liabilities, net | | $ | (2,694 | ) | | $ | — |
|
| | | | | |
| Net deferred tax assets | | $ | 2,293 |
| | $ | 3,459 |
|
| | | | | |
| Total deferred tax assets | | $ | 19,900 |
| | $ | 14,738 |
|
| | | | | |
| Total deferred tax liabilities | | $ | (17,607 | ) | | $ | (11,279 | ) |
A valuation allowance is provided when it is deemed more likely than not that some portion or all of a deferred tax asset will not be realized. In determining whether a valuation allowance is needed, we considered estimates of future taxable income, future reversals of temporary differences, the tax character of gains and losses, and the impact of tax planning strategies that can be implemented, if warranted. The
increasenet decrease in valuation allowance of
$0.8$0.1 million during
20132014 relates to
an increase in state and foreign losses generated in the current
year.year and a release of prior year valuation allowance related to certain state losses the Company believes will more likely than not be realized.
We have not provided Luxembourg deferred taxes on cumulative earnings of non-Luxembourg affiliates as we have chosen to indefinitely reinvest these earnings. The earnings reinvested as of December 31,
20132014 were approximately
$38.5$48.0 million, which if distributed would result in additional tax due totaling approximately $9.6 million.
The Company had a deferred tax asset of
$12.4$13.9 million as of December 31,
20132014 relating to
United Statesthe U.S. federal, state and foreign net operating losses compared to
$14.3$12.4 million as of December 31,
2012.2013. Of this amount,
$1.4$1.8 million as of December 31,
20132014 related to state net operating losses subject to a valuation allowance compared to
$1.5$1.4 million as of December 31,
2012,2013, and
$1.8$1.7 million as of December 31,
20132014 related to Luxembourg net operating losses subject to a valuation allowance compared to
$0.9$1.8 million as of December 31,
2012.2013. The Company has not recognized
the U.S. federal net operating loss
carry forwardscarryforwards of
$9.5$13.6 million as of December 31,
20132014 related to stock options exercised compared to
$2.2$9.5 million as of December 31,
2012.2013. If realized, the benefit would be an increase to additional
paid-in-capital.paid-in capital. The gross amount of net operating losses available for carryover to future years is approximately
$35.7 million as of December 31, 2014 compared to $32.6 million as of December 31,
2013 compared to $36.12013. Of this amount, $12.2 million as of December 31,
2012. Of this amount,2014 compared to $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.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
In addition, the Company had a deferred tax asset of $1.2 million as of December 31, 2014 relating to the U.S. federal and state tax credits (no comparative amount for 2013). The U.S. federal credit carryforward is scheduled to expire between 2032 and 2034. The state tax credit carryforwards are scheduled to expire between 2017 and 2024.
The distribution 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 had in the assets that comprised 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
75
Table of Contents
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
related to our operating results. The Company does not anticipate a material obligation under this indemnity.
The following table reconciles the income tax provision to the Luxembourg statutory income tax rate for the years ended December 31:
| | 2013 | | 2012 | | 2011 | |
| | | | | | | |
Statutory tax rate | | 29.22 | % | 28.80 | % | 28.80 | % |
Foreign rate differential | | (24.97 | ) | (23.30 | ) | (20.03 | ) |
Change in valuation allowance | | 0.76 | | 0.16 | | — | |
State tax expense | | 0.24 | | 0.17 | | 0.06 | |
Other | | 0.75 | | 1.18 | | 0.42 | |
| | | | | | | |
| | 6.00 | % | 7.01 | % | 9.25 | % |
|
| | | | | | | | | |
| | | 2014 | | 2013 | | 2012 |
| | | | | | | |
| Statutory tax rate | | 29.22 | % | | 29.22 | % | | 28.80 | % |
| Permanent difference related to Luxembourg intangible assets | | (22.60 | ) | | (23.59 | ) | | (21.99 | ) |
| Change in valuation allowance | | (0.05 | ) | | 0.76 |
| | 0.16 |
|
| State tax expense | | 0.03 |
| | 0.24 |
| | 0.17 |
|
| Tax credits | | (0.71 | ) | | — |
| | — |
|
| Uncertain taxes | | 0.88 |
| | — |
| | — |
|
| Other | | 0.14 |
| | (0.63 | ) | | (0.13 | ) |
| | | | | | | |
| Effective tax rate | | 6.91 | % | | 6.00 | % | | 7.01 | % |
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 reservesThe Company has open tax years in the United States (2011 through 2013), India (2010 through 2014) and Luxembourg (2010 through 2013).
The following table reconciles the amount of unrecognized tax benefits for uncertainthe year ended December 31, 2014 (no comparative amounts for 2013):
|
| | | | |
| (in thousands) | | 2014 |
| | | |
| Amount of unrecognized tax benefits as of the beginning of the year | | $ | — |
|
| Increases as a result of tax positions taken in a prior period | | 1,153 |
|
| | | |
| Amount of unrecognized tax benefit as of the end of the year | | $ | 1,153 |
|
The total amount of unrecognized tax benefits including interest and penalties that, if recognized, would affect the effective tax rate is $1.3 million as of December 31, 2014 (no comparative amount for 2013). The Company recognizes interest, if any, related to unrecognized tax benefits as a component of income tax
positions were required to have beenexpense. As of December 31, 2014, the Company had recorded
pursuant to ASC Topic 740.We recognize accrued interest and penalties related to uncertainunrecognized tax positions in selling, general and administrative expenses inbenefits of $0.1 million (no comparative amount for 2013).
Due to an expected settlement within the
consolidated statementsnext twelve months, an estimated $1.3 million of
operations. As of December 31, 2013 and 2012, we did not have a liability recorded for payment of interest and penalties associated with uncertainunrecognized tax
positions.20.benefits may be recognized during that twelve month period.
NOTE 21 — EARNINGS PER SHARE
Basic EPS is computed by dividing income available to common
stockholdersshareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the assumed conversion of
all dilutive
securities.securities using the treasury stock method.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
Basic and diluted EPS are calculated as follows for the years ended December 31:
(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
|
| | | | | | | | | | | | |
| (in thousands, except per share data) | | 2014 | | 2013 | | 2012 |
| | | | | | | |
| Net income attributable to Altisource | | $ | 134,484 |
| | $ | 129,973 |
| | $ | 110,627 |
|
| | | | | | | |
| Weighted average common shares outstanding, basic | | 21,625 |
| | 23,072 |
| | 23,358 |
|
| Dilutive effect of stock options | | 2,009 |
| | 1,981 |
| | 1,604 |
|
| | | | | | | |
| Weighted average common shares outstanding, diluted | | 23,634 |
| | 25,053 |
| | 24,962 |
|
| | | | | | | |
| Earnings per share: | | | | | | |
| Basic | | $ | 6.22 |
| | $ | 5.63 |
| | $ | 4.74 |
|
| | | | | | | |
| Diluted | | $ | 5.69 |
| | $ | 5.19 |
| | $ | 4.43 |
|
For each of options for the years ended December 31, 2014, 2013 and 2012, andless than 0.1 million options for the year ended December 31, 2011 that were anti-dilutive have been excluded from the computation of diluted EPS. These options were anti-dilutive because their exercise price was greater than the average market price of our common stock. Also excluded from the computation of diluted EPS are0.1 million, 0.30.1 million and 0.3 million options for the years ended December 31, 2014, 2013 2012 and 2011,2012, 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.76
Table of Contents
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
21.NOTE 22 — COMMITMENTS, CONTINGENCIES AND CONTINGENCIES
REGULATORY MATTERS
From time to time, we are involved in legal
and administrative proceedings arising in the
ordinary course of
our business. We record a liability for
litigationthese matters if an unfavorable outcome is probable and the amount of loss can be reasonably estimated, including expected insurance coverage. For proceedings where
a rangethe reasonable estimate of loss is
determined,a range, we record a best estimate of loss within the range.
When legal proceedings are material, we disclose
On September 8, 2014, the natureWest Palm Beach Firefighter’s Pension Fund filed a putative securities class action suit against Altisource and certain of its officers and directors in the United States District Court for the Southern District of Florida alleging violations of the litigation,Securities Exchange Act of 1934 and Rule 10b-5 with regard to disclosures concerning pricing and transactions with related parties that allegedly inflated Altisource share prices. The court subsequently appointed the extent possible,Pension Fund of the estimateInternational Union of loss or rangePainters and Allied Trades District Council 35 and the Annuity Fund of loss. In the opinionInternational Union of management, after consultation with legal counsel,Painters and Allied Trades District Council 35 as Lead Plaintiffs. On January 30, 2015, Lead Plaintiffs filed an amended class action complaint which adds Ocwen Financial Corporation as a defendant, and seeks a determination that the action may be maintained as a class action on behalf of purchasers of the Company’s securities between April 25, 2013 and December 21, 2014 and an unspecified amount of damages. Altisource intends to vigorously defend this lawsuit. Altisource is unable to predict the outcome of currentthis lawsuit or reasonably estimate the potential loss, if any, arising from the suit, given that motions to dismiss have not yet been filed or adjudicated, discovery has not commenced and significant legal and factual issues remain to be determined.
In addition to the matter referenced above, we are involved in legal actions in the course of our business, some of which seek monetary damages. We do not believe that the outcome of these proceedings, both individually and in the aggregate, will
not have a material impact on our financial condition, results of operations or cash flows.
Regulatory Matters
Our business is subject to regulation and oversight by federal, state and local governmental authorities. We periodically receive subpoenas, civil investigative demands or other requests for information from regulatory agencies in connection with their regulatory or investigative authority. We are currently responding to such inquiries from federal and state agencies relating to certain aspects of our business. We believe it is premature to predict the potential outcome or to estimate any potential financial impact in connection with these inquiries.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
Ocwen Related Matters
Ocwen is our largest customer and 60% of our 2014 revenue was related party revenue from Ocwen. Additionally, 24% of our 2014 revenue was earned on the portfolios serviced by Ocwen, but is not considered related party revenue because a party other than Ocwen selects Altisource as the service provider. Ocwen has been and is subject to a number of pending federal and state regulatory investigations, inquiries and requests for information that have or could result in adverse regulatory actions against Ocwen. For example, as a result of various regulatory actions, Ocwen is (i) subject to an independent auditor’s review of compliance with California servicing laws and has agreed not to obtain any new servicing rights in California until the regulator is satisfied with future document requests, (ii) operating under the oversight of an on-site operations monitor imposed by New York Department of Financial Services (“NYDFS”), which is assessing the adequacy and effectiveness of Ocwen’s operations, including information technology systems, (iii) required to perform benchmarking pricing studies for transactions with related parties, which are subject to periodic review by the monitor imposed by the NYDFS and (iv) subject to requirements under an agreement with the Consumer Finance Protection Bureau and various states attorneys general and agencies that imposed specific servicing guidelines and oversight by an independent national monitor, who recently reported they were investigating the reliability of information Ocwen has provided. In addition to these matters, Ocwen continues to be subject to other regulatory investigations, inquiries and requests for information and pending legal proceedings, and Ocwen may become subject to future federal and state regulatory investigations, inquiries and requests for information, any of which could also result in adverse regulatory or other actions against Ocwen.
As a result of these various difficulties faced by Ocwen, its debt and servicer ratings have been downgraded. Further, certain bondholders of Ocwen-serviced residential mortgage-backed securities (“RMBS”) alleged that Ocwen, as servicer of certain mortgage-backed securities trusts, defaulted on these servicing agreements.
Ocwen relies, in part, on HLSS to finance its operations. For a significant portion of Ocwen-serviced non-government-sponsored enterprise (“non-GSE”) loans, HLSS owns (1) the rights to receive the servicing fees that Ocwen is entitled to receive and (2) associated servicing advances. As a result of certain of the foregoing matters, HLSS has received notices of default with respect to certain of its debt financing and has received demands from a shareholder that servicing be transferred away from Ocwen.
The foregoing may have significant and varied effects on Ocwen’s business and our continuing relationships with Ocwen. For example, Ocwen may be required to alter the way it conducts business, including the parties it contracts with for services (including information technology services), it may be required to seek changes to its existing pricing structure with related parties or otherwise, it may lose or sell some or all of its non-GSE servicing rights or subservicing arrangements or may lose one or more of its state servicing licenses. Additional regulatory actions may impose additional restrictions on or require changes in Ocwen’s business that would require it to sell assets or change its business operations. Further, Ocwen’s ability to finance its operations and repay maturing obligations rests in large part on its ability and the ability of HLSS to continue to borrow money, which also may be affected by any or all of the circumstances described above. Any or all of these effects could result in our eventual loss of Ocwen as a customer or a reduction in the volume of services they purchase from us or the loss of other customers.
If any of the following events occurred, Altisource’s revenue would be significantly lower and our results of operations would be materially adversely affected, including from the impairment or write-off of goodwill, intangible assets, property and equipment, other assets and accounts receivable:
Altisource loses Ocwen as a customer or there is a significant reduction in the volume of services they purchase from us
Ocwen loses or sells a significant portion or all of its non-GSE servicing rights or subservicing arrangements
Ocwen loses its state servicing licenses in states with a significant number of loans in Ocwen’s servicing portfolio
The contractual relationship between Ocwen and Altisource changes significantly or there are significant changes to our pricing to Ocwen for services from which we generate material revenue
Management cannot predict the outcome of the Ocwen related matters or the impact they may have on Altisource. However, in the event these Ocwen related matters materially negatively impact Altisource, we believe the impact to Altisource would occur over an extended period of time and the variable nature of our cost structure allows us to realign our cost structure in line with remaining revenue.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
In this regard, we have a plan that allows us to efficiently execute on this realignment. We believe that transfers of Ocwen’s servicing rights to a successor servicer(s) would take an extended period of time because of the approval required from many parties, including regulators, rating agencies, RMBS trustees, lenders and others. During this period of time, we believe we would continue to generate revenue from the services we provide to the portfolio. Additionally, we have several growth initiatives that focus on diversifying and growing our revenue and customer base. Our major growth initiatives include:
Attracting new clients to our comprehensive default related businesses
Growing our origination services and technology businesses
Expanding our innovative online real estate marketplaces
Growing our property management and renovation services businesses
We have an established sales and marketing strategy to support each of these initiatives.
Management believes our plans, together with current liquidity and cash flows from operations will be sufficient to meet working capital, capital expenditures, debt service and other cash needs for at least the next year. However, there can be no assurance that our plans would be successful or our operations would be profitable.
We lease certain premises and equipment under various operating lease agreements. Future minimum lease payments at December 31,
20132014 under non-cancelable operating leases with an original term exceeding one year are as follows:
(in thousands) | | Operating lease
obligations | |
| | | |
2014 | | $ | 9,142 | |
2015 | | 8,517 | |
2016 | | 7,077 | |
2017 | | 5,148 | |
2018 | | 4,386 | |
Thereafter | | 138 | |
| | | |
| | $ | 34,408 | |
|
| | | | |
| (in thousands) | | Operating lease obligations |
| | | |
| 2015 | | $ | 17,924 |
|
| 2016 | | 15,357 |
|
| 2017 | | 11,841 |
|
| 2018 | | 7,941 |
|
| 2019 | | 5,060 |
|
| Thereafter | | 5,355 |
|
| | | |
| | | $ | 63,478 |
|
Total operating lease expense, net of sublease income, was
$20.1 million, $12.8 million
$10.9 million and
$10.8$10.9 million for the years ended December 31,
2014, 2013
2012 and
2011,2012, respectively. The operating leases generally relate to office locations and reflect customary lease terms which range from
31 to
610 years in duration.
In connection with the acquisition of Equator (see Note 5), we executed a standby letter of credit in the amount of $1.5 million related to an office lease, secured by a restricted cash balance. In addition, we executed standby letters of credit totaling $1.8 million for three other office leases.
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 and are not included in the consolidated balance sheets. Amounts held in escrow and trust accounts were
$71.8$62.5 million and
$47.2$71.8 million at December 31,
2014 and 2013,
and 2012, respectively.
22.
NOTE 23 — 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 used by our Chief Executive Officer
(our Chief Operating Decision Maker) to evaluate operating performance and to assess the allocation of our resources.
We classify our businessbusinesses 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, investors and investors inother sellers of single family
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
homes. The Financial Services segment provides collection and customer relationship management77
Table of Contents
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
services primarily to debt originators and servicers (e.g., credit card, auto lending, retail credit and mortgage) and the utility, insurance and insurancehotel industries. The Technology Services segmentprincipally consists of our REALSuite software applications, Equator’s software applications, as well asMortgage Builder’s software applications and our information technology infrastructure services. 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. Equator’s software applications provide comprehensive, end-to-end workflow and transaction services to manage real estate and foreclosure related activities and purchase related services from vendors. Mortgage Builder provides mortgage origination and servicing software applications. In addition, Corporate Items and Eliminations includesinclude eliminations of transactions between the reportingreportable segments, interest expense and costs related to corporate support functions including executive, finance, legal, compliance, human resources, vendor management, risk and operational effectiveness.effectiveness and marketing.
Financial information for our segments is as follows: | | For the year ended December 31, 2013 | |
| | | | | | | | Corporate | | | |
| | Mortgage | | Financial | | Technology | | Items and | | Consolidated | |
(in thousands) | | Services | | Services | | Services | | Eliminations | | Altisource | |
| | | | | | | | | | | |
Revenue | | $ | 596,152 | | $ | 92,958 | | $ | 103,891 | | $ | (24,644 | ) | $ | 768,357 | |
Cost of revenue | | 374,713 | | 55,328 | | 84,538 | | (22,099 | ) | 492,480 | |
Gross profit | | 221,439 | | 37,630 | | 19,353 | | (2,545 | ) | 275,877 | |
Selling, general and administrative expenses | | 46,515 | | 15,571 | | 12,442 | | 39,282 | | 113,810 | |
Income from operations | | 174,924 | | 22,059 | | 6,911 | | (41,827 | ) | 162,067 | |
Other income (expense), net | | (136 | ) | (10 | ) | 7 | | (19,595 | ) | (19,734 | ) |
Income before income taxes and non-controlling interests | | $ | 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 | |
78
|
| | | | | | | | | | | | | | | | | | | | |
| | | For the year ended December 31, 2014 |
| (in thousands) | | Mortgage
Services | | Financial
Services | | Technology
Services | | Corporate
Items and
Eliminations | | Consolidated
Altisource |
| | | | | | | | | | | |
| Revenue | | $ | 790,076 |
| | $ | 98,499 |
| | $ | 230,367 |
| | $ | (40,026 | ) | | $ | 1,078,916 |
|
| Cost of revenue | | 484,512 |
| | 64,338 |
| | 194,301 |
| | (35,971 | ) | | 707,180 |
|
| Gross profit | | 305,564 |
| | 34,161 |
| | 36,066 |
| | (4,055 | ) | | 371,736 |
|
| Selling, general and administrative expenses | | 94,678 |
| | 18,791 |
| | 31,950 |
| | 55,863 |
| | 201,282 |
|
| Income from operations | | 210,886 |
| | 15,370 |
| | 4,116 |
| | (59,918 | ) | | 170,454 |
|
| Other income (expense), net | | 204 |
| | 62 |
| | (31 | ) | | (23,424 | ) | | (23,189 | ) |
| | | | | | | | | | | |
| Income before income taxes and non-controlling interests | | $ | 211,090 |
| | $ | 15,432 |
| | $ | 4,085 |
| | $ | (83,342 | ) | | $ | 147,265 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | For the year ended December 31, 2013 |
| (in thousands) | | Mortgage
Services | | Financial
Services | | Technology
Services | | Corporate
Items and
Eliminations | | Consolidated
Altisource |
| | | | | | | | | | | |
| Revenue | | $ | 596,152 |
| | $ | 92,958 |
| | $ | 103,891 |
| | $ | (24,644 | ) | | $ | 768,357 |
|
| Cost of revenue | | 374,713 |
| | 55,328 |
| | 84,538 |
| | (22,099 | ) | | 492,480 |
|
| Gross profit | | 221,439 |
| | 37,630 |
| | 19,353 |
| | (2,545 | ) | | 275,877 |
|
| Selling, general and administrative expenses | | 46,515 |
| | 15,571 |
| | 12,442 |
| | 39,282 |
| | 113,810 |
|
| Income from operations | | 174,924 |
| | 22,059 |
| | 6,911 |
| | (41,827 | ) | | 162,067 |
|
| Other income (expense), net | | (136 | ) | | (10 | ) | | 7 |
| | (19,595 | ) | | (19,734 | ) |
| | | | | | | | | | | |
| Income before income taxes and non-controlling interests | | $ | 174,788 |
| | $ | 22,049 |
| | $ | 6,918 |
| | $ | (61,422 | ) | | $ | 142,333 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | For the year ended December 31, 2012 |
| (in thousands) | | Mortgage
Services | | Financial
Services | | Technology
Services | | Corporate
Items and
Eliminations | | Consolidated
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 |
|
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)( | | 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 | |
Continued)
|
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Mortgage Services | | Financial Services | | Technology Services | | Corporate
Items and Eliminations | | Consolidated Altisource |
| | | | | | | | | | | |
| Total assets: | | |
| | |
| | |
| | |
| | |
|
| December 31, 2014 | | $ | 313,206 |
| | $ | 56,096 |
| | $ | 250,403 |
| | $ | 168,516 |
| | $ | 788,221 |
|
| December 31, 2013 | | 310,253 |
| | 55,930 |
| | 277,941 |
| | 85,928 |
| | 730,052 |
|
Our services are provided to customers primarily located in the United States.
| | | | | | | | 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 | |
23. Premises and equipment, net consist of the following, by country:
|
| | | | | | | | |
| (in thousands) | | December 31,
2014 | | December 31,
2013 |
| | | | | |
| United States | | $ | 88,274 |
| | $ | 63,615 |
|
| India | | 27,082 |
| | 16,404 |
|
| Luxembourg | | 9,059 |
| | 3,217 |
|
| Philippines | | 3,344 |
| | 4,016 |
|
| | | | | |
| Total | | $ | 127,759 |
| | $ | 87,252 |
|
NOTE 24 — QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables contain selected unaudited statement of operations information for each quarter of
20132014 and
2012.2013. 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.
79
|
| | | | | | | | | | | | | | | | |
| | | 2014 quarter ended (1)(2) |
| (in thousands, except per share data) | | March 31, | | June 30, | | September 30, | | December 31, |
| | | | | | | | | |
| Revenue | | $ | 239,269 |
| | $ | 296,072 |
| | $ | 287,688 |
| | $ | 255,887 |
|
| Gross profit | | 91,464 |
| | 112,073 |
| | 98,964 |
| | 69,235 |
|
Income (loss) before income taxes and non-controlling interests | | 43,201 |
| | 58,225 |
| | 45,867 |
| | (28 | ) |
| Net income (loss) | | 40,146 |
| | 54,732 |
| | 43,115 |
| | (906 | ) |
| Net income (loss) attributable to Altisource | | 39,631 |
| | 54,101 |
| | 42,287 |
| | (1,535 | ) |
| | | | | | | | | |
| Earnings (loss) per share: | | | | | | | | |
| Basic | | $ | 1.76 |
| | $ | 2.45 |
| | $ | 1.96 |
| | $ | (0.08 | ) |
| Diluted | | $ | 1.61 |
| | $ | 2.24 |
| | $ | 1.79 |
| | $ | (0.08 | ) |
| | | | | | | | | |
| Weighted average shares outstanding: | | | | | | | | |
| Basic | | 22,509 |
| | 22,089 |
| | 21,626 |
| | 20,306 |
|
| Diluted | | 24,662 |
| | 24,166 |
| | 23,640 |
| | 20,306 |
|
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)(Unaudited quarterly results are as follows:
| | 2013 quarter ended(1)(2) | |
(in thousands, except per share data) | | March 31, | | June 30, | | September 30, | | December 31, | |
| | | | | | | | | |
Revenue | | $ | 148,827 | | $ | 186,110 | | $ | 210,835 | | $ | 222,585 | |
Gross profit | | 51,865 | | 69,138 | | 76,574 | | 78,300 | |
Income before income taxes and non-controlling interests | | 30,678 | | 34,485 | | 38,614 | | 38,556 | |
Net income | | 28,527 | | 32,068 | | 36,955 | | 36,243 | |
Net income attributable to Altisource | | 27,518 | | 30,931 | | 36,008 | | 35,516 | |
| | | | | | | | | |
Earnings per share: | | | | | | | | | |
Basic | | $ | 1.18 | | $ | 1.34 | | $ | 1.56 | | $ | 1.56 | |
Diluted | | $ | 1.10 | | $ | 1.25 | | $ | 1.42 | | $ | 1.42 | |
Weighted average shares outstanding: | | | | | | | | | |
Basic | | 23,374 | | 23,161 | | 23,025 | | 22,734 | |
Diluted | | 25,058 | | 24,823 | | 25,333 | | 25,005 | |
| | 2012 quarter ended(1) | |
(in thousands, except per share data) | | March 31, | | June 30, | | September 30, | | December 31, | |
| | | | | | | | | |
Revenue | | $ | 139,066 | | $ | 144,205 | | $ | 143,988 | | $ | 141,101 | |
Gross profit | | 47,306 | | 51,467 | | 49,701 | | 53,685 | |
Income before income taxes and non-controlling interests | | 29,940 | | 32,128 | | 30,982 | | 31,599 | |
Net income | | 27,121 | | 29,352 | | 28,084 | | 31,354 | |
Net income attributable to Altisource | | 25,229 | | 28,081 | | 27,024 | | 30,293 | |
| | | | | | | | | |
Earnings per share: | | | | | | | | | |
Basic | | $ | 1.08 | | $ | 1.20 | | $ | 1.16 | | $ | 1.30 | |
Diluted | | $ | 1.02 | | $ | 1.13 | | $ | 1.08 | | $ | 1.20 | |
Weighted average shares outstanding: | | | | | | | | | |
Basic | | 23,381 | | 23,316 | | 23,338 | | 23,389 | |
Diluted | | 24,844 | | 24,846 | | 25,016 | | 25,162 | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | 2013 quarter ended (1)(3) |
| (in thousands, except per share data) | | March 31, | | June 30, | | September 30, | | December 31, |
| | | | | | | | | |
| Revenue | | $ | 148,827 |
| | $ | 186,110 |
| | $ | 210,835 |
| | $ | 222,585 |
|
| Gross profit | | 51,865 |
| | 69,138 |
| | 76,574 |
| | 78,300 |
|
Income before income taxes and non-controlling interests | | 30,678 |
| | 34,485 |
| | 38,614 |
| | 38,556 |
|
| Net income | | 28,527 |
| | 32,068 |
| | 36,955 |
| | 36,243 |
|
| Net income attributable to Altisource | | 27,518 |
| | 30,931 |
| | 36,008 |
| | 35,516 |
|
| | | | | | | | | |
| Earnings per share: | | | | | | | | |
| Basic | | $ | 1.18 |
| | $ | 1.34 |
| | $ | 1.56 |
| | $ | 1.56 |
|
| Diluted | | $ | 1.10 |
| | $ | 1.25 |
| | $ | 1.42 |
| | $ | 1.42 |
|
| | | | | | | | | |
| Weighted average shares outstanding: | | | | | | | | |
| Basic | | 23,374 |
| | 23,161 |
| | 23,025 |
| | 22,734 |
|
| Diluted | | 25,058 |
| | 24,823 |
| | 25,333 |
| | 25,005 |
|
___________________________________________________
(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-averageweighted average shares outstanding for each period. (2)On March 29, 2013, weWe acquired Mortgage Builder on September 12, 2014 and acquired Owners.com on November 21, 2014 (see Note 5).
(3)We acquired the Homeward fee-based businesses. On April 12,businesses on March 29, 2013, we completed the ResCap fee-based business transaction. Ontransaction on April 12, 2013 and acquired Equator on November 15, 2013 we acquired Equator (see Note 5).80
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, such officers have concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and to ensure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s
Report on Internal Control over Financial ReportingManagement is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 20132014 based on criteria established in Internal Control—IntegratedControl-Integrated Framework (2013) 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,the businesses and certain assets acquired and certain liabilities assumed of Mortgage Builder Software, Inc. and Owners Advantage, LLC, which waswere acquired on September 12, 2014 and November 15, 201321, 2014, respectively, and whose combined financial statements represent 17%5% 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, 2013.2014. See Note 5 to the accompanying consolidated financial statements for further discussion of this acquisition.these acquisitions. As a result of this assessment, management concluded that, as of December 31, 2013,2014, 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 ReportingThere were no changes in our internal control over financial reporting
(as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the quarter ended December 31,
20132014, that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
During 2014, we determined that disclosures of related party expenses in previously issued financial statements were not complete. In connection with our second quarter of 2014 financial reporting and closing process, we enhanced and implemented our related party disclosure controls to include disclosure reconciliation procedures between us and our related parties and reviews of related party activity reflected in accounts receivable and accounts payable to ensure our disclosures are complete.
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
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference to our definitive proxy statement in connection with our 20142015 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 proxy statement in connection with our
20142015 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
The information required by this item is incorporated herein by reference to our definitive proxy statement in connection with our 20142015 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 proxy statement in connection with our 20142015 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Exchange Act.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated herein by reference to our definitive proxy statement in connection with our
20142015 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Exchange Act.
82
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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,
Schedule II - Valuation and therefore have been omitted.Qualifying Accounts - included below.
|
| | |
3. |
|
Exhibits: |
Exhibit
|
|
|
Number
|
| Exhibit Description
|
| Exhibit Number | | Exhibit Description |
2.1
| | |
| 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 21,28, 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 21,28, 2012) |
| | |
2.4 | | 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*
3.1 | | Articles of Incorporation of Altisource Portfolio Solutions S.A. (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-K filed on February 13, 2014) |
| | |
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, by and 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 | | Transition Services 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 10.3 of the Registrant’s Current Report on Form 8-K as filed with the Commission on August 13, 2009) |
| | |
| 10.4 | | Employee Matters 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 10.4 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
| | |
| 10.5 | | Technology Products Services 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 10.5 of the Registrant’s Current Report on Form 8-K as filed with the Commission on August 13, 2009) |
| | |
10.5
10.6 | | Services 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 10.6 of the Registrant’s Current Report on Form 8-K as filed with the Commission on August 13, 2009) |
| | |
|
10.6
| | |
| 10.7 | | Data Center and Disaster Recovery Services 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 10.7 of the Registrant’s Current Report on Form 8-K as filed with the Commission on August 13, 2009) |
| | |
10.7
10.8 | | 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†
10.9† | | Form of Altisource Portfolio Solutions S.A. 2009 Equity Incentive Plan, dated as of August 7, 2009 (incorporated by reference tofrom Exhibit 10.8 ofto Amendment No. 1 to the Registration Statement on Form 10 asof Altisource Portfolio Solutions S.A. filed with the Commission on June 29, 2009)
|
| | |
10.9†
10.10† | | Employment Agreement by andContract between Altisource Solutions S.à r.l. and William B. Shepro (incorporated by reference tofrom Exhibit 10.9 ofto Amendment No. 1 to the Registration Statement on Form 10 asof Altisource Portfolio Solutions S.A. filed with the Commission on June 29, 2009) |
| | |
10.10†
10.11† | | Employment Agreement by andContract between Altisource Solutions S.à r.l. and Robert D. Stiles (incorporated by reference tofrom Exhibit 10.10 ofto Amendment No. 1 to the Registration Statement on Form 10 asof Altisource Portfolio Solutions S.A. filed with the Commission on June 29, 2009) |
| | |
10.11†
10.12† | | Employment Agreement by andContract between Altisource Solutions S.à r.l. and Kevin J. Wilcox (incorporated by reference tofrom Exhibit 10.11 ofto Amendment No. 1 to the Registration Statement on Form 10 of Altisource Portfolio Solutions S.A. as filed with the Commission on June 29, 2009) |
| | |
10.12
10.13 | | 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†
10.14† | | 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†
10.15† | | 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
10.16 | | 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†
10.17† | | 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†
10.18† | | 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
| | |
| 10.19 | | 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) |
| | |
10.19†
10.20† | | 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†
10.21† | | 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
10.22 | | 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 1,5, 2012) |
| | |
10.22
10.23 | | 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 1,5, 2012) |
| | |
10.23
10.24 | | 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 1,5, 2012) |
| | |
10.24
10.25 | | 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 1,5, 2012) |
| | |
|
10.25
| | |
| 10.26 | | 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 1,5, 2012) |
| | |
10.26
10.27 | | 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 1,5, 2012) |
| | |
10.27
10.28 | | 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 1,5, 2012) |
| | |
10.28
10.29 | | 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 1,5, 2012) |
| | |
10.29
10.30 | | 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 1,5, 2012) |
| | |
10.30
10.31 | | 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.time (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on December 3, 2012) |
| | |
10.31
10.32 | | 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 21,28, 2012) |
| | |
10.32
10.33 | | 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 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 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 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 21,28, 2012) |
| | |
10.36
10.34 | | Tax Matters Agreement, dated as of December 21, 2012, between Altisource Residential Corporation and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on December 28, 2012) |
| | |
| 10.35 | | 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 21,28, 2012) |
| | |
10.37
10.36** | | Master Services Agreement, dated as of December 21, 2012, between Altisource Residential Corporation and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.5 to the Company’s Form 8-K filed on December 28, 2012) |
| | |
| 10.37 | | Trademark License Agreement, dated as of December 21, 2012, between Altisource Residential Corporation and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.6 to the Company’s Form 8-K filed on December 28, 2012) |
| | |
| 10.38 | | 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 21,28, 2012) |
| | |
10.38
10.39 | | 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 21,28, 2012) |
| | |
10.39
10.40 | | 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.Guarantors (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on December 31, 2012) |
| | |
10.40
10.41 | | 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
10.42 | | 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
10.43 | | 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
| | |
| 10.44 | | 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
10.45 | | 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
10.46 | | 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
10.47 | | 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,April 4, 2013) |
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10.47
| | |
| 10.48 | | 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,April 4, 2013) |
| | |
10.48
10.49 | | 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
10.50 | | 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.thereto (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on May 13, 2013) |
| | |
10.50
10.51 | | 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) |
| | |
| 10.52 | | Amendment No. 3 to Credit Agreement, dated as of August 1, 2014, 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 Lendersother lenders party thereto.thereto (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on December 11, 2013)August 6, 2014)
|
| | |
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 adoptedand Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
32.2*
101* | | 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 year ended December 31, 20132014 is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at December 31, 20132014 and December 31, 2012;2013; (ii) Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2013;2014; (iii) Consolidated Statements of Equity for each of the years in the three-year period ended December 31, 2013;2014; (iv) Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2013; and2014; (v) Notes to Consolidated Financial Statements. Statements; and (vi) Financial Statement Schedule. |
* 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
88
|
| | |
| | |
| * | 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 |
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2014, 2013 and 2012:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | Additions | | |
| | | Balance at | | | | Charged to | | | | |
| | | Beginning of | | Charged to | | Other Accounts | | Deductions | | Balance at |
| (in thousands) | | Period | | Expenses | | Note (a)(b) | | Note (c)(d) | | End of Period |
| | | | | | | | | | | |
| Deductions from asset accounts: | | | | | | | | | | |
| | | | | | | | | | | |
| Allowance for doubtful accounts: | | | | | | | | | | |
| | | | | | | | | | | |
| Year 2014 | | $ | 5,631 |
| | $ | 16,257 |
| | $ | 1,399 |
| | $ | 612 |
| | $ | 22,675 |
|
| Year 2013 | | 3,274 |
| | 2,549 |
| | — |
| | 192 |
| | 5,631 |
|
| Year 2012 | | 2,047 |
| | 3,049 |
| | — |
| | 1,822 |
| | 3,274 |
|
| | | | | | | | | | | |
| Valuation allowance for deferred tax assets: | | | | | | | | | | |
| | | | | | | | | | | |
| Year 2014 | | $ | 3,189 |
| | $ | — |
| | $ | — |
| | $ | 74 |
| | $ | 3,115 |
|
| Year 2013 | | 2,413 |
| | — |
| | 776 |
| | — |
| | 3,189 |
|
| Year 2012 | | 2,209 |
| | — |
| | 204 |
| | — |
| | 2,413 |
|
SIGNATURES
(a) Allowance for doubtful accounts primarily includes amounts previously written off which were credited directly to this account when recovered.
(b)Valuation allowance for deferred tax assets includes current year increase to valuation allowance charged to equity and reclassifications from other balance sheet accounts.
(c) Amounts written off as uncollectible or transferred to other accounts or utilized.
(d) Reductions to valuation allowances related to deferred tax assets.
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: March 2, 2015
Date: February 13, 2014
| | | |
|
|
|
| Altisource Portfolio Solutions S.A.
|
| | | | | |
| | | | | |
| By: | | | By:
| /s/ William B. Shepro
|
| Name: | | | Name:
| William B. Shepro
|
| Title: | | | Title:
| Director and Chief Executive Officer
|
| | | | | (Principal Executive Officer) |
| | | | | |
| By: | | | By:
| /s/ Michelle D. Esterman |
| Name: | | | Name:
| Michelle D. Esterman |
| Title: | | | 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, 2014.and on the dates indicated.
Signature
|
| Title
|
| Date
|
| | | | |
Signature | | Title | | Date |
| | | | |
/s/ William C. ErbeyTimo Vättö
| | Chairman of the Board of Directors | | February 13, 2014
March 2, 2015 |
William C. Erbey
Timo Vättö
| | | | |
| | | | |
/s/ William B. Shepro
| | Director and Chief Executive Officer
| | February 13, 2014
March 2, 2015 |
William B. Shepro | | (Principal Executive Officer) | | |
| | | | |
/s/ W. Michael Linn
| | Director | | February 13, 2014
March 2, 2015 |
W. Michael Linn
| | | | |
| | | | |
/s/ Roland Müller-Ineichen | | Director | | February 13, 2014
March 2, 2015 |
Roland Müller-Ineichen | | | | |
| | | | |
/s/ Timo Vättö
| | Director
| | February 13, 2014
|
Timo Vättö
| | | | |
| | | | |
/s/ Michelle D. Esterman
| | Chief Financial Officer | | February 13, 2014
March 2, 2015 |
Michelle D. Esterman
| | (Principal Financial Officer and Principal Accounting Officer) | | |
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