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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
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 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).
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
FORM 10-Q
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5 |
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6 |
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7 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
22 |
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42 |
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43 |
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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 |
|
||
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ASSETS |
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||||||
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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 |
|
||
|
|
|
|
|
|
|
||
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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 |
|
||
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Loan to Ocwen |
|
— |
|
75,000 |
|
||
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Other assets |
|
15,113 |
|
11,674 |
|
||
|
|
|
|
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|
||
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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 |
|
||
|
|
|
|
|
|
|
||
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Commitments and contingencies (Note 17) |
|
|
|
|
|
||
|
|
|
|
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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 .
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
Three months ended |
|
Six months ended |
|
||||||||
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|
June 30, |
|
June 30, |
|
||||||||
|
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2013 |
|
2012 |
|
2013 |
|
2012 |
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||||
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Revenue |
|
$ |
186,110 |
|
$ |
144,205 |
|
$ |
334,937 |
|
$ |
283,271 |
|
|
Cost of revenue |
|
116,972 |
|
92,738 |
|
213,934 |
|
184,498 |
|
||||
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|
|
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|
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|
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Gross profit |
|
69,138 |
|
51,467 |
|
121,003 |
|
98,773 |
|
||||
|
Selling, general and administrative expenses |
|
29,828 |
|
19,018 |
|
48,508 |
|
36,033 |
|
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|
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|
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|
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|
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 |
) |
||||
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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 |
) |
||||
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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 |
) |
||||
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||||
|
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 .
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)
|
|
|
Altisource Equity |
|
|
|
|
|
||||||||||||||
|
|
|
Common stock |
|
Additional
|
|
Retained
|
|
Treasury
|
|
Non-
|
|
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 .
|
|
|
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.
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.
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
|
|
Six months ended
|
|
||||
|
|
|
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).
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.
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
|
|
|
|
|
|
|
|
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
|
|
||||
|
(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 |
|
||
|
|
|
Six months ended
|
|
||||
|
(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
|
|
||||
|
(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.
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 |
|
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), w e 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 |
|
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.
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. T he 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.
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.
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
|
|
Six months ended
|
|
||||
|
|
|
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
|
|
Weighted
|
|
Weighted
|
|
Aggregate
|
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
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 |
|
||
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).
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
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 |
|
|
|
|
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 |
) |
(16 |
) |
(17 |
) |
(72 |
) |
(672 |
) |
|||||
|
Income before income taxes and non-controlling interests |
|
$ |
67,499 |
|
$ |
2,809 |
|
$ |
6,543 |
|
$ |
(14,783 |
) |
$ |
62,068 |
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|||||
|
|
|
Mortgage |
|
Financial |
|
Technology |
|
Items and |
|
Consolidated |
|
|||||
|
(in thousands) |
|
Services |
|
Services |
|
Services |
|
Eliminations |
|
Altisource |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total assets: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
June 30, 2013 |
|
$ |
316,648 |
|
$ |
56,322 |
|
$ |
113,794 |
|
$ |
156,369 |
|
$ |
643,133 |
|
|
December 31, 2012 |
|
132,924 |
|
37,782 |
|
64,570 |
|
193,950 |
|
429,226 |
|
|||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
.
Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our businesses, current developments, financial condition, results of operations and liquidity. Our MD&A should be read in conjunction with our Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission (“SEC”) on February 13, 2013.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q regarding anticipated financial outcomes, business and market conditions, outlook and other similar statements related to Altisource’s future financial and operational performance are “forward looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of terminology such as “anticipate,” “intend,” “expect,” “may,” “could,” “should,” “would,” “plan,” “estimate,” “believe,” “predict,” “potential” or “continue” or the negative of these terms and other comparable terminology. Forward-looking statements are not guarantees of future performance and involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially. The following are examples of such items and are not intended to be all inclusive:
· assumptions related to the sources of liquidity and the adequacy of financial resources;
· assumptions about our ability to grow our business;
· assumptions about our ability to improve margins;
· expectations regarding collection rates and placements in our Financial Services segment;
· assumptions regarding the impact of seasonality;
· estimates regarding the calculation of our effective tax rate; and
· estimates regarding our reserves and valuations.
Important factors that could cause actual results to differ materially from those suggested by the forward-looking statements include, but are not limited to, the risks discussed in the “Risk Factors” section of our Form 10-K for the year ended December 31, 2012 and include the following:
· our ability to retain our existing customers, expand relationships and attract new customers;
· the level of loan delinquencies;
· the level of origination volume;
· technology failures;
· the trend toward outsourcing;
· our ability to raise debt;
· our ability to retain our directors, executive officers and key personnel; and
· our ability to comply with and burdens imposed by changes in governmental regulations, taxes and policies.
We caution you not to place undue reliance on these forward-looking statements as they reflect our view only as of the date of this report. We are under no obligation (and expressly disclaim any obligation) to update or alter any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
OVERVIEW
Our business
When we refer to “we,” “us,” “our,” “the Company” or “Altisource” we mean Altisource Portfolio Solutions S.A., a Luxembourg société anonyme, or public limited company, and its wholly-owned subsidiaries.
We, through our subsidiaries, are a global provider of outsourcing and services focused on high-value, technology-enabled solutions principally related to mortgage and real estate portfolio management, asset recovery and customer relationship management.
We classify our business into the following three reportable segments:
Mortgage Services : Provides services that span the mortgage and real estate lifecycle and are typically outsourced by loan servicers, originators and investors in single family homes. We provide these services primarily for loan portfolios serviced by Ocwen Financial Corporation and its subsidiaries (“Ocwen”). We also have longstanding relationships with some of the leading capital markets firms, commercial banks, hedge funds, insurance companies and mortgage bankers. Within the Mortgage Services segment, we provide the following services:
Asset management — Asset management services principally include property preservation, property inspection, real estate owned (“REO”) asset management, our consumer real estate portal and REO brokerage services. In connection with the spin-off of Altisource Residential Corporation (“Residential”) and Altisource Asset Management Corporation (“AAMC”), we also provide property management, lease management and renovation management services for single family rental properties.
Residential property valuation — Residential property valuation services principally include traditional appraisal products through our licensed appraisal management company and alternative valuation products primarily through our network of real estate professionals. We generally provide these services for loan servicers, mortgage bankers and investors in single family homes.
Closing and insurance services — Closing and insurance services principally include an array of title search, closing, title agency and insurance related services, including document preparation, pre-foreclosure and REO title searches, escrow and title insurance, program management and insurance brokerage services applicable to residential loan servicers. We also provide closing and title agency services for loan originations.
Default management services — Default management services principally include foreclosure trustee services for loan servicers and non-legal processing and related services for and under the supervision of foreclosure, bankruptcy and eviction attorneys.
Origination management services — Origination management services principally include the operations of Mortgage Partnership of America, L.L.C. (“MPA”) and our contract underwriting and quality control businesses. MPA serves as the manager of Best Partners Mortgage Cooperative, Inc. (“BPMC”), which is referred to as the Lenders One Mortgage Cooperative (“Lenders One”), a national alliance of independent mortgage bankers that provides its members with education and training along with revenue enhancing, cost reducing and market share expanding opportunities. We provide other origination related services in the residential property valuation and closing and insurance services businesses. In addition, some of the origination related reseller businesses, including the flood certification business, are included in the Technology Services REALSuite business.
Financial Services : Provides collection and customer relationship management services primarily to debt originators and servicers (e.g., credit card, auto lending, retail credit and mortgage) and the utility and insurance industries. Within the Financial Services segment, we provide the following services:
Asset recovery management — Asset recovery management principally includes post-charge-off debt collection services on a contingency fee basis.
Customer relationship management — Customer relationship management includes customer care and early stage collections services as well as insurance and claims processing, call center services and analytical support.
Technology Services : Comprises our REALSuite of software applications as well as our information technology (“IT”) infrastructure services. We currently provide our IT infrastructure services to Ocwen, Home Loan Servicing Solutions (“HLSS”), Correspondent One S.A. (“Correspondent One”), Residential, AAMC and ourselves. The REALSuite platform provides a fully integrated set of software applications and technologies that manage the end-to-end lifecycle for residential and commercial mortgage loan servicing including the automated management and payment of a distributed network of vendors. A brief description of the key REALSuite software products is below:
REALServicing ® — An enterprise residential mortgage loan servicing product that offers an efficient and effective platform for loan servicing including default administration. This technology solution features automated workflows, a dialogue engine and robust reporting capabilities. The solution spans the loan servicing lifecycle from loan boarding to satisfaction including all collections, payment processing and reporting. We also offer our REALSynergy ® enterprise commercial loan servicing system.
REALTrans ® — A patented electronic business-to-business exchange that automates and simplifies the ordering, tracking and fulfilling of vendor provided services principally related to mortgages. This technology solution, whether web-based or integrated into a servicing system, connects multiple service providers through a single platform and forms an efficient method for managing a large scale network of vendors.
REALRemit ® — A patented electronic invoicing and payment system that provides vendors with the ability to submit invoices electronically for payment and to have invoice payments deposited directly to their respective bank accounts.
REALDoc ® — A correspondence management platform that automates document generation, distribution, archival and retrieval. It is capable of integrating with all commercially available servicing, origination and process management applications.
Corporate Items and Eliminations : Includes costs related to corporate support functions including executive, finance, legal, human resources, vendor management, risk and six sigma and also includes eliminations of transactions between the reporting segments. Corporate items and eliminations also include the cost of facilities until 40% of the facilities are occupied by the business units.
We classify revenue in three categories: (i) service revenue, (ii) revenue from reimbursable expenses and (iii) non-controlling interests. In evaluating our performance, we focus on service revenue, which consists of amounts attributable to our fee-based services. Reimbursable expenses and non-controlling interests are pass-through items for which we earn no margin. Reimbursable expenses consist of amounts we incur on behalf of our customers in performing our fee-based services, but we pass such costs directly on to our customers without any additional markup. Non-controlling interests represent the earnings of Lenders One, a consolidated entity not owned by Altisource, and are included in revenue and reduced from net income to arrive at net income attributable to Altisource.
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.
Growth initiatives
We believe there are significant growth opportunities for Altisource. Our 2013 strategic growth initiatives are:
· maintaining and growing our services provided to Ocwen as it continues to grow its residential loan servicing portfolio;
· growing our origination related services by providing services to the members of Lenders One and Ocwen’s origination platform;
· deploying the Hubzu ® consumer real estate portal to the distressed and non-distressed home sales market;
· providing property management, lease management and renovation management services for single family home rentals; and
· growing the Financial Services segment’s revenue and earnings.
Services provided to Ocwen - On June 13, 2013, Ocwen entered into a mortgage servicing rights purchase and sale agreement with OneWest Bank, FSB (“OneWest”) to purchase mortgage servicing rights with approximately $78 billion in unpaid principal balance, representing approximately 307,000 loans as of June 30, 2013. As of June 30, 2013, between 25% and 30% of the non-Government-
Sponsored Enterprise (“non-GSE”) loans and between 20% and 25% of the Government-Sponsored Enterprise (“GSE”) loans in the portfolio were delinquent. We expect this acquisition will drive meaningful default and technology related revenue growth to Altisource.
We believe Ocwen’s servicing portfolio growth will continue to provide a meaningful contribution to our revenue even as delinquency rates decline. In time, delinquencies and the opportunities for Ocwen to acquire the servicing on large non-performing loan portfolios should return to a more normal level. The expansion of our other services, and the redeployment of the operating cash generated from our businesses, should provide for on-going growth.
We continue to develop new services to complement our current offerings. In our Mortgage Services segment, we recently developed short sale offerings. Our initial rollout of the short sale program is complete and was limited to non-Home Affordable Foreclosure Alternatives (“HAFA”) program short sales in seven states. In July 2013, we added 28 additional states and expect to expand over the next month our services to include both HAFA and non-HAFA short sales. We expect our short sale revenue stream to grow throughout the second half of the year as we gain a greater share of Ocwen approved short sales. During the first half of 2013, Ocwen processed approximately 1,150 first lien short sales on average per month.
With respect to Ocwen’s servicing portfolio growth, the Mortgage Services segment is almost fully staffed to support the anticipated 65% increase in the number of non-GSE loans on REALServicing by the fourth quarter of 2013 compared to the second quarter of 2013. This growth is expected based on Ocwen’s acquisitions of the Homeward Residential, Inc. (“Homeward”), ResCap, Ally Financial Inc. (“Ally”) and OneWest servicing rights. We expect Ocwen to board 619,000 non-GSE loans on REALServicing in the second half of 2013. Of the 619,000 non-GSE loans, approximately 470,000 ResCap loans will be boarded in the third quarter of 2013 and 149,000 OneWest loans will be boarded in the fourth quarter of 2013. With respect to the GSE loans, we anticipate Ocwen will board 1.2 million GSE loans, which are between 5% and 10% delinquent, from the Homeward, ResCap, OneWest and Ally portfolios through the first half of 2014.
Mortgage origination related services — To grow our mortgage origination related services, we are focused on expanding the mortgage services platform to provide the services typically outsourced by a mortgage loan originator. We intend to do this by providing services to Ocwen’s origination platform and by providing services to the Lenders One members and their estimated 11% share of the year-to-date 2013 residential loan origination market. We believe we can enhance the profitability and competitive position of the Lenders One members and Ocwen’s origination platform through the retention of Altisource as their service provider.
Our service revenue from origination related services was $21.9 million for the six months ended June 30, 2013 ($16.4 million for the six months ended June 30, 2012), an increase of 34% over the six months ended June 30, 2012. During the second quarter of 2013, we signed an additional 15 master services agreements with the members of Lenders One. As a result, over 72% of the members have now signed master service agreements with Altisource.
Hubzu - We continue to focus on expanding the Hubzu online real estate transaction website to the distressed and non-distressed home sales market as we believe there are opportunities to benefit from a shifting consumer preference for online transacting. Hubzu provides an automated, transparent and integrated online solution for buying and selling real estate and, eventually, related services. We have demonstrated that homeowners will purchase their homes on Hubzu. We believe over 50% of homes acquired through Hubzu in 2012 were purchased for personal use.
Our efforts to grow Hubzu in 2013 are centered on two key growth efforts. The first effort is focused on marketing Hubzu to other servicers and financial institutions to sell their REO and short sale properties. In this regard, we are in contract negotiations with 4 prospects and are engaged in dialogue with others.
Our second effort is focused on attracting real estate agents and brokers to list non-distressed homes for sale on Hubzu. In the first quarter of 2013, we completed a successful pilot of Hubzu’s direct-to-broker program. During the second quarter, we made technology enhancements based on the feedback we received from the pilot. These enhancements included providing brokers and agents with easier capacity to upload both individual and bulk home listings to Hubzu and robust dashboard and reporting functionality. The technology went live in early July 2013. The early signs point to strong market acceptance of our direct-to-broker product. Since the launch of the program in early July 2013, over 700 properties have been listed on Hubzu by independent agents and brokers — the vast majority of which are non-distressed.
Property management, lease management and renovation management services — We have a 15-year agreement through 2027 to act as the exclusive provider of property management, lease management and renovation management services to Residential. In time, we also intend to offer our services to other single family property owners. Altisource’s property management, lease management and renovation management business is fully operational and prepared to scale as Residential continues to grow. During the second quarter, Residential raised $309.5 million of equity and entered into agreements to acquire two pools of non-performing loans with a total unpaid principal balance of $470 million. Currently, substantially all of Residential’s assets are non-performing loans. As these non-performing loans move through the resolution process and as Residential continues to acquire assets, we expect the number of rental assets and our revenue to grow accordingly.
Financial Services segment — This segment includes our receivables management and customer relationship management businesses. We are focused on growing the profitability of the Financial Services business by expanding our higher margin customer relationship management and charge-off mortgage businesses. In this regard, we began providing services for a new customer relationship business management client in the second quarter of 2013 and continued providing services to the new customer relationship management client we added in the first quarter of 2013. With respect to the charge-off mortgage business, we expanded our capabilities with the ResCap fee-based business and in the second quarter of 2013 began providing these services to the ResCap loans and a greater portion of the other loans in the Ocwen portfolio. Compared to the first quarter of 2013, service revenue grew 42% in the second quarter of 2013 and operating income as a percentage of service revenue improved from 9% to 25%. Income before taxes and non-controlling interests was $5.7 million for the second quarter of 2013, an increase of 293% from the first quarter of 2013.
Factors affecting comparability
The following additional items may impact the comparability of our results:
· The average number of loans serviced by Ocwen on REALServicing totaled 0.9 million loans for the six months ended June 30, 2013 compared to 0.7 million loans for the six months ended June 30, 2012 (1.0 million loans for the three months ended June 30, 2013 and 0.8 million loans for the three months ended June 30, 2012). The average number of delinquent non-GSE loans serviced by Ocwen on REALServicing totaled 263,000 loans for the six months ended June 30, 2013, compared to 203,000 loans for the six months ended June 30, 2012. During the six months ended June 30, 2013, Ocwen boarded all of the Homeward non-GSE loans on REALServicing and none of the ResCap loans were boarded. We anticipate Ocwen to board the ResCap non-GSE loans on REALServicing before the end of the third quarter of 2013. We also expect Ocwen to board the Homeward, ResCap, OneWest and Ally GSE loans on REALServicing during the first half of 2014;
· In November 2012, we borrowed $200 million under a senior secured term loan agreement, increased to $400 million on May 7, 2013. Interest expense, including amortization of debt issuance costs and debt discount, totaled $8.1 million for the six months ended June 30, 2013 and $4.9 million in the second quarter of 2013 (no comparative amounts in 2012);
· We repurchased 0.6 million shares of our common stock under our stock repurchase program for the six months ended June 30, 2013 compared to 0.3 million shares for the six months ended June 30, 2012 (0.3 million shares for the second quarter of 2013 and none for the second quarter of 2012);
· In connection with our 2013 fee-based business transactions with Ocwen related to Homeward and ResCap, we recorded customer relationship intangible assets of $206.4 million. Intangible asset amortization expense relating to these transactions totaled $7.9 million for the second quarter and six months ended June 30, 2013 (no comparative amounts in 2012); and
· On December 27, 2012, we loaned Ocwen $75.0 million that earned interest at 6.75%. The loan was repaid on February 15, 2013.
CONSOLIDATED RESULTS OF OPERATIONS
Summary Consolidated Results
Following is a discussion of our consolidated results of operations for the periods indicated.
The following table sets forth information regarding our results of operations:
|
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
||||||||||||
|
|
|
|
|
|
|
% Increase |
|
|
|
|
|
% Increase |
|
||||
|
(dollars in thousands, except per share data) |
|
2013 |
|
2012 |
|
(decrease) |
|
2013 |
|
2012 |
|
(decrease) |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Service revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Mortgage Services |
|
$ |
119,887 |
|
$ |
89,999 |
|
33 |
|
$ |
216,264 |
|
$ |
169,319 |
|
28 |
|
|
Financial Services |
|
22,959 |
|
16,057 |
|
43 |
|
39,091 |
|
33,817 |
|
16 |
|
||||
|
Technology Services |
|
24,783 |
|
17,886 |
|
39 |
|
45,014 |
|
34,908 |
|
29 |
|
||||
|
Eliminations |
|
(5,955 |
) |
(5,823 |
) |
(2 |
) |
(11,143 |
) |
(11,456 |
) |
3 |
|
||||
|
|
|
161,674 |
|
118,119 |
|
37 |
|
289,226 |
|
226,588 |
|
28 |
|
||||
|
Reimbursable expenses |
|
23,299 |
|
24,815 |
|
(6 |
) |
43,565 |
|
53,520 |
|
(19 |
) |
||||
|
Non-controlling interests |
|
1,137 |
|
1,271 |
|
(11 |
) |
2,146 |
|
3,163 |
|
(32 |
) |
||||
|
Total revenue |
|
186,110 |
|
144,205 |
|
29 |
|
334,937 |
|
283,271 |
|
18 |
|
||||
|
Cost of revenue |
|
116,972 |
|
92,738 |
|
26 |
|
213,934 |
|
184,498 |
|
16 |
|
||||
|
Gross profit |
|
69,138 |
|
51,467 |
|
34 |
|
121,003 |
|
98,773 |
|
23 |
|
||||
|
Selling, general and administrative expenses |
|
29,828 |
|
19,018 |
|
57 |
|
48,508 |
|
36,033 |
|
35 |
|
||||
|
Income from operations |
|
39,310 |
|
32,449 |
|
21 |
|
72,495 |
|
62,740 |
|
16 |
|
||||
|
Other income (expense), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Interest expense |
|
(4,902 |
) |
(14 |
) |
N/M |
|
(8,114 |
) |
(29 |
) |
N/M |
|
||||
|
Other income (expense), net |
|
77 |
|
(307 |
) |
125 |
|
782 |
|
(643 |
) |
222 |
|
||||
|
Total other income (expense), net |
|
(4,825 |
) |
(321 |
) |
N/M |
|
(7,332 |
) |
(672 |
) |
N/M |
|
||||
|
Income before income taxes and non-controlling interests |
|
34,485 |
|
32,128 |
|
7 |
|
65,163 |
|
62,068 |
|
5 |
|
||||
|
Income tax provision |
|
(2,417 |
) |
(2,776 |
) |
13 |
|
(4,568 |
) |
(5,595 |
) |
18 |
|
||||
|
Net income |
|
32,068 |
|
29,352 |
|
9 |
|
60,595 |
|
56,473 |
|
7 |
|
||||
|
Net income attributable to non-controlling interests |
|
(1,137 |
) |
(1,271 |
) |
11 |
|
(2,146 |
) |
(3,163 |
) |
32 |
|
||||
|
Net income attributable to Altisource |
|
$ |
30,931 |
|
$ |
28,081 |
|
10 |
|
$ |
58,449 |
|
$ |
53,310 |
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Margins: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Gross profit/service revenue |
|
43 |
% |
44 |
% |
|
|
42 |
% |
44 |
% |
|
|
||||
|
Income from operations/service revenue |
|
24 |
% |
27 |
% |
|
|
25 |
% |
28 |
% |
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Basic |
|
$ |
1.34 |
|
$ |
1.20 |
|
12 |
|
$ |
2.51 |
|
$ |
2.28 |
|
10 |
|
|
Diluted |
|
$ |
1.25 |
|
$ |
1.13 |
|
11 |
|
$ |
2.34 |
|
$ |
2.15 |
|
9 |
|
N/M — not meaningful.
Revenue
We recognized service revenue of $289.2 million for the six months ended June 30, 2013, a 28% increase when compared to the six months ended June 30, 2012 ($161.7 million for the second quarter of 2013, a 37% increase over the second quarter of 2012). The continued growth in service revenue was driven by Ocwen’s Homeward acquisition along with expansion of the Financial Services segment. The Homeward non-GSE portfolio was boarded on REALServicing from January 1, 2013 through April 1, 2013. We anticipate that the ResCap non-GSE portfolio will be boarded on REALServicing before the end of the third quarter of 2013. Financial Services’ growth was primarily from the mortgage collection services on the ResCap and Ocwen portfolios and the growth of the customer relationship management business as a result of customer expansion and new customer wins. Service revenue growth was also driven by an increase in origination related services provided to Lenders One members.
The decreases in revenue from reimbursable expenses are due primarily to lower REO property preservation orders and utility payments, with a corresponding decrease in cost of revenue, resulting from lower average REO inventory for the six months ended June 30, 2013 compared to the six months ended June 30, 2012.
Our revenues are impacted by seasonality. More specifically, the Financial Services segment’s asset recovery revenue tends to be higher in the first quarter and generally declines throughout the year. Mortgage Services revenue is impacted by REO sales, which tend to be at their lowest level during the fall and winter months and highest during the spring and summer months. We believe that customer growth is likely to offset the typical impact of seasonality.
Cost of Revenue and Gross Profit
Cost of revenue principally includes payroll and employee benefits associated with personnel employed in customer service and operations roles, fees paid to external providers related to the provision of services, reimbursable expenses, technology and telecommunications expenses and depreciation and amortization of operating assets.
We recognized cost of revenue of $213.9 million for the six months ended June 30, 2013, a 16% increase when compared to the six months ended June 30, 2012 ($117.0 million for the second quarter of 2013, a 26% increase over the second quarter of 2012). The increase in cost of revenue is directly attributable to compensation, technology and vendor costs associated with the growth in Ocwen’s servicing portfolio, including its acquisition of the Homeward portfolio, and higher costs in our Technology Services segment as we continue to invest in the development of our next generation technology and technology infrastructure to support our growth. Additionally, we incurred costs for excess staff we are carrying in the Mortgage Services segment to support the anticipated 65% increase in the number of non-GSE loans on REALServicing by the fourth quarter of 2013 compared to the second quarter of 2013. These cost increases were partially offset by lower reimbursable expenses discussed above.
Gross profit increased from $98.8 million, representing 44% of service revenue, for the six months ended June 30, 2012 to $121.0 million, representing 42% of service revenue, for the six months ended June 30, 2013 (an increase from $51.5 million, representing 44% of service revenue, for the second quarter of 2012 to $69.1 million, representing 43% of service revenue for the second quarter of 2013). The decrease in gross profit margin was driven by revenue mix. We experienced higher growth in the lower margin property inspection and preservation services from the early referrals from the Homeward portfolio, partially offset by expansion of the higher margin mortgage charge-off business. Gross profit margins were also impacted by the carrying costs to support Mortgage Services’ anticipated growth and higher costs in our Technology Services segment as we continue to invest in the development of our next generation technology to support our growth initiatives. Our gross profit margins can vary significantly from period to period. The most significant factors that contribute to margin variability include the mix of services delivered, timing of investments in new services, hiring of staff in advance of new business and the timing of when loans are boarded by our customers.
Selling, General and Administrative Expenses and Income from Operations
Selling, general and administrative expenses (“SG&A”) 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, depreciation and amortization on non-operating assets.
We recognized SG&A of $48.5 million for the six months ended June 30, 2013, a 35% increase when compared to the six months ended June 30, 2012 ($29.8 million for the second quarter of 2013, a 57% increase over the second quarter of 2012). This increase is primarily driven by higher amortization of intangible assets recorded in connection with the Homeward and ResCap transactions of $7.9 million for the second quarter and six months ended June 30, 2013 (no comparative amounts in 2012). In addition, we are expanding some of our corporate functions to support Altisource’s growth. On a consolidated basis, income from operations as a percentage of service revenue declined from 28% for the six months ended June 30, 2012 to 25% for the six months ended June 30, 2013 (24% for the second quarter of 2013 and 27% for the second quarter of 2012) as a result of lower gross margins and the increase of SG&A as a percentage of service revenue for the reasons mentioned above.
Other Income (Expense), net
Other income (expense), net principally includes interest expense, interest income and equity loss in affiliate. Interest expense for the six months ended June 30, 2013 increased by $8.1 million ($4.9 million for the second quarter of 2013) from the $200 million senior secured term loan borrowed in the fourth quarter of 2012 and increased to $400 million on May 7, 2013 (no comparative amounts in 2012). The higher interest expense was partially offset by $0.8 million of interest income recognized in the six months ended June 30, 2013 (no comparative amounts in 2012) from a $75.0 million loan to Ocwen. Ocwen repaid the loan in February 2013.
Income Tax Provision
We recognized an income tax provision of $4.6 million for the six months ended June 30, 2013 and $2.4 million for the second quarter of 2013. Altisource’s effective tax rate differs from the Luxembourg statutory tax rate of 28.8% primarily because of the effect of a favorable tax ruling in Luxembourg and the mix of income and losses in multiple tax jurisdictions. Our effective tax rate for the six months ended June 30, 2013 was 7.0% compared to 9.0% for the six months ended June 30, 2012 (7.0% and 8.6% for the second quarter of 2013 and 2012, respectively). The lower effective tax rates in 2013 are due to higher relative taxable income in the current year in tax jurisdictions with a lower tax rate. Our consolidated effective income tax rate for financial reporting purposes may change periodically due to changes in enacted tax rates, fluctuations in the mix of income earned from our domestic and international operations, which may be subject to differing tax rates, and our ability to utilize net operating loss and tax credit carryforwards.
SEGMENT RESULTS OF OPERATIONS
The following section provides a discussion of pretax results of operations of our business segments for the three and six months ended June 30, 2013 and 2012. Transactions between segments are accounted for as third party arrangements for purposes of presenting segment results of operations. Intercompany transactions primarily consist of IT infrastructure services and charges for the use of certain REALSuite applications from our Technology Services segment to our other two segments. Generally, we reflect these charges within technology and telecommunications in the segment receiving the services, except for consulting services, which we reflect in outside fees and services. Certain prior year amounts have been reclassified to conform to the current period presentation.
Financial information for our segments is as follows:
|
|
|
Three months ended June 30, 2013 |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|||||
|
|
|
Mortgage |
|
Financial |
|
Technology |
|
Items and |
|
Consolidated |
|
|||||
|
(dollars in thousands) |
|
Services |
|
Services |
|
Services |
|
Eliminations |
|
Altisource |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Service revenue |
|
$ |
119,887 |
|
$ |
22,959 |
|
$ |
24,783 |
|
$ |
(5,955 |
) |
$ |
161,674 |
|
|
Reimbursable expenses |
|
23,186 |
|
113 |
|
— |
|
— |
|
23,299 |
|
|||||
|
Non-controlling interests |
|
1,137 |
|
— |
|
— |
|
— |
|
1,137 |
|
|||||
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Margins: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Gross profit/service revenue |
|
46 |
% |
40 |
% |
22 |
% |
N/M |
|
43 |
% |
|||||
|
Income from operations/service revenue |
|
35 |
% |
25 |
% |
9 |
% |
N/M |
|
24 |
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Transactions with related parties: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Revenue |
|
$ |
101,252 |
|
$ |
6,683 |
|
$ |
13,299 |
|
$ |
— |
|
$ |
121,234 |
|
|
Selling, general and administrative expenses |
|
29 |
|
— |
|
— |
|
711 |
|
740 |
|
|||||
N/M — not meaningful.
|
|
|
Three months ended June 30, 2012 |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|||||
|
|
|
Mortgage |
|
Financial |
|
Technology |
|
Items and |
|
Consolidated |
|
|||||
|
(dollars in thousands) |
|
Services |
|
Services |
|
Services |
|
Eliminations |
|
Altisource |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Service revenue |
|
$ |
89,999 |
|
$ |
16,057 |
|
$ |
17,886 |
|
$ |
(5,823 |
) |
$ |
118,119 |
|
|
Reimbursable expenses |
|
24,633 |
|
182 |
|
— |
|
— |
|
24,815 |
|
|||||
|
Non-controlling interests |
|
1,271 |
|
— |
|
— |
|
— |
|
1,271 |
|
|||||
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Margins: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Gross profit/service revenue |
|
47 |
% |
28 |
% |
26 |
% |
N/M |
|
44 |
% |
|||||
|
Income from operations/service revenue |
|
41 |
% |
6 |
% |
16 |
% |
N/M |
|
27 |
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Transactions with related parties: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Revenue |
|
$ |
80,878 |
|
$ |
50 |
|
$ |
7,225 |
|
$ |
— |
|
$ |
88,153 |
|
|
Selling, general and administrative expenses |
|
— |
|
— |
|
— |
|
606 |
|
606 |
|
|||||
N/M — not meaningful.
|
|
|
Six months ended June 30, 2013 |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|||||
|
|
|
Mortgage |
|
Financial |
|
Technology |
|
Items and |
|
Consolidated |
|
|||||
|
(dollars in thousands) |
|
Services |
|
Services |
|
Services |
|
Eliminations |
|
Altisource |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Service revenue |
|
$ |
216,264 |
|
$ |
39,091 |
|
$ |
45,014 |
|
$ |
(11,143 |
) |
$ |
289,226 |
|
|
Reimbursable expenses |
|
43,248 |
|
317 |
|
— |
|
— |
|
43,565 |
|
|||||
|
Non-controlling interests |
|
2,146 |
|
— |
|
— |
|
— |
|
2,146 |
|
|||||
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Margins: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Gross profit/service revenue |
|
46 |
% |
35 |
% |
19 |
% |
N/M |
|
42 |
% |
|||||
|
Income from operations/service revenue |
|
38 |
% |
18 |
% |
8 |
% |
N/M |
|
25 |
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Transactions with related parties: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Revenue |
|
$ |
181,127 |
|
$ |
6,722 |
|
$ |
23,483 |
|
$ |
— |
|
$ |
211,332 |
|
|
Selling, general and administrative expenses |
|
58 |
|
— |
|
— |
|
1,355 |
|
1,413 |
|
|||||
|
Interest income |
|
— |
|
— |
|
— |
|
773 |
|
773 |
|
|||||
N/M — not meaningful.
|
|
|
Six months ended June 30, 2012 |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|||||
|
|
|
Mortgage |
|
Financial |
|
Technology |
|
Items and |
|
Consolidated |
|
|||||
|
(dollars in thousands) |
|
Services |
|
Services |
|
Services |
|
Eliminations |
|
Altisource |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Service revenue |
|
$ |
169,319 |
|
$ |
33,817 |
|
$ |
34,908 |
|
$ |
(11,456 |
) |
$ |
226,588 |
|
|
Reimbursable expenses |
|
53,082 |
|
438 |
|
— |
|
— |
|
53,520 |
|
|||||
|
Non-controlling interests |
|
3,163 |
|
— |
|
— |
|
— |
|
3,163 |
|
|||||
|
|
|
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 |
) |
(16 |
) |
(17 |
) |
(72 |
) |
(672 |
) |
|||||
|
Income before income taxes and non-controlling interests |
|
$ |
67,499 |
|
$ |
2,809 |
|
$ |
6,543 |
|
$ |
(14,783 |
) |
$ |
62,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Margins: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Gross profit/service revenue |
|
47 |
% |
30 |
% |
29 |
% |
N/M |
|
44 |
% |
|||||
|
Income from operations/service revenue |
|
40 |
% |
8 |
% |
19 |
% |
N/M |
|
28 |
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Transactions with related parties: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Revenue |
|
$ |
156,963 |
|
$ |
118 |
|
$ |
13,852 |
|
$ |
— |
|
$ |
170,933 |
|
|
Selling, general and administrative expenses |
|
— |
|
— |
|
— |
|
1,180 |
|
1,180 |
|
|||||
N/M — not meaningful.
Mortgage Services
Revenue
Revenue by service line was as follows:
|
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
||||||||||||
|
|
|
|
|
|
|
% Increase |
|
|
|
|
|
% Increase |
|
||||
|
(in thousands) |
|
2013 |
|
2012 |
|
(decrease) |
|
2013 |
|
2012 |
|
(decrease) |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Service revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Asset management services |
|
$ |
46,747 |
|
$ |
27,995 |
|
67 |
|
$ |
78,116 |
|
$ |
49,136 |
|
59 |
|
|
Closing and insurance services |
|
26,827 |
|
21,420 |
|
25 |
|
49,374 |
|
43,190 |
|
14 |
|
||||
|
Residential property valuation |
|
26,028 |
|
22,469 |
|
16 |
|
48,839 |
|
41,428 |
|
18 |
|
||||
|
Default management services |
|
11,888 |
|
12,170 |
|
(2 |
) |
22,858 |
|
23,274 |
|
(2 |
) |
||||
|
Origination management services |
|
8,397 |
|
5,945 |
|
41 |
|
17,077 |
|
12,291 |
|
39 |
|
||||
|
Total service revenue |
|
119,887 |
|
89,999 |
|
33 |
|
216,264 |
|
169,319 |
|
28 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Reimbursable expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Asset management services |
|
22,157 |
|
23,940 |
|
(7 |
) |
41,557 |
|
51,860 |
|
(20 |
) |
||||
|
Default management services |
|
610 |
|
650 |
|
(6 |
) |
1,038 |
|
985 |
|
5 |
|
||||
|
Closing and insurance services |
|
378 |
|
43 |
|
N/M |
|
521 |
|
237 |
|
120 |
|
||||
|
Origination management services |
|
41 |
|
— |
|
N/M |
|
132 |
|
— |
|
N/M |
|
||||
|
Total reimbursable expenses |
|
23,186 |
|
24,633 |
|
(6 |
) |
43,248 |
|
53,082 |
|
(19 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Non-controlling interests |
|
1,137 |
|
1,271 |
|
(11 |
) |
2,146 |
|
3,163 |
|
(32 |
) |
||||
|
Total revenue |
|
$ |
144,210 |
|
$ |
115,903 |
|
24 |
|
$ |
261,658 |
|
$ |
225,564 |
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Transactions with related parties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Asset management services |
|
$ |
62,052 |
|
$ |
47,195 |
|
31 |
|
$ |
106,253 |
|
$ |
94,171 |
|
13 |
|
|
Residential property valuation |
|
24,770 |
|
20,762 |
|
19 |
|
46,366 |
|
38,258 |
|
21 |
|
||||
|
Closing and insurance services |
|
9,828 |
|
9,751 |
|
1 |
|
19,320 |
|
18,866 |
|
2 |
|
||||
|
Default management services |
|
4,252 |
|
3,170 |
|
34 |
|
8,604 |
|
5,668 |
|
52 |
|
||||
|
Origination management services |
|
350 |
|
— |
|
N/M |
|
584 |
|
— |
|
N/M |
|
||||
|
Total |
|
$ |
101,252 |
|
$ |
80,878 |
|
25 |
|
$ |
181,127 |
|
$ |
156,963 |
|
15 |
|
N/M — not meaningful.
Revenue growth in all of the business lines, except default management services and origination management services, primarily reflects Ocwen’s Homeward servicing platform acquisitions. The Homeward non-GSE portfolio was boarded on REALServicing from January 1, 2013 through April 1, 2013. The growth in asset management services is primarily from higher property inspection and preservation services from early referrals from the Homeward portfolio. The growth in the closing and insurance services and residential property valuation businesses also reflects Ocwen’s larger loan portfolio. Default management services revenue was lower as one of Ocwen’s subservicing customers has placed a temporary moratorium on the foreclosure of its loans and the requirements under the “Making Homes Affordable” program limits servicers’ ability to initiate a foreclosure while pursuing other avenues of resolution. The higher origination management services revenue is driven by the growth of Lenders One and the incremental roll-out of new origination related services to the members and Ocwen. For the six months ended June 30, 2013, the Lenders One membership grew to 249 members, a net increase of 17 members from June 30, 2012.
Cost of Revenue and Gross Profit
Cost of revenue consists of the following:
|
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
||||||||||||
|
|
|
|
|
|
|
% Increase |
|
|
|
|
|
% Increase |
|
||||
|
(in thousands) |
|
2013 |
|
2012 |
|
(decrease) |
|
2013 |
|
2012 |
|
(decrease) |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Compensation and benefits |
|
$ |
16,093 |
|
$ |
13,395 |
|
20 |
|
$ |
30,699 |
|
$ |
26,833 |
|
14 |
|
|
Outside fees and services |
|
44,757 |
|
29,974 |
|
49 |
|
77,994 |
|
56,551 |
|
38 |
|
||||
|
Reimbursable expenses |
|
23,186 |
|
24,633 |
|
(6 |
) |
43,248 |
|
53,082 |
|
(19 |
) |
||||
|
Technology and telecommunications |
|
4,605 |
|
4,853 |
|
(5 |
) |
8,725 |
|
9,165 |
|
(5 |
) |
||||
|
Depreciation and amortization |
|
437 |
|
301 |
|
45 |
|
781 |
|
564 |
|
38 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cost of revenue |
|
$ |
89,078 |
|
$ |
73,156 |
|
22 |
|
$ |
161,447 |
|
$ |
146,195 |
|
10 |
|
Cost of revenue increased during the second quarter and six months ended June 30, 2013 primarily due to higher outside fees and services and compensation and benefits. Outside fees and services increased in line with the increase in service revenue, particularly the increase in property inspection and preservation orders. Compensation and benefits grew at a slower pace as we began to experience the benefit of our workforce efficiency initiatives on higher referral volumes even after incurring carrying costs to support Mortgage Services’ anticipated growth.
Gross profit as a percentage of service revenue decreased to 46% for the six months ended June 30, 2013 from 47% for the six months ended June 30, 2012 (a decrease to 46% in the second quarter of 2013 from 47% in the second quarter of 2012). The most significant factors impacting gross profit margins were the increase of lower margin property preservation and property inspection orders, partially offset by decreased compensation and benefits costs as a percentage of service revenue from process efficiencies. Although we have been able to generally maintain our margins in a period of accelerated growth, we anticipate we will improve margins by reducing employee and vendor costs as a percent of service revenue through our workforce efficiency initiatives, displacing vendors with internal personnel at a lower cost and deploying vendor, process and payment management technologies.
Our margins can vary substantially depending upon when servicing rights are acquired by Ocwen. Typically, compensation and benefits will increase in anticipation of an acquisition as we hire and train personnel to deliver services in advance of the actual boarding of loans. Subsequently, as new loans are boarded, for the first couple of months post-boarding, we tend to deliver an elevated level of valuations and property inspection and preservation services for which we incur substantially more outside fees and services.
Selling, General and Administrative Expenses and Income from Operations
SG&A increased during the second quarter and six months ended June 30, 2013 principally due to the amortization of intangible assets recorded in connection with the Homeward and ResCap transactions of $6.0 million (no comparative amounts in 2012). Income from operations as a percentage of service revenue decreased to 38% for the six months ended June 30, 2013 from 40% for the six months ended June 30, 2012 (a decrease to 35% in the second quarter of 2013 from 41% in the second quarter of 2012) due to the lower gross profit margins and higher amortization expense.
Financial Services
Revenue
Revenue by service line was as follows:
|
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
||||||||||||
|
|
|
|
|
|
|
% Increase |
|
|
|
|
|
% Increase |
|
||||
|
(in thousands) |
|
2013 |
|
2012 |
|
(decrease) |
|
2013 |
|
2012 |
|
(decrease) |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Service revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Asset recovery management |
|
$ |
12,172 |
|
$ |
7,475 |
|
63 |
|
$ |
18,124 |
|
$ |
16,625 |
|
9 |
|
|
Customer relationship management |
|
10,787 |
|
8,582 |
|
26 |
|
20,967 |
|
17,192 |
|
22 |
|
||||
|
Total service revenue |
|
22,959 |
|
16,057 |
|
43 |
|
39,091 |
|
33,817 |
|
16 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Reimbursable expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Asset recovery management |
|
113 |
|
182 |
|
(38 |
) |
317 |
|
438 |
|
(28 |
) |
||||
|
Total reimbursable expenses |
|
113 |
|
182 |
|
(38 |
) |
317 |
|
438 |
|
(28 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total revenue |
|
$ |
23,072 |
|
$ |
16,239 |
|
42 |
|
$ |
39,408 |
|
$ |
34,255 |
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Transactions with related parties included above: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Asset recovery management |
|
$ |
6,683 |
|
$ |
50 |
|
N/M |
|
$ |
6,722 |
|
$ |
118 |
|
N/M |
|
N/M — not meaningful.
Financial Services revenue increased during the second quarter and six months ended June 30, 2013 due to increased charge-off mortgage collections and growth in customer relationship management from the addition of one new client in the first quarter of 2013 and one new client in the second quarter of 2013. The increases were partially offset by lower credit card charge-off placements due to 23-year record low charge-offs. With respect to the charge-off mortgage business, we expanded our capabilities in connection with the ResCap fee-based business transaction, and in the second quarter began providing these services to the ResCap loans serviced by Ocwen and a portion of the other loans in the Ocwen portfolio.
Financial Services’ asset recovery management revenue tends to be higher in the first quarter as borrowers utilize tax refunds and bonuses to pay debts.
Cost of Revenue and Gross Profit
Cost of revenue consists of the following:
|
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
||||||||||||
|
|
|
|
|
|
|
% Increase |
|
|
|
|
|
% Increase |
|
||||
|
(in thousands) |
|
2013 |
|
2012 |
|
(decrease) |
|
2013 |
|
2012 |
|
(decrease) |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Compensation and benefits |
|
$ |
10,507 |
|
$ |
8,021 |
|
31 |
|
$ |
19,410 |
|
$ |
16,378 |
|
19 |
|
|
Outside fees and services |
|
1,151 |
|
1,422 |
|
(19 |
) |
2,371 |
|
3,249 |
|
(27 |
) |
||||
|
Reimbursable expenses |
|
113 |
|
182 |
|
(38 |
) |
317 |
|
438 |
|
(28 |
) |
||||
|
Technology and telecommunications |
|
1,811 |
|
1,861 |
|
(3 |
) |
3,278 |
|
3,728 |
|
(12 |
) |
||||
|
Depreciation and amortization |
|
225 |
|
177 |
|
27 |
|
457 |
|
203 |
|
125 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cost of revenue |
|
$ |
13,807 |
|
$ |
11,663 |
|
18 |
|
$ |
25,833 |
|
$ |
23,996 |
|
8 |
|
Compensation and benefits increased during the second quarter and six months ended June 30, 2013 primarily due to higher mortgage charge-off and customer relationship management headcount in connection with new business. These increases were partially offset by lower outside fees and services as we continually evaluate our cost structure in our asset recovery management business in connection with lower credit card charge-off placements. We principally try to manage our cost structure through a
reduction in compensation and benefit costs through a reduction in overall headcount as well as expanding our use of our global workforce.
Gross profit as a percentage of service revenue increased to 35% for the six months ended June 30, 2013 compared to 30% for the six months ended June 30, 2012 (40% for the second quarter of 2013 compared to 28% for the second quarter of 2012) due to the revenue mix in the asset recovery management business and growth in the higher margin customer relationship management business from new customers.
Selling, General and Administrative Expenses and Income from Operations
SG&A decreased in the second quarter and six months ended June 30, 2013 principally from lower administrative employee-related costs, partially offset by higher amortization of intangible assets recorded in connection with the ResCap transaction of $1.3 million for the second quarter and six months ended June 30, 2013.
Income from operations as a percentage of service revenue for the six months ended June 30, 2013 increased to 18% compared to 8% for the six months ended June 30, 2012 (25% for the second quarter of 2013 compared to 6% for the second quarter of 2012) due to higher gross margins and decreased SG&A, as described above.
Technology Services
Revenue
Revenue by service line was as follows:
|
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
||||||||||||
|
|
|
|
|
|
|
% Increase |
|
|
|
|
|
% Increase |
|
||||
|
(in thousands) |
|
2013 |
|
2012 |
|
(decrease) |
|
2013 |
|
2012 |
|
(decrease) |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
REALSuite |
|
$ |
15,325 |
|
$ |
10,540 |
|
45 |
|
$ |
28,298 |
|
$ |
20,678 |
|
37 |
|
|
IT infrastructure services |
|
9,458 |
|
7,346 |
|
29 |
|
16,716 |
|
14,230 |
|
17 |
|
||||
|
Total revenue |
|
$ |
24,783 |
|
$ |
17,886 |
|
39 |
|
$ |
45,014 |
|
$ |
34,908 |
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Transactions with related parties included above: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
REALSuite |
|
$ |
8,736 |
|
$ |
4,132 |
|
111 |
|
$ |
15,934 |
|
$ |
8,019 |
|
99 |
|
|
IT infrastructure services |
|
4,563 |
|
3,093 |
|
48 |
|
7,549 |
|
5,833 |
|
29 |
|
||||
|
Total |
|
$ |
13,299 |
|
$ |
7,225 |
|
84 |
|
$ |
23,483 |
|
$ |
13,852 |
|
70 |
|
The increase in REALSuite revenue in the second quarter and six months ended June 30, 2013 is primarily attributable to licensing revenue relating to REALDoc, the growth in Ocwen’s residential loan servicing portfolio on REALServicing and an increase in flood certification services to Lenders One members.
IT infrastructure services revenue also increased in the second quarter and six months ended June 30, 2013. IT infrastructure services are billed on a cost plus basis. As such, the increase in cost to support headcount growth at both Ocwen and Altisource resulted in a corresponding increase in revenue in the Technology Services segment.
The services provided to our other segments are eliminated in consolidation but are included as revenue in the Technology Services segment and as technology and telecommunications expense, a component of cost of revenue, in our other segments for segment presentation purposes.
Cost of Revenue and Gross Profit
Cost of revenue consists of the following:
|
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
||||||||||||
|
|
|
|
|
|
|
% Increase |
|
|
|
|
|
% Increase |
|
||||
|
(in thousands) |
|
2013 |
|
2012 |
|
(decrease) |
|
2013 |
|
2012 |
|
(decrease) |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Compensation and benefits |
|
$ |
10,144 |
|
$ |
6,572 |
|
54 |
|
$ |
19,214 |
|
$ |
12,262 |
|
57 |
|
|
Outside fees and services |
|
508 |
|
415 |
|
22 |
|
1,015 |
|
718 |
|
41 |
|
||||
|
Technology and telecommunications |
|
5,892 |
|
4,393 |
|
34 |
|
10,273 |
|
8,363 |
|
23 |
|
||||
|
Depreciation and amortization |
|
2,863 |
|
1,834 |
|
56 |
|
6,017 |
|
3,337 |
|
80 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cost of revenue |
|
$ |
19,407 |
|
$ |
13,214 |
|
47 |
|
$ |
36,519 |
|
$ |
24,680 |
|
48 |
|
Cost of revenue increased in the second quarter and six months ended June 30, 2013 due to the increase in personnel and the hiring of more expensive personnel to support the development of our next generation REALSuite software, higher technology and communications costs from the addition of new facilities and headcount and the expansion of bandwidth at existing facilities. We expect cost of revenue in the Technology Services segment to increase as we continue to invest in personnel to support our development and growth initiatives. Depreciation and amortization increased in the second quarter and six months ended June 30, 2013 primarily as a result of our 2012 investment in a disaster recovery center.
Outside fees and services increased in the second quarter and six months ended June 30, 2013, primarily as a result of the increase in flood certification services provided as described in the revenue section above.
Gross profit margins declined in the second quarter and six months ended June 30, 2013, compared to the second quarter and six months ended June 30, 2012, as we continue to invest in the development of our next generation technologies.
We are investing in the development of our next generation technologies to support our continued expansion. In 2014, we expect technology expenditures to reach a stable level.
Selling, General and Administrative Expenses and Income from Operations
SG&A increased in the second quarter and six months ended June 30, 2013 principally due to higher administrative employee costs, increased depreciation and amortization and higher amortization of intangible assets recorded in connection with the Homeward and ResCap transactions of $0.5 million for the second quarter and six months ended June 30, 2013 (no comparative amounts in 2012).
Income from operations as a percentage of service revenue for the six months ended June 30, 2013 decreased to 8% compared to 19% for the six months ended June 30, 2012 (9% for the second quarter of 2013 compared to 16% for the second quarter of 2012) due to lower gross margins and higher SG&A as described above.
Corporate Items and Eliminations
Our Corporate segment includes costs related to corporate support functions including executive, finance, legal, human resources, vendor management, risk and six sigma. It also includes eliminations of transactions between the business segments.
Corporate costs increased in the second quarter and six months ended June 30, 2013, compared to the similar periods of the prior year, primarily due to higher compensation and employee-related costs, depreciation and amortization and lease costs. We incurred higher compensation and employee-related costs as we are expanding certain corporate functions in 2013 to support our continued growth. The higher depreciation and amortization and lease costs relate to the build out of new facilities to support our continued expansion. We reflect initial lease costs in our corporate segment until the facilities are 40% occupied by the business units, at which time the cost is reflected in the respective segment’s financial statements. In 2014, we expect our overhead expenditures to reach a stable level.
Corporate expenses also include interest expense, interest income and equity loss in affiliate. Interest expense for the six months ended June 30, 2013 increased by $8.1 million ($4.9 million for the second quarter of 2013) from the $200 million senior secured term loan borrowed in the fourth quarter of 2012 and increased to $400 million on May 7, 2013 (no comparative amounts in
2012). We recognized interest income of $0.8 million for the six months ended June 30, 2013 (no comparative amounts in 2012) from a fourth quarter 2012 $75.0 million loan to Ocwen. Ocwen repaid the loan in February 2013.
The amount of i ntercompany revenue eliminated in consolidation was consistent in the second quarter and six months ended June 30, 2013 compared to the similar periods of the prior year. These intercompany transactions primarily consisted of IT infrastructure services as well as charges for the use of certain REALSuite applications from our Technology Service segment to our other two business segments. While the expenses are recognized in the Mortgage Services and Financial Services segments above, the elimination of these expenses are reflected in Corporate items and eliminations.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our primary source of liquidity is cash flow from operations. We seek to deploy excess cash generated in a disciplined manner. Principally, we intend to use excess cash to develop complementary services and businesses that we believe will generate attractive margins in line with our core capabilities. Further, we are evaluating potential acquisitions that align with our vision and accelerate the achievement of our strategic objectives. We also intend to use excess cash to repurchase shares of our stock and repay amounts outstanding under our senior secured term loan (as described below).
Senior Secured Term Loan
On November 27, 2012, we entered into a seven-year senior secured term loan agreement with Bank of America, N.A. as administrative agent, pursuant to which we borrowed $200 million. On May 7, 2013, we amended the senior secured term loan agreement to increase the principal amount of the senior secured term loan by $200 million (to $400 million) and provide additional share repurchase capacity. Under the terms of the senior secured term loan, as amended, we have the ability to borrow an additional $200 million under an accordion provision.
The senior secured term loan must be repaid in equal consecutive quarterly principal installments of 0.25% of the initial principal amounts outstanding on the borrowing dates, with the balance due on November 27, 2019. However, if leverage ratios, as defined in the senior secured term loan agreement, exceed a defined threshold, a percentage of cash flow must be used to repay principal. Interest payments are due monthly. The interest rate as of June 30, 2013 was 5.75%.
The debt covenants in the senior secured term loan agreement limit, among other things, our ability to incur additional debt and repurchase stock. In the event we require additional liquidity, our ability to obtain it may be limited by the senior secured term loan.
Cash Flows
The following table presents our cash flows for the six months ended June 30:
|
|
|
|
|
|
|
% Increase |
|
||
|
(dollars in thousands) |
|
2013 |
|
2012 |
|
(decrease) |
|
||
|
|
|
|
|
|
|
|
|
||
|
Net income adjusted for non-cash items |
|
$ |
83,760 |
|
$ |
66,994 |
|
25 |
|
|
Working capital |
|
(16,292 |
) |
(12,945 |
) |
(26 |
) |
||
|
Cash flow from operating activities |
|
67,468 |
|
54,049 |
|
25 |
|
||
|
Cash flow from investing activities |
|
(141,499 |
) |
(21,128 |
) |
N/M |
|
||
|
Cash flow from financing activities |
|
146,334 |
|
(19,887 |
) |
N/M |
|
||
|
Net change in cash |
|
72,303 |
|
13,034 |
|
N/M |
|
||
|
Cash and cash equivalents at beginning of period |
|
105,502 |
|
32,125 |
|
228 |
|
||
|
Cash and cash equivalents at end of period |
|
$ |
177,805 |
|
$ |
45,159 |
|
N/M |
|
N/M — not meaningful.
Cash Flows from Operating Activities
Cash flows from operating activities generally consist of the cash effects of transactions and events that enter into the determination of net income. In the six months ended June 30, 2013, we generated $67.5 million of positive cash flows from operations, or approximately $0.23 per every dollar of service revenue compared to $54.0 million of positive cash flows from operations or approximately $0.24 per every dollar of service revenue in the six months ended June 30, 2012. The increase in cash from operations on an absolute basis is principally driven by the increase in net income, after adding back depreciation and
amortization, including amortization of intangible assets. The decrease in operating cash per dollar of service revenue is from the timing of converting working capital to cash.
In periods of growth, operating cash flows per service revenue dollar can be negatively impacted because of the nature of some of our services. Certain services are performed immediately following or shortly after the referral, but the collection of the receivable does not occur until a specific event occurs (i.e., the foreclosure is complete, the REO asset is sold, etc.). As we continue to grow, our receivables will also grow and our cash flows from operations may be negatively impacted when comparing one interim period to another.
Cash Flows from Investing Activities
On March 29, 2013, we acquired the Homeward fee-based business from Ocwen for $87.0 million. On April 12, 2013, we entered into an agreement with Ocwen to establish additional terms related to the existing servicing arrangements between Altisource and Ocwen in connection with Ocwen’s acquisition of certain mortgage servicing platform assets of ResCap. The cash consideration paid by Altisource to Ocwen under the ResCap agreement totaled $128.8 million. On February 15, 2013, Ocwen repaid the $75.0 million loan that was borrowed from us in December 2012. Capital expenditures of $13.4 million and $21.1 million for the six months ended June 30, 2013 and 2012, respectively, primarily related to facility build-outs and investments in infrastructure and the next generation of our REALSuite of software applications. The prior year period also included investments in a disaster recovery center. On March 31, 2013, we sold our 49% interest in Correspondent One to Ocwen for $12.6 million.
Cash Flows from Financing Activities
Cash flows from financing activities for the six months ended June 30, 2013 and 2012 primarily include activity associated with debt proceeds, share repurchases, stock option exercises and payments to non-controlling interests. On May 7, 2013, we received $201.0 million in connection with amending our senior secured term loan agreement, including a $1.0 million original issue premium. We also incurred debt issuance costs of $2.4 million in connection with this amendment. We spent $51.6 million and $16.8 million to repurchase our common stock for the six months ended June 30, 2013 and 2012, respectively. Stock option exercises provided proceeds of $2.9 million and $2.0 million for the six months ended June 30, 2013 and 2012, respectively. During the six months ended June 30, 2013, we repaid $1.5 million of the borrowings under the senior secured term loan. Contributions to non-controlling interests were $1.9 million and $4.8 million for the six months ended June 30, 2013 and 2012, respectively.
Liquidity Requirements after June 30, 2013
During the third quarter of 2013, we expect to distribute $1.1 million to the Lenders One members representing non-controlling interests and repay $1.0 million of the senior secured term loan.
We believe that we will generate sufficient cash flow to fund operations, capital expenditures and required debt and interest payments as well as repurchase shares of our common stock. If we require additional capital, we believe that we have adequate access to both debt and equity capital markets.
Contractual Obligation, Commitments and Contingencies
For the six months ended June 30, 2013, there were no significant changes to our contractual obligations from those identified in our Form 10-K for the fiscal year ended December 31, 2012, other than the additional $200 million borrowed under our senior secured term loan and those that occur in the normal course of business (primarily the addition of operating leases due to our growth). See also Note 17 to the interim condensed consolidated financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our interim condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States. In applying many of these accounting principles, we need to make assumptions, estimates and/or judgments that affect the reported amounts of assets, liabilities, revenue and expenses in our interim condensed consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates and/or judgments, however, are often subjective. Actual results may be affected negatively based on changing circumstances. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known.
Our critical accounting policies are described in the MD&A section of our Form 10-K for the year ended December 31, 2012 filed with the SEC on February 13, 2013. Those policies have not changed during the six months ended June 30, 2013.
OTHER MATTERS
Related Parties
Ocwen
For the six months ended June 30, 2013, we generated segment revenue from Ocwen of $181.1 million for Mortgage Services ($101.2 million for the second quarter of 2013), $6.7 million for Financial Services ($6.7 million for second quarter of 2013) and $23.5 million for Technology Services ($13.3 million for the second quarter of 2013). Services provided to Ocwen during these periods included residential property valuation, real estate asset management and sales, trustee management services, property inspection and preservation, closing and insurance services, charge-off mortgage collections, core technology back office support and multiple business technologies including our REALSuite of products. We provided all services at rates we believe to be comparable to market rates.
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 the agreements described in Note 2 to the interim condensed consolidated financial statements. These amounts are reflected as a component of selling, general and administrative expenses in the condensed consolidated statements of operations.
On December 27, 2012, we entered into a senior unsecured term loan agreement with Ocwen pursuant to which we loaned $75.0 million to Ocwen. Interest income related to this loan was $ 0.8 million for the six months ended June 30, 2013 (no comparative amounts in 2012). On February 15, 2013, Ocwen repaid the entire outstanding principal amount of this loan plus all accrued and unpaid interest and the term loan was terminated.
Correspondent One and HLSS
For the six months ended June 30, 2013 and 2012, we billed Correspondent One less than $ 0.1 million in each period. 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.
We also provided certain origination-related services to Correspondent One. We earned revenue of less than $ 0.1 million for the six months ended June 30, 2013 from the provision of these services (no comparative amount in 2012). On March 31, 2013, we sold our 49% interest in Correspondent One to Ocwen for $12.6 million.
Residential and AAMC
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 services agreements. These amounts are reflected as a component of selling, general and administrative expenses in the condensed consolidated statements of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Market Risk
Our financial market risk consists primarily of interest rate and foreign currency exchange risk.
Interest Rate Risk
As of June 30, 2013, the interest rate charged on the senior secured term loan was 5.75%. The interest rate is calculated based on the Adjusted Eurodollar Rate (as defined in the senior secured term loan agreement) (with a minimum floor of 1.25%) plus 4.5%.
Based on the principal amount outstanding at June 30, 2013, a 1% increase in the Eurodollar rate would not impact our annual interest expense as the Adjusted Eurodollar Rate would remain below the minimum floor rate.
Foreign Currency Exchange Risk
We are exposed to currency risk from the potential changes in currency values of our foreign currency denominated assets, liabilities and cash flows. Our most significant foreign currency exposures relate to the Euro and Indian Rupee; however, the balances in Euros and Indian Rupees are immaterial.
Item 4. Controls and Procedures.
a) Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report. Based on such evaluation, such officers have concluded that our disclosure controls and procedures as of the end of the period covered by this quarterly report were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and to ensure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
b) Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
From time to time, we are involved in legal and administrative proceedings arising in the ordinary course of business. 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 the Company’s financial condition, results of operations or cash flows.
As of the date of this filing, there have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of our Form 10-K for the year ended December 31, 2012 filed with the SEC on February 13, 2013.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Equity securities purchased by us :
The following table presents information related to our repurchases of our equity securities during the three months ended June 30, 2013:
|
Period |
|
Total
|
|
Weighted
|
|
Total number
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock: |
|
|
|
|
|
|
|
|
|
|
|
April 1 — 30, 2013 |
|
— |
|
$ |
— |
|
— |
|
3,230,703 |
|
|
May 1 — 31, 2013 |
|
140,688 |
|
93.70 |
|
140,688 |
|
3,090,015 |
|
|
|
June 1 — 30, 2013 |
|
172,208 |
|
95.14 |
|
172,208 |
|
2,917,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares of common stock |
|
312,896 |
|
$ |
94.49 |
|
312,896 |
|
2,917,807 |
|
(1) Includes shares withheld from employees to satisfy tax withholding obligations that arose from the exercise of stock options.
(2) In May 2012, our shareholders authorized us to purchase up to 3.5 million shares of our common stock in the open market.
|
|
Exhibits. |
|
|
|
|
|
|
|
|
|
|
2.1 |
Purchase and Sale Agreement, dated as of March 29, 2013, by and among Altisource Portfolio Solutions, Inc., Altisource Solutions S.à r.l., Ocwen Financial Corporation, Homeward Residential, Inc. and Power Valuation Services, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on April 4, 2013) |
|
|
|
|
|
|
|
|
10.1 |
Amendment No. 1 to Credit Agreement, dated as of May 7, 2013, among Altisource Solutions S.à r.l., as borrower, Altisource Portfolio Solutions S.A., Bank of America, N.A., as administrative agent and incremental term lender and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on May 13, 2013) |
|
|
|
|
|
|
|
|
31.1 |
Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
|
|
|
|
|
|
|
|
31.2 |
Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
|
|
|
|
|
|
|
|
32.1 |
Certification by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
|
|
|
|
|
|
|
|
101 |
Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2013, is formatted in XBRL interactive data files: (i) Condensed Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012; (ii) Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012; (iii) Condensed Consolidated Statements of Equity for the six months ended June 30, 2013 and 2012; (iv) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012; and (v) Notes to Condensed Consolidated Financial Statements |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
(Registrant)
|
Date: July 25, 2013 |
By: |
/s/ Michelle D. Esterman |
|
|
|
Michelle D. Esterman |
|
|
|
Chief Financial Officer |
|
|
|
(On behalf of the Registrant and as its Principal Financial Officer) |
No information found
* THE VALUE IS THE MARKET VALUE AS OF THE LAST DAY OF THE QUARTER FOR WHICH THE 13F WAS FILED.
| FUND | NUMBER OF SHARES | VALUE ($) | PUT OR CALL |
|---|
| DIRECTORS | AGE | BIO | OTHER DIRECTOR MEMBERSHIPS |
|---|
No information found
No Customers Found
No Suppliers Found
Price
Yield
| Owner | Position | Direct Shares | Indirect Shares |
|---|