Table of Contents

 

 

 

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 September 30, 2013

 

OR

 

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 October 19, 2013, there were 22,857,130 outstanding shares of the registrant’s shares of beneficial interest (excluding 2,555,618 shares held as treasury stock).

 

 

 



Table of Contents

 

Table of Contents

 

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

40

 

 

 

 

 

Item 4

Controls and Procedures

41

 

 

 

 

 

 

 

 

PART II — Other Information

 

 

 

 

 

 

Item 1

Legal Proceedings

42

 

 

 

 

 

Item 1A

Risk Factors

42

 

 

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

42

 

 

 

 

 

Item 6

Exhibits

43

 

 

 

 

SIGNATURES

44

 



Table of Contents

 

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)

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

ASSETS

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

212,585

 

$

105,502

 

Accounts receivable, net

 

83,851

 

88,955

 

Prepaid expenses and other current assets

 

13,760

 

7,618

 

Deferred tax assets, net

 

1,775

 

1,775

 

Total current assets

 

311,971

 

203,850

 

 

 

 

 

 

 

Premises and equipment, net

 

59,464

 

50,399

 

Deferred tax assets, net

 

4,073

 

4,073

 

Intangible assets, net

 

242,088

 

56,586

 

Goodwill

 

14,915

 

14,915

 

Investment in Correspondent One

 

 

12,729

 

Loan to Ocwen

 

 

75,000

 

Other assets

 

15,243

 

11,674

 

 

 

 

 

 

 

Total assets

 

$

647,754

 

$

429,226

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

66,848

 

$

58,976

 

Current portion of long-term debt

 

4,000

 

2,000

 

Current portion of capital lease obligations

 

 

233

 

Other current liabilities

 

9,371

 

10,423

 

Total current liabilities

 

80,219

 

71,632

 

 

 

 

 

 

 

Long-term debt, less current portion

 

392,708

 

196,027

 

Other non-current liabilities

 

1,296

 

1,738

 

 

 

 

 

 

 

Commitments and contingencies (Note 17)

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Common stock ($1.00 par value; 100,000 shares authorized; 25,413 issued and 22,866 outstanding as of September 30, 2013; 25,413 issued and 23,427 outstanding as of December 31, 2012)

 

25,413

 

25,413

 

Additional paid-in-capital

 

88,949

 

86,873

 

Retained earnings

 

209,783

 

124,127

 

Treasury stock, at cost (2,547 shares as of September 30, 2013 and 1,986 shares as of December 31, 2012)

 

(151,861

)

(77,954

)

Altisource equity

 

172,284

 

158,459

 

 

 

 

 

 

 

Non-controlling interests

 

1,247

 

1,370

 

Total equity

 

173,531

 

159,829

 

 

 

 

 

 

 

Total liabilities and equity

 

$

647,754

 

$

429,226

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

ALTISOURCE PORTFOLIO SOLUTIONS S.A.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

210,835

 

$

143,988

 

$

545,772

 

$

427,259

 

Cost of revenue

 

134,261

 

94,287

 

348,195

 

278,785

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

76,574

 

49,701

 

197,577

 

148,474

 

Selling, general and administrative expenses

 

31,519

 

18,452

 

80,027

 

54,485

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

45,055

 

31,249

 

117,550

 

93,989

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

Interest expense

 

(6,188

)

(10

)

(14,302

)

(39

)

Other income (expense), net

 

(253

)

(257

)

529

 

(900

)

Total other income (expense), net

 

(6,441

)

(267

)

(13,773

)

(939

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes and non-controlling interests

 

38,614

 

30,982

 

103,777

 

93,050

 

Income tax provision

 

(1,659

)

(2,898

)

(6,227

)

(8,493

)

 

 

 

 

 

 

 

 

 

 

Net income

 

36,955

 

28,084

 

97,550

 

84,557

 

Net income attributable to non-controlling interests

 

(947

)

(1,060

)

(3,093

)

(4,223

)

 

 

 

 

 

 

 

 

 

 

Net income attributable to Altisource

 

$

36,008

 

$

27,024

 

$

94,457

 

$

80,334

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

1.56

 

$

1.16

 

$

4.07

 

$

3.44

 

Diluted

 

$

1.42

 

$

1.08

 

$

3.77

 

$

3.23

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

23,025

 

23,338

 

23,185

 

23,347

 

Diluted

 

25,333

 

25,016

 

25,070

 

24,895

 

 

 

 

 

 

 

 

 

 

 

Transactions with related parties included above

 

 

 

 

 

 

 

 

 

Revenue

 

$

143,557

 

$

86,558

 

$

354,889

 

$

257,491

 

Selling, general and administrative expenses

 

720

 

621

 

2,133

 

1,801

 

Other income

 

 

 

773

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



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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

 

 

 

 

80,334

 

 

4,223

 

84,557

 

Contributions from non-controlling interest holders

 

 

 

 

 

 

27

 

27

 

Distributions to non-controlling interest holders

 

 

 

 

 

 

(6,008

)

(6,008

)

Share-based compensation expense

 

 

 

2,038

 

 

 

 

2,038

 

Exercise of stock options

 

 

 

 

(5,759

)

8,378

 

 

2,619

 

Repurchase of shares

 

 

 

 

 

(16,781

)

 

(16,781

)

Balance, September 30, 2012

 

25,413

 

$

25,413

 

$

85,267

 

$

200,736

 

$

(80,451

)

$

1,430

 

$

232,395

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

25,413

 

$

25,413

 

$

86,873

 

$

124,127

 

$

(77,954

)

$

1,370

 

$

159,829

 

Net income

 

 

 

 

94,457

 

 

3,093

 

97,550

 

Contributions from non-controlling interest holders

 

 

 

 

 

 

18

 

18

 

Distributions to non-controlling interest holders

 

 

 

 

 

 

(3,234

)

(3,234

)

Share-based compensation expense

 

 

 

2,076

 

 

 

 

2,076

 

Exercise of stock options

 

 

 

 

(8,801

)

13,511

 

 

4,710

 

Repurchase of shares

 

 

 

 

 

(87,418

)

 

(87,418

)

Balance, September 30, 2013

 

25,413

 

$

25,413

 

$

88,949

 

$

209,783

 

$

(151,861

)

$

1,247

 

$

173,531

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



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ALTISOURCE PORTFOLIO SOLUTIONS S.A.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Nine months ended

 

 

 

September 30,

 

 

 

2013

 

2012

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

97,550

 

$

84,557

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

13,791

 

9,038

 

Amortization of intangible assets

 

18,857

 

3,833

 

Share-based compensation expense

 

2,076

 

2,038

 

Equity in losses of affiliates

 

176

 

872

 

Bad debt expense

 

1,338

 

1,170

 

Amortization of debt discount

 

184

 

 

Amortization of debt issuance costs

 

702

 

 

Loss on sale or disposal of fixed assets

 

1,178

 

401

 

Changes in operating assets and liabilities, net of effects of acquisitions:

 

 

 

 

 

Accounts receivable

 

3,762

 

(11,662

)

Prepaid expenses and other current assets

 

(6,142

)

(4,058

)

Other assets

 

(1,871

)

809

 

Accounts payable and accrued expenses

 

4,574

 

10,405

 

Other current and non-current liabilities

 

(1,535

)

(266

)

Net cash provided by operating activities

 

134,640

 

97,137

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Additions to premises and equipment

 

(20,528

)

(24,199

)

Acquisition of businesses, net of cash acquired

 

(204,567

)

 

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

 

(137,497

)

(24,199

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

201,000

 

 

Repayment of long-term debt

 

(2,503

)

 

Debt issuance costs

 

(2,400

)

 

Principal payments on capital lease obligations

 

(233

)

(491

)

Proceeds from stock option exercises

 

4,710

 

2,619

 

Purchase of treasury stock

 

(87,418

)

(16,781

)

Contributions from non-controlling interests

 

18

 

27

 

Distributions to non-controlling interests

 

(3,234

)

(6,008

)

Net cash provided by (used in) financing activities

 

109,940

 

(20,634

)

 

 

 

 

 

 

Increase in cash and cash equivalents

 

107,083

 

52,304

 

Cash and cash equivalents at the beginning of the period

 

105,502

 

32,125

 

Cash and cash equivalents at the end of the period

 

$

212,585

 

$

84,429

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

Interest paid

 

$

13,592

 

$

39

 

Income taxes paid, net

 

2,360

 

2,252

 

 

 

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

Amortization of tax-deductible goodwill

 

$

 

$

2,524

 

Premises and equipment purchased on account

 

1,947

 

5,992

 

 

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 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 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 September 30, 2013, Lenders One had total assets of $3.8 million and liabilities of $2.5 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.  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.  Our Chairman is also the Chairman of Ocwen.  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
September 30,

 

Nine months ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Mortgage Services

 

73

%

68

%

71

%

69

%

Financial Services

 

37

%

<1

%

25

%

<1

%

Technology Services

 

53

%

39

%

53

%

40

%

Consolidated revenue

 

68

%

60

%

65

%

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 and fees charged by our competitors.

 

Support Services

 

We have support services agreements with Ocwen.  These services provided and received pursuant to the above agreements include such areas as human resources, vendor management, corporate services, operational effectiveness, quality assurance, quantitative analytics and treasury.  Payment for the services provided or received 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 nine months ended September 30, 2013 and 2012, we billed Ocwen $1.8 million and $2.0 million, respectively ($0.6 million for the third quarter of 2013 and 2012), and Ocwen billed us $2.1 million and $1.8 million, respectively ($0.7 million and $0.6 million for the third 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 nine months ended September 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

 

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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).

 

Correspondent One® and HLSS

 

In July 2011, we acquired an equity interest in Correspondent One S.A. (“Correspondent One”) (see Note 8).  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, we provided Correspondent One certain finance, human resources, legal support, facilities, technology, vendor management and risk management services.  For the nine months ended September 30, 2013 and 2012, we billed Correspondent One less than $0.1 million and $0.2 million, respectively (none for the third quarter of 2013 and $0.1 million for the third quarter of 2012).  We also provided certain origination related services to Correspondent One.  We earned revenue of $0.1 million and $0.2 million for the nine months ended September 30, 2013 and 2012, respectively, for these services (none for the third quarter of 2013 and $0.2 million for the third quarter of 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 nine months ended September 30, 2013 and 2012, we billed HLSS $0.5 million and $0.4 million, respectively ($0.2 million for the third 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 acquiring and managing single family rental properties by acquiring portfolios of sub-performing and non-performing residential mortgage loans throughout the United States.  AAMC is an asset management company providing portfolio management and corporate governance services to Residential. Our Chairman is also the Chairman of each 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 nine months ended September 30, 2013, we billed Residential $0.4 million, and we billed AAMC $0.9 million ($0.2 million for Residential and $0.7 million for AAMC for the third 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 $75.8 million, after a working capital and net income adjustment of $11.1 million, for the Homeward fee-based businesses.  From the acquisition date through September 30, 2013, we recorded service revenue of $74.3 million and we estimate pre-tax income is $14.2 million related to these businesses.

 

Since the acquisition date, management adjusted the preliminary purchase price allocation and assigned associated asset lives based upon information that has become available. In addition to the working capital adjustment, we also reduced premises and equipment by $1.2 million based on a post-acquisition detailed analysis of software licenses received.  The purchase price allocation and assessment of asset lives will continue to be revised as additional 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)

 

 

 

 

 

 

 

Premises and equipment

 

$

1,559

 

Customer relationship

 

75,609

 

 

 

77,168

 

Accounts payable and accrued expenses

 

(1,351

)

Purchase price

 

$

75,817

 

 

 

 

Estimated
life

(in years)

 

 

 

 

 

Premises 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 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 September 30, 2013, we recorded service revenue of $28.6 million and we estimate pre-tax income is $10.9 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 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 earliest period presented.

 

 

 

Nine months ended
September 30, 2013

 

(in thousands, except per share amounts)

 

As reported

 

Pro forma

 

Revenue

 

$

545,772

 

$

579,263

 

Net income attributable to Altisource

 

94,457

 

101,413

 

Earnings per share — diluted

 

3.77

 

4.05

 

 

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Table of Contents

 

 

 

Nine months ended
September 30, 2012

 

(in thousands, except per share amounts)

 

As reported

 

Pro forma

 

Revenue

 

$

427,259

 

$

536,647

 

Net income attributable to Altisource

 

80,334

 

103,313

 

Earnings per share — diluted

 

3.23

 

4.15

 

 

 

 

Three months ended
September 30, 2012

 

(in thousands, except per share amounts)

 

As reported

 

Pro forma

 

Revenue

 

$

143,988

 

$

180,451

 

Net income attributable to Altisource

 

27,024

 

34,665

 

Earnings per share — diluted

 

1.08

 

1.39

 

 

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 and to reflect the impact of income taxes on the pro forma adjustments utilizing Altisource’s effective income tax rate in each period presented.

 

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

 

Equator Acquisition

 

On August 19, 2013, we entered into a Purchase and Sale Agreement (the “Purchase Agreement”) pursuant to which we agreed to purchase all of the outstanding limited liability company interests of Equator, LLC, a California limited-liability company (“Equator”).  The aggregate consideration payable under the Purchase Agreement is up to $150.0 million comprised of (i) $70.0 million in initial consideration and (ii) up to an additional $80.0 million in potential additional consideration, the payment of which is dependent upon the Equator business meeting targeted levels of profitability (as described in the Purchase Agreement) for three consecutive 12-month periods following closing.  Each 12-month period has targeted levels of profitability and potential additional consideration will be paid based on each 12-month period. We may, at our discretion, pay up to 20% of the initial consideration and up to 20% of each payment of any additional consideration in shares of our restricted stock, with the balance to be paid in cash.  The closing is subject to the satisfaction of customary closing terms and conditions, including, without limitation, clearance under the Hart-Scott-Rodino (“HSR”) Act. The purchase price is subject to certain adjustments based on targeted amounts of current assets and current liabilities of Equator at closing, to be settled within 90 days of the closing date.

 

We initially filed the HSR application with the Federal Trade Commission (the “FTC”) in the third quarter and initially expected to receive approval and close the acquisition in the third quarter of 2013.  With the recent disruption of the United States government and shutdown of nonessential services, approval from the FTC has been delayed. To ensure that the HSR waiting period did not expire during the United States government disruption, and following discussions with the staff of the FTC, we voluntarily withdrew our initial application and re-filed it early in the fourth quarter of 2013.  We believe, although there can be no assurance, the transaction will close in the fourth quarter of 2013.

 

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NOTE 4 — ACCOUNTS RECEIVABLE, NET

 

Accounts receivable, net consists of the following:

 

 

 

September 30,

 

December 31,

 

(in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Billed

 

 

 

 

 

Non-related parties

 

$

27,392

 

$

25,950

 

Ocwen

 

11,146

 

19,817

 

Correspondent One

 

 

27

 

HLSS

 

71

 

163

 

AAMC

 

595

 

14

 

Residential

 

71

 

 

Other receivables

 

234

 

353

 

 

 

39,509

 

46,324

 

Unbilled

 

 

 

 

 

Non-related parties

 

40,010

 

39,496

 

Ocwen

 

8,940

 

6,377

 

Correspondent One

 

 

32

 

 

 

88,459

 

92,229

 

Allowance for doubtful accounts

 

(4,608

)

(3,274

)

 

 

 

 

 

 

Total

 

$

83,851

 

$

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.

 

NOTE 5 — PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

 

 

September 30,

 

December 31,

 

(in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Maintenance agreements, current portion

 

$

4,350

 

$

3,636

 

Income taxes receivable

 

4,256

 

1,814

 

Prepaid expenses

 

4,646

 

1,640

 

Other current assets

 

508

 

528

 

 

 

 

 

 

 

Total

 

$

13,760

 

$

7,618

 

 

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Table of Contents

 

NOTE 6 — PREMISES AND EQUIPMENT, NET

 

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

 

 

 

September 30,

 

December 31,

 

(in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Computer hardware and software

 

$

81,897

 

$

68,329

 

Office equipment and other

 

21,849

 

15,592

 

Furniture and fixtures

 

6,414

 

5,344

 

Leasehold improvements

 

14,863

 

12,982

 

 

 

125,023

 

102,247

 

Less: Accumulated depreciation and amortization

 

(65,559

)

(51,848

)

 

 

 

 

 

 

Total

 

$

59,464

 

$

50,399

 

 

Depreciation and amortization expense, inclusive of capital leases, amounted to $13.8 million and $9.0 million for the nine months ended September 30, 2013 and 2012, respectively ($4.5 million and $3.8 million for the third 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 nine months ended September 30, 2013. The following is a summary of goodwill by segment:

 

 

 

Mortgage

 

Financial

 

Technology

 

 

 

(in thousands)

 

Services

 

Services

 

Services

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2013 and December 31, 2012

 

$

10,919

 

$

2,378

 

$

1,618

 

$

14,915

 

 

Intangible Assets, Net

 

Intangible assets, net consist of the following:

 

 

 

Weighted
average
estimated

 

Gross carrying amount

 

Accumulated amortization

 

Net book value

 

(dollars in thousands)

 

useful life
(years)

 

September 30,
2013

 

December 31,
2012

 

September 30,
2013

 

December 31,
2012

 

September 30,
2013

 

December 31,
2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Definite lived intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

16

 

$

10,614

 

$

10,614

 

$

(4,414

)

$

(4,060

)

$

6,200

 

$

6,554

 

Customer-related intangible assets

 

9

 

242,725

 

38,366

 

(35,520

)

(18,567

)

207,205

 

19,799

 

Operating agreement

 

20

 

35,000

 

35,000

 

(6,417

)

(5,104

)

28,583

 

29,896

 

Non-compete agreement

 

4

 

1,300

 

1,300

 

(1,200

)

(963

)

100

 

337

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

$

289,639

 

$

85,280

 

$

(47,551

)

$

(28,694

)

$

242,088

 

$

56,586

 

 

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Amortization expense for definite lived intangible assets was $18.9 million and $3.8 million for the nine months ended September 30, 2013 and 2012, respectively ($8.6 million and $1.2 million for the third quarter of 2013 and 2012, respectively). Expected annual definite lived intangible asset amortization for 2013 through 2017 is $27.6 million, $46.9 million, $40.4 million, $32.5 million and $26.0 million, respectively, for assets recorded as of September 30, 2013, including preliminary amounts associated with the Homeward and ResCap fee-based business transactions (see Note 3).

 

NOTE 8 — INVESTMENT IN EQUITY AFFILIATES

 

Correspondent One purchased closed conforming and government guaranteed residential mortgages from approved mortgage bankers.  Prior to the sale of our interest in Correspondent One to Ocwen on March 31, 2013 (see Note 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 was $0.1 million and $0.9 million for the nine months ended September 30, 2013 and 2012, respectively (none for the third quarter of 2013 and $0.3 million net loss for the third quarter of 2012).

 

NOTE 9 — OTHER ASSETS

 

Other assets consist of the following:

 

 

 

September 30,

 

December 31,

 

(in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Security deposits, net

 

$

7,105

 

$

5,019

 

Debt issuance costs, net

 

6,143

 

4,260

 

Maintenance agreements, non-current portion

 

1,743

 

1,614

 

Restricted cash

 

158

 

158

 

Other

 

94

 

623

 

 

 

 

 

 

 

Total

 

$

15,243

 

$

11,674

 

 

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

 

Accounts payable and accrued expenses consist of the following:

 

 

 

September 30,

 

December 31,

 

(in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Accounts payable

 

$

7,818

 

$

5,079

 

Accrued expenses - general

 

16,903

 

16,528

 

Accrued salaries and benefits

 

23,222

 

19,613

 

Income taxes payable

 

14,774

 

8,750

 

Payable to Ocwen

 

4,131

 

8,865

 

Payable to AAMC

 

 

141

 

 

 

 

 

 

 

Total

 

$

66,848

 

$

58,976

 

 

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Other current liabilities consist of the following:

 

 

 

September 30,

 

December 31,

 

(in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Deferred revenue

 

$

1,512

 

$

2,482

 

Facility closure cost accrual, current portion

 

141

 

138

 

Book overdrafts

 

4,601

 

5,229

 

Other

 

3,117

 

2,574

 

 

 

 

 

 

 

Total

 

$

9,371

 

$

10,423

 

 

NOTE 11 — LONG-TERM DEBT

 

Long-term debt consists of the following:

 

 

 

September 30,

 

December 31,

 

(in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Senior secured term loan

 

$

397,497

 

$

200,000

 

Less: Unamortized discount, net

 

(789

)

(1,973

)

Net long-term debt

 

396,708

 

198,027

 

Less: Current portion

 

(4,000

)

(2,000

)

 

 

 

 

 

 

Long-term debt, less current portion

 

$

392,708

 

$

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 Initial Proceeds and the Incremental Term Loan must be repaid in equal consecutive quarterly principal installments of 0.25% of the initial principal amounts, with the balance due at maturity. The aggregate amount of each quarterly scheduled principal installment of the term loans 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 a portion 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 September 30, 2013 was 5.75%.

 

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Table of Contents

 

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 September 30, 2013, debt issuance costs were $6.1 million, net of $0.8 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.

 

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 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 September 30, 2013, we have purchased approximately 3.4 million shares of our common stock in the open market at an average price of $53.94 per share.  We purchased 0.8 million shares of common stock (at an average price of $103.45 per share) and 0.3 million shares of common stock (at an average price of $63.25 per share) during the nine months ended September 30, 2013 and 2012, respectively (0.3 million shares at an average price of $134.86 per share for the third quarter of 2013 and no comparative amounts in the third quarter of 2012). Approximately 2.7 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 September 30, 2013, approximately $38 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 the amount we can spend on share repurchases in any year and may prevent repurchases in certain circumstances.  As of September 30, 2013, approximately $107 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 $2.1 million and $2.0 million for the nine months ended September 30, 2013 and 2012, respectively ($0.6 million and $1.1 million for the third quarter of 2013 and 2012, respectively). The amount for the nine months ended September 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 0.8 million service-based awards were outstanding at September 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 1.9 million market-based awards were outstanding at September 30, 2013.

 

The Company granted less than 0.1 million stock options (at a weighted average exercise price of $104.84 per share) and 0.3 million stock options (at a weighted average exercise price of $69.48 per share) during the nine months ended September 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:

 

 

 

Nine months ended
September 30, 2013

 

Nine months ended
September 30, 2012

 

 

 

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%

 

 

 

 

 

 

 

 

 

 

 

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 — $49.14

 

$16.12 — $41.72

 

$19.25 — $29.80

 

$9.98 — $22.76

 

 

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:

 

 

 

Nine months ended September 30,

 

(in thousands, except per share amounts)

 

2013

 

2012

 

 

 

 

 

 

 

Weighted average fair value at grant date per share

 

$

32.59

 

$

20.77

 

Intrinsic value of options exercised

 

24,587

 

11,535

 

Fair value of options vested

 

1,867

 

1,491

 

 

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

 

As of September 30, 2013, estimated unrecognized compensation costs related to share-based payments amounted to $3.0 million, which we expect to recognize over a weighted average remaining requisite service period of approximately 2.9 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

 

75,000

 

104.84

 

 

 

 

 

Exercised

 

(279,531

)

17.12

 

 

 

 

 

Forfeited

 

(117,248

)

59.49

 

 

 

 

 

Outstanding at September 30, 2013

 

2,736,530

 

18.34

 

5.4

 

332,955

 

 

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2013

 

2,216,347

 

11.99

 

4.9

 

283,735

 

 

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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
September 30,

 

Nine months ended
September 30,

 

(in thousands)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

$

39,600

 

$

28,840

 

$

108,923

 

$

84,314

 

Outside fees and services

 

56,611

 

31,084

 

137,851

 

91,494

 

Reimbursable expenses

 

29,496

 

24,326

 

73,061

 

77,846

 

Technology and telecommunications

 

5,459

 

6,900

 

18,010

 

17,890

 

Depreciation and amortization

 

3,095

 

3,137

 

10,350

 

7,241

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

134,261

 

$

94,287

 

$

348,195

 

$

278,785

 

 

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 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:

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

(in thousands)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

$

6,802

 

$

5,212

 

$

18,868

 

$

15,995

 

Professional services

 

2,168

 

2,089

 

5,184

 

5,550

 

Occupancy related costs

 

7,438

 

6,641

 

21,971

 

19,308

 

Amortization of intangible assets

 

8,620

 

1,201

 

18,857

 

3,833

 

Depreciation and amortization

 

1,390

 

701

 

3,441

 

1,797

 

Other

 

5,101

 

2,608

 

11,706

 

8,002

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

31,519

 

$

18,452

 

$

80,027

 

$

54,485

 

 

NOTE 15 — OTHER INCOME (EXPENSE), NET

 

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

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

(in thousands)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Loss in equity affiliates

 

$

(54

)

$

(293

)

$

(176

)

$

(872

)

Interest income

 

14

 

49

 

881

 

75

 

Other, net

 

(213

)

(13

)

(176

)

(103

)

 

 

 

 

 

 

 

 

 

 

Total

 

$

(253

)

$

(257

)

$

529

 

$

(900

)

 

Loss in equity affiliates primarily represents our proportional share of the losses in Correspondent One (see Note 8), net of 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
September 30,

 

Nine months ended
September 30,

 

(in thousands, except per share data)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Altisource

 

$

36,008

 

$

27,024

 

$

94,457

 

$

80,334

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic

 

23,025

 

23,338

 

23,185

 

23,347

 

Dilutive effect of stock options

 

2,308

 

1,678

 

1,885

 

1,548

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, diluted

 

25,333

 

25,016

 

25,070

 

24,895

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

Basic

 

$

1.56

 

$

1.16

 

$

4.07

 

$

3.44

 

Diluted

 

$

1.42

 

$

1.08

 

$

3.77

 

$

3.23

 

 

For the nine months ended September 30, 2013 and 2012, less than 0.1 million options (less than 0.1 million for the third 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 nine months ended September 30, 2013 and 2012 are 0.1 million and 0.3 million options, respectively (0.1 million and 0.2 million options for the third 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 $56.8 million and $47.2 million as of September 30, 2013 and December 31, 2012, respectively.

 

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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 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, interest expense and costs related to corporate support functions including executive, finance, legal, human resources, vendor management, risk and operational effectiveness.

 

Financial information for our segments is as follows:

 

 

 

Three months ended September 30, 2013

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

Mortgage

 

Financial

 

Technology

 

Items and

 

Consolidated

 

(in thousands)

 

Services

 

Services

 

Services

 

Eliminations

 

Altisource

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

164,661

 

$

27,267

 

$

25,175

 

$

(6,268

)

$

210,835

 

Cost of revenue

 

106,412

 

14,998

 

18,569

 

(5,718

)

134,261

 

Gross profit

 

58,249

 

12,269

 

6,606

 

(550

)

76,574

 

Selling, general and administrative expenses

 

14,224

 

4,616

 

2,621

 

10,058

 

31,519

 

Income from operations

 

44,025

 

7,653

 

3,985

 

(10,608

)

45,055

 

Other income (expense), net

 

(41

)

 

 

(6,400

)

(6,441

)

Income before income taxes and non-controlling interests

 

$

43,984

 

$

7,653

 

$

3,985

 

$

(17,008

)

$

38,614

 

 

 

 

Three months ended September 30, 2012

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

Mortgage

 

Financial

 

Technology

 

Items and

 

Consolidated

 

(in thousands)

 

Services

 

Services

 

Services

 

Eliminations

 

Altisource

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

115,882

 

$

15,394

 

$

19,076

 

$

(6,364

)

$

143,988

 

Cost of revenue

 

72,774

 

11,784

 

15,418

 

(5,689

)

94,287

 

Gross profit

 

43,108

 

3,610

 

3,658

 

(675

)

49,701

 

Selling, general and administrative expenses

 

6,155

 

3,116

 

1,851

 

7,330

 

18,452

 

Income from operations

 

36,953

 

494

 

1,807

 

(8,005

)

31,249

 

Other income (expense), net

 

(290

)

(6

)

(5

)

34

 

(267

)

Income before income taxes and non-controlling interests

 

$

36,663

 

$

488

 

$

1,802

 

$

(7,971

)

$

30,982

 

 

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Table of Contents

 

 

 

Nine months ended September 30, 2013

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

Mortgage

 

Financial

 

Technology

 

Items and

 

Consolidated

 

(in thousands)

 

Services

 

Services

 

Services

 

Eliminations

 

Altisource

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

426,319

 

$

66,675

 

$

70,189

 

$

(17,411

)

$

545,772

 

Cost of revenue

 

267,859

 

40,831

 

55,088

 

(15,583

)

348,195

 

Gross profit

 

158,460

 

25,844

 

15,101

 

(1,828

)

197,577

 

Selling, general and administrative expenses

 

32,272

 

11,000

 

7,514

 

29,241

 

80,027

 

Income from operations

 

126,188

 

14,844

 

7,587

 

(31,069

)

117,550

 

Other income (expense), net

 

(153

)

(8

)

3

 

(13,615

)

(13,773

)

Income before income taxes and non-controlling interests

 

$

126,035

 

$

14,836

 

$

7,590

 

$

(44,684

)

$

103,777

 

 

 

 

Nine months ended September 30, 2012

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

Mortgage

 

Financial

 

Technology

 

Items and

 

Consolidated

 

(in thousands)

 

Services

 

Services

 

Services

 

Eliminations

 

Altisource

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

341,446

 

$

49,649

 

$

53,984

 

$

(17,820

)

$

427,259

 

Cost of revenue

 

218,969

 

35,780

 

40,098

 

(16,062

)

278,785

 

Gross profit

 

122,477

 

13,869

 

13,886

 

(1,758

)

148,474

 

Selling, general and administrative expenses

 

17,458

 

10,550

 

5,519

 

20,958

 

54,485

 

Income from operations

 

105,019

 

3,319

 

8,367

 

(22,716

)

93,989

 

Other income (expense), net

 

(857

)

(22

)

(22

)

(38

)

(939

)

Income before income taxes and non-controlling interests

 

$

104,162

 

$

3,297

 

$

8,345

 

$

(22,754

)

$

93,050

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

Mortgage

 

Financial

 

Technology

 

Items and

 

Consolidated

 

(in thousands)

 

Services

 

Services

 

Services

 

Eliminations

 

Altisource

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets:

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

$

313,441

 

$

52,578

 

$

120,059

 

$

161,676

 

$

647,754

 

December 31, 2012

 

132,924

 

37,782

 

64,570

 

193,950

 

429,226

 

 

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