Edgar Filing: Altisource Portfolio Solutions S.A.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-34354

ALTISOURCE PORTFOLIO SOLUTIONS S.A.

(Exact name of Registrant as specified in its Charter)

Luxembourg		Not applicable
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

291, Route d’Arlon

L-1150 Luxembourg

Grand Duchy of Luxembourg

(Address of principal executive offices) (Zip Code)

+352 2469 7900

Registrant’s telephone number

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act):

Large accelerated filer x		Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of July 19, 2013, there were 22,994,405 outstanding shares of the registrant’s shares of beneficial interest (excluding 2,418,343 shares held as treasury stock).

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.

FORM 10-Q

			Page
PART I — Financial Information

	Item 1	Interim Condensed Consolidated Financial Statements
		Condensed Consolidated Balance Sheets	3
		Condensed Consolidated Statements of Operations	4
		Condensed Consolidated Statements of Equity	5
		Condensed Consolidated Statements of Cash Flows	6
		Notes to Condensed Consolidated Financial Statements	7

	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

	Item 3	Quantitative and Qualitative Disclosures about Market Risk	39

	Item 4	Controls and Procedures	40


PART II — Other Information

	Item 1	Legal Proceedings	41

	Item 1A	Risk Factors	41

	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	41

	Item 6	Exhibits	42

SIGNATURES			43

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PART I. FINANCIAL INFORMATION

Item 1. Interim Condensed Consolidated Financial Statements (Unaudited)

ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)

	June 30,			December 31,
	2013			2012

ASSETS
Current assets:
Cash and cash equivalents	$	177,805		$	105,502
Accounts receivable, net	99,316			88,955
Prepaid expenses and other current assets	20,185			7,618
Deferred tax assets, net	1,775			1,775
Total current assets	299,081			203,850

Premises and equipment, net	57,204			50,399
Deferred tax assets, net	4,073			4,073
Intangible assets, net	252,747			56,586
Goodwill	14,915			14,915
Investment in Correspondent One	—			12,729
Loan to Ocwen	—			75,000
Other assets	15,113			11,674

Total assets	$	643,133		$	429,226

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	63,789		$	58,976
Current portion of long-term debt	4,000			2,000
Current portion of capital lease obligations	—			233
Other current liabilities	8,915			10,423
Total current liabilities	76,704			71,632

Long-term debt, less current portion	393,679			196,027
Other non-current liabilities	1,340			1,738

Commitments and contingencies (Note 17)

Equity:
Common stock ($1.00 par value; 100,000 shares authorized; 25,413 issued and 22,995 outstanding as of June 30, 2013; 25,413 issued and 23,427 outstanding as of December 31, 2012)	25,413			25,413
Additional paid-in-capital	88,392			86,873
Retained earnings	178,937			124,127
Treasury stock, at cost (2,418 shares as of June 30, 2013 and 1,986 shares as of December 31, 2012)	(122,974		)	(77,954		)
Altisource equity	169,768			158,459

Non-controlling interests	1,642			1,370
Total equity	171,410			159,829

Total liabilities and equity	$	643,133		$	429,226

See accompanying notes to condensed consolidated financial statements.

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

	Three months ended						Six months ended
	June 30,						June 30,
	2013			2012			2013			2012

Revenue	$	186,110		$	144,205		$	334,937		$	283,271
Cost of revenue	116,972			92,738			213,934			184,498

Gross profit	69,138			51,467			121,003			98,773
Selling, general and administrative expenses	29,828			19,018			48,508			36,033

Income from operations	39,310			32,449			72,495			62,740
Other income (expense), net:
Interest expense	(4,902		)	(14		)	(8,114		)	(29		)
Other income (expense), net	77			(307		)	782			(643		)
Total other income (expense), net	(4,825		)	(321		)	(7,332		)	(672		)

Income before income taxes and non-controlling interests	34,485			32,128			65,163			62,068
Income tax provision	(2,417		)	(2,776		)	(4,568		)	(5,595		)

Net income	32,068			29,352			60,595			56,473
Net income attributable to non-controlling interests	(1,137		)	(1,271		)	(2,146		)	(3,163		)

Net income attributable to Altisource	$	30,931		$	28,081		$	58,449		$	53,310

Earnings per share:
Basic	$	1.34		$	1.20		$	2.51		$	2.28
Diluted	$	1.25		$	1.13		$	2.34		$	2.15

Weighted average shares outstanding:
Basic	23,161			23,316			23,267			23,353
Diluted	24,823			24,846			24,940			24,850

Transactions with related parties included above:
Revenue	$	121,234		$	88,153		$	211,332		$	170,933
Selling, general and administrative expenses	740			606			1,413			1,180
Other income	—			—			773			—

See accompanying notes to condensed consolidated financial statements.

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)

	Altisource Equity
	Common stock			Additional paid-in capital		Retained earnings			Treasury stock, at cost			Non- controlling interests			Total

Balance, December 31, 2011	25,413	$	25,413	$	83,229	$	126,161		$	(72,048	)	$	3,188		$	165,943
Net income	—	—		—		53,310			—			3,163			56,473
Contributions from non-controlling interest holders	—	—		—		—			—			24			24
Distributions to non-controlling interest holders	—	—		—		—			—			(4,830		)	(4,830		)
Share-based compensation expense	—	—		892		—			—			—			892
Exercise of stock options	—	—		—		(4,397		)	6,415			—			2,018
Repurchase of shares	—	—		—		—			(16,781		)	—			(16,781		)
Balance, June 30, 2012	25,413	$	25,413	$	84,121	$	175,074		$	(82,414	)	$	1,545		$	203,739

Balance, December 31, 2012	25,413	$	25,413	$	86,873	$	124,127		$	(77,954	)	$	1,370		$	159,829
Net income	—	—		—		58,449			—			2,146			60,595
Contributions from non-controlling interest holders	—	—		—		—			—			15			15
Distributions to non-controlling interest holders	—	—		—		—			—			(1,889		)	(1,889		)
Share-based compensation expense	—	—		1,519		—			—			—			1,519
Exercise of stock options	—	—		—		(3,639		)	6,553			—			2,914
Repurchase of shares	—	—		—		—			(51,573		)	—			(51,573		)
Balance, June 30, 2013	25,413	$	25,413	$	88,392	$	178,937		$	(122,974	)	$	1,642		$	171,410

See accompanying notes to condensed consolidated financial statements.

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

	Six months ended
	June 30,
	2013			2012
Cash flows from operating activities:
Net income	$	60,595		$	56,473
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	9,306			5,200
Amortization of intangible assets	10,237			2,632
Share-based compensation expense	1,519			892
Equity in losses of affiliate	122			579
Bad debt expense	452			852
Amortization of debt discount	152			—
Amortization of debt issuance costs	451			—
Loss on sale or disposal of fixed assets	926			366
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	(10,813		)	(19,168		)
Prepaid expenses and other current assets	(3,009		)	(743		)
Other assets	(1,440		)	876
Accounts payable and accrued expenses	917			5,873
Other current and non-current liabilities	(1,947		)	217
Net cash provided by operating activities	67,468			54,049

Cash flows from investing activities:
Additions to premises and equipment	(13,397		)	(21,128		)
Acquisition of business, net of cash acquired	(215,700		)	—
Investment in equity affiliate	(50		)	—
Proceeds from sale of equity affiliate	12,648			—
Proceeds from loan to Ocwen	75,000			—
Net cash used in investing activities	(141,499		)	(21,128		)

Cash flows from financing activities:
Proceeds from issuance of long-term debt	201,000			—
Repayment of long-term debt	(1,500		)	—
Debt issuance costs	(2,400		)	—
Principal payments on capital lease obligations	(233		)	(318		)
Proceeds from stock option exercises	2,914			2,018
Purchase of treasury stock	(51,573		)	(16,781		)
Contributions from non-controlling interests	15			24
Distributions to non-controlling interests	(1,889		)	(4,830		)
Net cash provided by (used in) financing activities	146,334			(19,887		)

Increase in cash and cash equivalents	72,303			13,034
Cash and cash equivalents at the beginning of the period	105,502			32,125
Cash and cash equivalents at the end of the period	$	177,805		$	45,159

Supplemental cash flow information
Interest paid	$	7,562		$	28
Income taxes paid, net	1,165			1,255

Non-cash investing and financing activities
Amortization of tax-deductible goodwill	$	—		$	1,684
Premises and equipment purchased on account	891			—

See accompanying notes to condensed consolidated financial statements.

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION

Description of Business

Altisource Portfolio Solutions S.A., together with its subsidiaries (which may be referred to as “Altisource,” the “Company,” “we,” “us” or “our”), is a global provider of outsourcing and software services focused on high-value, technology-enabled solutions principally related to real estate and mortgage portfolio management, asset recovery and customer relationship management.

We are incorporated under the laws of Luxembourg and are publicly traded on the NASDAQ Global Select market under the symbol “ASPS.”

We conduct our operations through three reporting segments: Mortgage Services, Financial Services and Technology Services. In addition, we report our corporate related expenditures and eliminations as a separate segment (see Note 18 for a description of our business segments).

Basis of Presentation

The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission (“SEC”) Regulation S-X. Accordingly, these financial statements do not include all of the information and notes required by GAAP for complete consolidated financial statements. In the opinion of management, the interim data includes all normal recurring adjustments considered necessary to fairly state the results for the interim periods presented. The preparation of interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our interim condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. All significant intercompany and inter-segment transactions and accounts have been eliminated in consolidation.

The Mortgage Partnership of America, L.L.C. (“MPA”), a wholly-owned subsidiary of Altisource®, is the manager of a national alliance of community mortgage bankers, correspondent lenders and suppliers of mortgage products and services that is referred to as the Lenders One® Mortgage Cooperative (“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 interim condensed consolidated financial statements on a consolidated basis with the interests of the members reflected as non-controlling interests. As of June 30, 2013, Lenders One had total assets of $3.1 million and liabilities of $1.4 million. As of December 31, 2012, Lenders One had total assets of $2.3 million and liabilities of $1.0 million.

These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in our Form 10-K for the year ended December 31, 2012, filed with the SEC on February 13, 2013, which contains a summary of our significant accounting policies. Certain footnote detail in the Form 10-K is omitted from the information included herein.

Fair Value of Financial Instruments

Our financial instruments primarily include cash and cash equivalents, restricted cash and long-term debt. The carrying amount of 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 level 1 of the three level hierarchy established by the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement, using quoted prices in active markets for identical assets. The carrying amount of the long-term debt approximates fair value due to the variable interest rate. The fair value was determined by level 2 of the three level hierarchy in ASC Topic 820 using inputs other than quoted prices that are observable, either directly or indirectly.

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NOTE 2 — TRANSACTIONS WITH RELATED PARTIES

Ocwen®

Ocwen Financial Corporation, together with its subsidiaries (“Ocwen”), is our largest customer. Ocwen is contractually obligated to purchase certain mortgage services and technology services from us through August 2025 under the terms of a master services agreement and amendments to the master services agreement (collectively, the “Service Agreements”). In connection with our acquisition from Ocwen of the fee-based businesses of Homeward Residential, Inc. (“Homeward”) that closed on March 29, 2013 and the acquisition from Ocwen related to the fee-based businesses of Residential Capital, LLC (“ResCap”) that closed on April 12, 2013 (see Note 3), 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. We settle amounts with Ocwen on a daily, weekly or monthly basis depending upon the nature of the service and when the service is provided.

Related party revenue consists of revenue earned directly from Ocwen and revenue earned from the loans serviced by Ocwen when Ocwen designates us as the service provider. We earn additional revenue on the portfolios serviced by Ocwen that are not considered related party revenue when a party other than Ocwen selects the service provider. Related party revenue as a percentage of segment and consolidated revenue was as follows:

	Three months ended June 30,				Six months ended June 30,
	2013		2012		2013		2012

Mortgage Services	70	%	70	%	69	%	70	%
Technology Services	54	%	40	%	52	%	40	%
Financial Services	29	%	<1	%	17	%	<1	%
Consolidated revenue	65	%	61	%	63	%	60	%

We record revenue we earn from Ocwen under various long-term servicing contracts at rates we believe to be market rates as they are consistent with one or more of the following: the fees we charge to other customers for comparable services, the fees Ocwen pays to other service providers, fees commensurate with market surveys prepared by unaffiliated firms and fees charged by our competitors.

Support Services

We have support services agreements with Ocwen. These services include such areas as human resources, vendor management, corporate services, six sigma, quality assurance, quantitative analytics, treasury, accounting, risk management, legal, strategic planning and compliance. Payment for the services provided is on the fully-allocated cost of providing the service based on an estimate of the time and expense of providing the service. For the six months ended June 30, 2013 and 2012, we billed Ocwen $1.2 million and $1.4 million, respectively ($0.6 million for the second quarter of 2013 and 2012), and Ocwen billed us $1.4 million and $1.2 million, respectively ($0.7 million and $0.6 million for the second quarter of 2013 and 2012, respectively) for services provided under these agreements. These amounts are reflected as a component of selling, general and administrative expenses in the condensed consolidated statements of operations.

Unsecured Term Loan

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 be less than 1.50%. On February 15, 2013, Ocwen repaid the outstanding principal amount of $75.0 million, plus all accrued and unpaid interest and the term loan was terminated. Interest income related to this loan was $0.8 million for the six months ended June 30, 2013 (no comparative amounts for 2012).

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 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 (see Note 3). 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 3).

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Correspondent One® and HLSS™

In July 2011, we acquired an equity interest in Correspondent One S.A. (“Correspondent One”) (see Note 8). Correspondent One purchases closed conforming and government guaranteed residential mortgages from approved mortgage bankers. On March 31, 2013, we sold our 49% interest in Correspondent One to Ocwen for $12.6 million. Under a support services agreement, we provided Correspondent One certain finance, human resources, legal support, facilities, technology, vendor management and risk management services. For the six months ended June 30, 2013 and 2012, we billed Correspondent One less than $0.1 million for each period. We also provided certain origination related services to Correspondent One. We earned revenue of $0.1 million for the six months ended June 30, 2013 for these services (no comparative amount in 2012).

Home Loan Servicing Solutions, Ltd. (“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 offering and subsequent thereto, HLSS acquired mortgage servicing related assets from Ocwen. Our Chairman is also the Chairman of HLSS. Under a support services agreement, we provide HLSS certain finance, human resources and legal support services. For the six months ended June 30, 2013 and 2012, we billed HLSS $0.3 million and $0.2 million, respectively ($0.1 million for the second quarter of 2013 and 2012).

These amounts are reflected as a component of selling, general and administrative expenses in the condensed consolidated statements of operations.

Residential and AAMC

Altisource Residential Corporation (“Residential”) and Altisource Asset Management Corporation (“AAMC”) were established, capitalized and their equity was distributed to our shareholders on December 21, 2012 and are each separate publicly traded companies (the “Separation of the Residential Asset Businesses”). Residential is focused on the single family rental market, acquiring single family properties through the purchase of distressed mortgage loan portfolios. 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 risk management. Further, we have separate agreements for certain services related to income tax matters, trademark licenses and technology products and services. For the six months ended June 30, 2013, we billed Residential $0.2 million, and we billed AAMC $0.2 million ($0.2 million for Residential and less than $0.1 million for AAMC for the second quarter of 2013 and no comparative amounts in 2012), under these agreements.

NOTE 3 — ACQUISITIONS

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 the Service Agreements were amended to extend the term from 2020 to 2025 (see Note 2). We paid $87.0 million, subject to a working capital and net income adjustment within 90 days, subsequently extended for an additional 60 days, for the Homeward fee-based businesses. From the acquisition date through June 30, 2013, we have recorded revenue of $33.9 million and pre-tax income of $8.9 million related to these businesses.

Management has adjusted the preliminary purchase price allocation and assigned associated asset lives based upon information that has become available since the acquisition date. The purchase price allocation and assessment of asset lives will continue to be revised as additional information about the fair value of assets and liabilities becomes available. Such assessment must be completed within 12 months from the acquisition date.

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The preliminary adjusted allocation of the purchase price is estimated as follows:

(in thousands)

Due from Ocwen	$	9,558
Premises and equipment	2,749
Customer relationship	77,648
	89,955
Accounts payable and accrued expenses	(3,005		)
Purchase price	$	86,950

		Estimated life (in years)

Premises and equipment		2 - 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 provide that (i) Altisource will be the exclusive 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) for the ResCap fee-based businesses. From the acquisition date through June 30, 2013, we have recorded revenue of $7.8 million and pre-tax income of $1.8 million related to these businesses.

We acquired no tangible assets and assumed no liabilities in connection with the acquisition. 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, Business Combinations.

Management has prepared a preliminary purchase price allocation and assigned associated asset lives based upon available information at the time of the agreement and through the date of filing. This preliminary allocation and assessment of asset lives will be revised as additional information about the fair value of assets and liabilities becomes available. Such assessment must be completed within 12 months from the acquisition date. 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.

The following tables present the unaudited pro forma condensed consolidated results of operations as if the Homeward and ResCap Business transactions had occurred at the beginning of the periods presented.

	Six months ended June 30, 2013
(in thousands, except per share amounts)	As reported		Pro forma
Revenue	$	334,937	$	368,428
Net income attributable to Altisource	58,449		64,980
Earnings per share — diluted	2.34		2.61

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	Six months ended June 30, 2012
(in thousands, except per share amounts)	As reported		Pro forma
Revenue	$	283,271	$	356,196
Net income attributable to Altisource	53,310		67,963
Earnings per share — diluted	2.15		2.73

	Three months ended June 30, 2012
(in thousands, except per share amounts)	As reported		Pro forma
Revenue	$	144,205	$	180,668
Net income attributable to Altisource	28,081		35,437
Earnings per share — diluted	1.13		1.43

The unaudited pro forma information presents the combined operating results of Altisource and the Homeward and ResCap Business transactions. The Homeward and ResCap Business operating results were derived from their historical financial statements for the most comparable periods available. The results prior to the 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, used in the Homeward and ResCap Business transactions (i.e., the pro forma impact of borrowing $215.7 million for the six months ended June 30, 2012) and to reflect the impact of income taxes on the pro forma adjustments utilizing Altisource’s effective income tax rate in each period presented.

The unaudited pro forma results are presented for illustrative purposes only and do not reflect additional revenue opportunities, the realization of any potential cost savings and any related integration costs. Certain revenue opportunities and cost savings may result from the transactions and the conversion to the Altisource model; however, there can be no assurance that these revenue opportunities and cost savings will be achieved. These pro forma results do not purport to be indicative of the results that would have actually been obtained if the transactions occurred as of the beginning of each of the periods presented, nor does the pro forma data intend to be a projection of results that may be obtained in the future.

NOTE 4 — ACCOUNTS RECEIVABLE, NET

Accounts receivable, net consists of the following:

	June 30,			December 31,
(in thousands)	2013			2012

Billed
Non-related parties	$	29,274		$	25,950
Ocwen	18,909			19,817
Correspondent One	—			27
HLSS	66			163
AAMC	546			14
Residential	75			—
Other receivables	1,908			353
	50,778			46,324
Unbilled
Non-related parties	38,330			39,496
Ocwen	13,940			6,377
Correspondent One	—			32
	103,048			92,229
Allowance for doubtful accounts	(3,732		)	(3,274		)

Total	$	99,316		$	88,955

Unbilled fees consist primarily of asset management and default management services for which we recognize revenues over the service delivery period but bill following completion of the service.

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NOTE 5 — PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following:

	June 30,		December 31,
(in thousands)	2013		2012

Maintenance agreements, current portion	$	4,833	$	3,636
Income taxes receivable	2,970		1,814
Prepaid expenses	2,674		1,640
Due from Ocwen	9,558		—
Other current assets	150		528

Total	$	20,185	$	7,618

NOTE 6 — PREMISES AND EQUIPMENT, NET

Premises and equipment, net, which includes amounts recorded under capital leases, consists of the following:

	June 30,			December 31,
(in thousands)	2013			2012

Computer hardware and software	$	77,766		$	68,329
Office equipment and other	18,391			15,592
Furniture and fixtures	6,086			5,344
Leasehold improvements	16,034			12,982
	118,277			102,247
Less: Accumulated depreciation and amortization	(61,073		)	(51,848		)

Total	$	57,204		$	50,399

Depreciation and amortization expense, inclusive of capital leases, amounted to $9.3 million and $5.2 million for the six months ended June 30, 2013 and 2012, respectively ($4.6 million and $2.9 million for the second quarter of 2013 and 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 condensed consolidated statements of operations.

NOTE 7 — GOODWILL AND INTANGIBLE ASSETS, NET

Goodwill

There were no changes in goodwill during the six months ended June 30, 2013. The following is a summary of goodwill by segment:

	Mortgage		Financial		Technology
(in thousands)	Services		Services		Services		Total

Balance, June 30, 2013 and December 31, 2012	$	10,919	$	2,378	$	1,618	$	14,915

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Intangible Assets, Net

Intangible assets, net consist of the following:

	Weighted
	average
	estimated	Gross carrying amount				Accumulated amortization						Net book value
	useful life	June 30,		December 31,		June 30,			December 31,			June 30,		December 31,
(dollars in thousands)	(years)	2013		2012		2013			2012			2013		2012

Definite-lived intangible assets
Trademarks	16	$	10,614	$	10,614	$	(4,298	)	$	(4,060	)	$	6,316	$	6,554
Customer-related intangible assets	9	244,764		38,366		(27,529		)	(18,567		)	217,235		19,799
Operating agreement	20	35,000		35,000		(5,979		)	(5,104		)	29,021		29,896
Non-compete agreement	4	1,300		1,300		(1,125		)	(963		)	175		337

Total		$	291,678	$	85,280	$	(38,931	)	$	(28,694	)	$	252,747	$	56,586

Amortization expense for definite lived intangible assets was $10.2 million and $2.6 million for the six months ended June 30, 2013 and 2012, respectively ($9.0 million and $1.3 million for the second quarter of 2013 and 2012, respectively). Expected annual definite lived intangible asset amortization for 2013 through 2017 is $28.3 million, $44.8 million, $40.7 million, $33.4 million and $26.6 million, respectively, including preliminary amounts associated with the Homeward and ResCap fee-based business transactions (see Note 3).

NOTE 8 — INVESTMENT IN EQUITY AFFILIATE

Correspondent One purchases 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 2), 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 on this investment using the equity method was $0.1 million and $0.6 million for the six months ended June 30, 2013 and 2012, respectively ($0.1 million gain and $0.3 million loss for the second quarter of 2013 and 2012, respectively).

NOTE 9 — OTHER ASSETS

Other assets consist of the following:

	June 30,		December 31,
(in thousands)	2013		2012

Security deposits, net	$	6,289	$	5,019
Debt issuance costs, net	6,394		4,260
Maintenance agreements, non-current portion	2,093		1,614
Restricted cash	158		158
Other	179		623

Total	$	15,113	$	11,674

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NOTE 10 — ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accounts payable and accrued expenses consist of the following:

	June 30,		December 31,
(in thousands)	2013		2012

Accounts payable	$	6,518	$	5,079
Accrued expenses - general	18,969		16,528
Accrued salaries and benefits	20,750		19,613
Income taxes payable	13,135		8,750
Payable to Ocwen	4,414		8,865
Payable to AAMC	3		141

Total	$	63,789	$	58,976

Other current liabilities consist of the following:

	June 30,		December 31,
(in thousands)	2013		2012

Deferred revenue	$	1,694	$	2,482
Facility closure cost accrual, current portion	125		138
Book overdrafts	5,213		5,229
Other	1,883		2,574

Total	$	8,915	$	10,423

Facility Closure Costs

During 2009, we accrued facility closure costs (included in other current and other non-current liabilities in the condensed consolidated balance sheets) primarily consisting of lease exit costs (expected to be paid through 2014) and severance related to the closure of two facilities. The following table summarizes the activity, all recorded in our Financial Services segment, for the six months ended June 30, 2013:

(in thousands)	Lease Costs

Balance, December 31, 2012	$	294
Payments	(112		)
Balance, June 30, 2013	182
Less: Long-term portion	(57		)

Facility closure cost accrual, current portion	$	125

We do not expect significant additional costs related to the closure of these facilities.

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NOTE 11 — LONG-TERM DEBT

Long-term debt consists of the following:

	June 30,			December 31,
(in thousands)	2013			2012

Senior secured term loan	$	398,500		$	200,000
Less: Unamortized discount, net	(821		)	(1,973		)
Net long-term debt	397,679			198,027
Less: Current portion	(4,000		)	(2,000		)

Long-term debt, less current portion	$	393,679		$	196,027

On November 27, 2012, we entered into a senior secured term loan agreement with Bank of America, N.A., as administrative agent, and certain lenders, pursuant to which we borrowed $200 million. The senior secured term loan was issued with a 1.0% original issue discount ($2.0 million), resulting in net proceeds of $198.0 million (the “Initial Proceeds”), with the Company and certain wholly-owned subsidiaries acting as guarantors (collectively, the “Guarantors”).

On May 7, 2013, we amended the senior secured term loan agreement to increase the principal amount of the senior secured term loan by $200 million (the “Incremental Term Loan”), which was issued with a $1.0 million original issue premium, resulting in gross proceeds to the Company of $201.0 million.

The Incremental Term Loan must be repaid in equal consecutive quarterly principal installments of 0.25% of the initial principal amount, with the balance due at maturity, commencing on June 28, 2013. The aggregate amount of each quarterly scheduled principal installment of the term loans, including the Incremental Term Loan, is equal to approximately $1.0 million. All amounts outstanding under the senior secured term loan agreement will become due on the earlier of (i) November 27, 2019, being the seventh anniversary of the closing date of the senior secured term loan agreement or (ii) the date on which the loans are declared to be due and owed by the administrative agent at the request (or with the consent) of the lenders upon the occurrence of any event of default under the senior secured term loan agreement.

The Incremental Term Loan was used to fund the remainder of the Company’s previously announced transaction with Ocwen related to the ResCap servicing portfolio (see Note 3), with the remainder to be used for stock repurchases and for general corporate purposes, including potential acquisitions. Additionally, the Incremental Term Loan was used to pay certain fees, commissions and expenses in connection with the Incremental Term Loan. The Company paid legal fees and other costs associated with the Incremental Term Loan of $2.4 million, which were recorded as debt issuance costs in other assets in the accompanying condensed consolidated balance sheets.

Additionally, the Incremental Term Loan modified the senior secured term loan agreement to, among other changes, provide for an additional $200 million incremental term loan facility accordion and increase the maximum amount of Restricted Payments (as defined in the senior secured term loan) that may be made by us, including increasing the amount of Company share repurchases permitted.

All of the term loans outstanding 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). 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) 1.25% plus (ii) a 4.50% 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) 2.25% plus (ii) a 3.50% margin. The interest rate at June 30, 2013 was 5.75%.

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.

At June 30, 2013, debt issuance costs were $6.4 million, net of $0.5 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 condensed consolidated balance sheets.

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NOTE 12 — EQUITY AND SHARE-BASED COMPENSATION

Stock Repurchase Plan

In May 2012, our shareholders approved a stock repurchase program, which replaced the previous stock repurchase program. Under the plan, we are authorized to purchase up to 3.5 million shares of our common stock in the open market in addition to amounts previously purchased under the prior plan. From authorization of the prior plan in May 2010 through June 30, 2013, we have purchased approximately 3.1 million shares of our common stock in the open market at an average price of $47.04 per share. We purchased 0.6 million shares of common stock (at an average price of $89.01 per share) and 0.3 million shares of common stock (at an average price of $63.25 per share) during the six months ended June 30, 2013 and 2012, respectively (0.3 million shares at an average price of $94.49 per share for the second quarter of 2013 and no comparative amounts in the second quarter of 2012). 2.9 million shares of common stock remain available for repurchase under the plan. Luxembourg law limits share repurchases to approximately the balance of Altisource Portfolio Solutions S.A. (unconsolidated parent company) retained earnings less shares repurchased. As of June 30, 2013, approximately $40 million was available to repurchase our common stock under Luxembourg law. Our $200 million senior secured term loan, increased to $400 million on May 7, 2013, also limits our ability to repurchase our common stock, which will limit the amount we can spend on share repurchases in any year and may prevent repurchases in certain circumstances. As of June 30, 2013, approximately $80 million was available to repurchase our common stock under our senior secured term loan.

Share-Based Compensation

We issue share-based awards in the form of stock options and certain other equity-based awards for certain employees and officers. We recorded share-based compensation expense of $1.5 million and $0.9 million for the six months ended June 30, 2013 and 2012, respectively ($0.1 million and $1.1 million for the second quarter of 2013 and 2012, respectively). The amount for the six months ended June 30, 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 Options. These options are granted at fair value on the date of grant. The options generally vest over four years with equal annual cliff-vesting and expire on the earlier of 10 years after the date of grant or following termination of service. A total of 0.9 million service-based awards were outstanding at June 30, 2013.

Market-based Options. These option grants have two components each of which vest only upon the achievement of certain criteria. The first component, which we refer to internally as “ordinary performance” grants, consists of two-thirds of the market-based grant and begins to vest if the stock price 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 2.0 million market-based awards were outstanding at June 30, 2013.

The Company granted less than 0.1 million stock options (at a weighted average exercise price of $90.75 per share) and 0.2 million stock options (at a weighted average exercise price of $63.14 per share) during the six months ended June 30, 2013 and 2012, respectively.

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The fair value of the service-based options was determined using the Black-Scholes option pricing model, and a lattice (binomial) model was used to determine the fair value of the market-based options, using the following assumptions as of the grant date:

	Six months ended June 30, 2013		Six months ended June 30, 2012
	Black-Scholes	Binomial	Black-Scholes	Binomial

Risk-free interest rate	1.02%–1.13%	0.01%–2.02%	0.97% – 1.17%	0.08% – 2.04%
Expected stock price volatility	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	—
Contractual life (in years)	—	14	—	14

Fair value	$31.33–$35.77	$16.12–$31.15	$19.25 – $22.80	$11.65 – $17.27

The following table summarizes the weighted-average fair value of stock options granted, the total intrinsic value of stock options exercised and the fair value of options vested:

	Six months ended June 30,
(in thousands, except per share amounts)	2013		2012

Weighted-average fair value at grant date per share	$	25.83	$	16.86
Intrinsic value of options exercised	9,625		8,339
Fair value of options vested	1,475		973

Share-based compensation expense is recorded net of estimated forfeiture rates ranging from 1% to 10%.

As of June 30, 2013, estimated unrecognized compensation costs related to share-based payments amounted to $2.7 million, which we expect to recognize over a weighted-average remaining requisite service period of approximately 2.6 years.

The following table summarizes the activity related 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	6.1	$	211,072
Granted	45,000		90.75
Exercised	(142,977	)	20.38
Forfeited	(102,875	)	62.27
Outstanding at June 30, 2013	2,857,457		17.09		5.5	220,622

Exercisable at June 30, 2013	2,320,557		11.89		5.1	191,243

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NOTE 13 — COST OF REVENUE

Cost of revenue principally includes payroll and employee benefits associated with personnel employed in customer service and operations roles, fees paid to external providers related to 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:

	Three months ended				Six months ended
	June 30,				June 30,
(in thousands)	2013		2012		2013		2012

Compensation and benefits	$	36,744	$	27,989	$	69,323	$	55,474
Outside fees and services	46,345		31,757		81,240		60,410
Reimbursable expenses	23,299		24,814		43,565		53,520
Technology and telecommunications	7,060		5,866		12,551		10,990
Depreciation and amortization	3,524		2,312		7,255		4,104

Total	$	116,972	$	92,738	$	213,934	$	184,498

NOTE 14 — SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses include payroll for personnel employed in executive, finance, legal, human resources, vendor management, risk and six sigma 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:

	Three months ended				Six months ended
	June 30,				June 30,
(in thousands)	2013		2012		2013		2012

Compensation and benefits	$	6,609	$	6,400	$	12,066	$	10,783
Professional services	1,384		1,806		3,016		3,461
Occupancy related costs	7,957		6,158		14,533		12,667
Amortization of intangible assets	9,037		1,292		10,237		2,632
Depreciation and amortization	1,058		609		2,051		1,096
Other	3,783		2,753		6,605		5,394

Total	$	29,828	$	19,018	$	48,508	$	36,033

NOTE 15 — OTHER INCOME (EXPENSE), NET

Other income (expense), net consists of the following:

	Three months ended						Six months ended
	June 30,						June 30,
(in thousands)	2013			2012			2013			2012

Equity gain (loss) in affiliate	$	54		$	(255	)	$	(122	)	$	(579	)
Interest expense	(4,902		)	(14		)	(8,114		)	(29		)
Interest income	11			10			867			26
Other, net	12			(62		)	37			(90		)

Total	$	(4,825	)	$	(321	)	$	(7,332	)	$	(672	)

Equity loss in affiliate represents our proportional share of the losses in Correspondent One (see Note 8). The equity gain in affiliate represents the gain on sale of Correspondent One (see Note 2).

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NOTE 16 — EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the assumed conversion of all dilutive securities using the treasury stock method.

Basic and diluted EPS are calculated as follows:

	Three months ended				Six months ended
	June 30,				June 30,
(in thousands, except per share data)	2013		2012		2013		2012

Net income attributable to Altisource	$	30,931	$	28,081	$	58,449	$	53,310

Weighted-average common shares outstanding, basic	23,161		23,316		23,267		23,353
Dilutive effect of stock options	1,662		1,530		1,673		1,497

Weighted-average common shares outstanding, diluted	24,823		24,846		24,940		24,850

Earnings per share
Basic	$	1.34	$	1.20	$	2.51	$	2.28
Diluted	$	1.25	$	1.13	$	2.34	$	2.15

For the six months ended June 30, 2013 and 2012, 0.1 million and less than 0.1 million options, respectively (less than 0.1 million for the second quarter of 2013 and 2012), 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 for the six months ended June 30, 2013 and 2012 are 0.1 million and 0.3 million options, respectively (0.1 million and 0.3 million for the second quarter of 2013 and 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 been met.

NOTE 17 — COMMITMENTS AND CONTINGENCIES

Litigation

From time to time, we are involved in legal proceedings arising in the ordinary course of business. We record a liability for litigation if an unfavorable outcome is probable and the amount of loss can be reasonably estimated, including expected insurance coverage. For proceedings where a range of loss is determined, we record a best estimate of loss within the range.

When legal proceedings are material, we disclose the nature of the litigation, and to the extent possible, the estimate of loss or range of loss. In the opinion of management, after consultation with legal counsel and considering insurance coverage where applicable, the outcome of current legal proceedings, both individually and in the aggregate, will not have a material impact on our financial condition, results of operations or cash flows.

Escrow Balances

We hold customers’ assets in escrow at various financial institutions pending completion of certain real estate activities. These amounts are held in escrow for limited periods of time, generally consisting of a few days and are not included in the condensed consolidated balance sheets. Amounts held in escrow were $48.7 million and $47.2 million as of June 30, 2013 and December 31, 2012, respectively.

NOTE 18 — 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 to evaluate operating performance and to assess the allocation of our resources.

We classify our businesses into three reportable segments. The Mortgage Services segment provides services that span the mortgage and real estate lifecycle and are typically outsourced by loan servicers, loan originators and investors in single family

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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 and insurance industries. The Technology Services segment principally consists of our REALSuite software applications as well as 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. In addition, our Corporate Items and Eliminations segment includes eliminations of transactions between the reporting segments and costs related to corporate support functions including executive, finance, legal, human resources, vendor management, risk and six sigma.

Financial information for our segments is as follows:

	Three months ended June 30, 2013
									Corporate
	Mortgage		Financial			Technology			Items and			Consolidated
(in thousands)	Services		Services			Services			Eliminations			Altisource

Revenue	$	144,210	$	23,072		$	24,783		$	(5,955	)	$	186,110
Cost of revenue	89,078		13,807			19,407			(5,320		)	116,972
Gross profit	55,132		9,265			5,376			(635		)	69,138
Selling, general and administrative expenses	12,590		3,534			3,028			10,676			29,828
Income from operations	42,542		5,731			2,348			(11,311		)	39,310
Other income (expense), net	61		(5		)	(1		)	(4,880		)	(4,825		)
Income before income taxes and non-controlling interests	$	42,603	$	5,726		$	2,347		$	(16,191	)	$	34,485

	Three months ended June 30, 2012
										Corporate
	Mortgage			Financial			Technology			Items and			Consolidated
(in thousands)	Services			Services			Services			Eliminations			Altisource

Revenue	$	115,903		$	16,239		$	17,886		$	(5,823	)	$	144,205
Cost of revenue	73,156			11,663			13,214			(5,295		)	92,738
Gross profit	42,747			4,576			4,672			(528		)	51,467
Selling, general and administrative expenses	5,612			3,604			1,819			7,983			19,018
Income from operations	37,135			972			2,853			(8,511		)	32,449
Other expense, net	(246		)	(2		)	(6		)	(67		)	(321		)
Income before income taxes and non-controlling interests	$	36,889		$	970		$	2,847		$	(8,578	)	$	32,128

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	Six months ended June 30, 2013
									Corporate
	Mortgage			Financial			Technology		Items and			Consolidated
(in thousands)	Services			Services			Services		Eliminations			Altisource

Revenue	$	261,658		$	39,408		$	45,014	$	(11,143	)	$	334,937
Cost of revenue	161,447			25,833			36,519		(9,865		)	213,934
Gross profit	100,211			13,575			8,495		(1,278		)	121,003
Selling, general and administrative expenses	18,048			6,384			4,893		19,183			48,508
Income from operations	82,163			7,191			3,602		(20,461		)	72,495
Other income (expense), net	(112		)	(8		)	3		(7,215		)	(7,332		)
Income before income taxes and non-controlling interests	$	82,051		$	7,183		$	3,605	$	(27,676	)	$	65,163

	Six months ended June 30, 2012
							Corporate
	Mortgage		Financial		Technology		Items and			Consolidated
(in thousands)	Services		Services		Services		Eliminations			Altisource

Revenue	$	225,564	$	34,255	$	34,908	$	(11,456	)	$	283,271
Cost of revenue	146,195		23,996		24,680		(10,373		)	184,498
Gross profit	79,369		10,259		10,228		(1,083		)	98,773
Selling, general and administrative expenses	11,303		7,434		3,668		13,628			36,033
Income from operations	68,066		2,825		6,560		(14,711		)	62,740
Other expense, net	(567