Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

FORM 10-Q

 


 

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

 

For the quarterly period ended March 31, 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 April 19, 2013, there were 23,176,918 outstanding shares of the registrant’s shares of beneficial interest (excluding 2,235,830 shares held as treasury stock).

 

 

 



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Table of Contents

 

ALTISOURCE PORTFOLIO SOLUTIONS S.A.

 

FORM 10-Q

 

 

Page

PART I — Financial Information

 

 

 

 

Item 1

Interim Condensed Consolidated Financial Statements

 

 

 

Condensed Consolidated Balance Sheets

3

 

 

Condensed Consolidated Statements of Operations

4

 

 

Condensed Consolidated Statements of Equity

5

 

 

Condensed Consolidated Statements of Cash Flows

6

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

 

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

 

 

 

 

Item 3

Quantitative and Qualitative Disclosures about Market Risk

36

 

 

 

 

 

Item 4

Controls and Procedures

37

 

 

 

 

PART II — Other Information

 

 

 

 

 

 

Item 1

Legal Proceedings

38

 

 

 

 

 

Item 1A

Risk Factors

38

 

 

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

38

 

 

 

 

 

Item 6

Exhibits

39

 

 

 

 

SIGNATURES

 

41

 



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Interim Condensed Consolidated Financial Statements (Unaudited)

 

ALTISOURCE PORTFOLIO SOLUTIONS S.A.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

 

 

 

March 31,
2013

 

December 31,
2012

 

 

 

 

 

 

 

ASSETS

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

77,303

 

$

105,502

 

Accounts receivable, net

 

109,238

 

88,955

 

Prepaid expenses and other current assets

 

21,760

 

7,618

 

Deferred tax assets, net

 

1,775

 

1,775

 

Total current assets

 

210,076

 

203,850

 

 

 

 

 

 

 

Premises and equipment, net

 

53,344

 

50,399

 

Deferred tax assets, net

 

4,073

 

4,073

 

Intangible assets, net

 

135,774

 

56,586

 

Goodwill

 

14,915

 

14,915

 

Investment in Correspondent One

 

 

12,729

 

Loan to Ocwen

 

 

75,000

 

Other assets

 

13,250

 

11,674

 

 

 

 

 

 

 

Total assets

 

$

431,432

 

$

429,226

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

57,704

 

$

58,976

 

Current portion of long-term debt

 

2,000

 

2,000

 

Current portion of capital lease obligations

 

57

 

233

 

Other current liabilities

 

7,185

 

10,423

 

Total current liabilities

 

66,946

 

71,632

 

 

 

 

 

 

 

Long-term debt, less current portion

 

195,622

 

196,027

 

Other non-current liabilities

 

1,703

 

1,738

 

 

 

 

 

 

 

Commitments and contingencies (Note 17)

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Common stock ($1.00 par value; 100,000 shares authorized; (25,413 issued and 23,177 outstanding as of March 31, 2013; 25,413 issued and 23,427 outstanding as of December 31, 2012)

 

25,413

 

25,413

 

Additional paid-in-capital

 

88,297

 

86,873

 

Retained earnings

 

151,441

 

124,127

 

Treasury stock, at cost (2,236 shares as of March 31, 2013 and 1,986 shares as of December 31, 2012)

 

(99,291

)

(77,954

)

Altisource equity

 

165,860

 

158,459

 

 

 

 

 

 

 

Non-controlling interests

 

1,301

 

1,370

 

Total equity

 

167,161

 

159,829

 

 

 

 

 

 

 

Total liabilities and equity

 

$

431,432

 

$

429,226

 

 

See accompanying notes to condensed consolidated financial statements.

 

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

 

 

Three months ended
March 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Revenue

 

$

148,827

 

$

139,066

 

Cost of revenue

 

96,962

 

91,760

 

 

 

 

 

 

 

Gross profit

 

51,865

 

47,306

 

Selling, general and administrative expenses

 

18,680

 

17,015

 

 

 

 

 

 

 

Income from operations

 

33,185

 

30,291

 

Other income (expense), net:

 

 

 

 

 

Interest expense

 

(3,212

)

(15

)

Other income (expense), net

 

705

 

(336

)

Total other income (expense), net

 

(2,507

)

(351

)

 

 

 

 

 

 

Income before income taxes and non-controlling interests

 

30,678

 

29,940

 

Income tax provision

 

(2,151

)

(2,819

)

 

 

 

 

 

 

Net income

 

28,527

 

27,121

 

Net income attributable to non-controlling interests

 

(1,009

)

(1,892

)

 

 

 

 

 

 

Net income attributable to Altisource

 

$

27,518

 

$

25,229

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic

 

$

1.18

 

$

1.08

 

Diluted

 

$

1.10

 

$

1.02

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

Basic

 

23,374

 

23,381

 

Diluted

 

25,058

 

24,844

 

 

 

 

 

 

 

Transactions with related parties included above:

 

 

 

 

 

Revenue

 

$

90,098

 

$

82,780

 

Selling, general and administrative expenses

 

673

 

574

 

Other income

 

773

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(in thousands)

 

 

 

Altisource Equity

 

 

 

 

 

 

 

Common stock

 

Additional
paid-in
capital

 

Retained
earnings

 

Treasury
stock, at cost

 

Non-
controlling
interests

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2011

 

25,413

 

$

25,413

 

$

83,229

 

$

126,161

 

$

(72,048

)

$

3,188

 

$

165,943

 

Net income

 

 

 

 

25,229

 

 

1,892

 

27,121

 

Contributions from non-controlling interest holders

 

 

 

 

 

 

11

 

11

 

Distributions to non-controlling interest holders

 

 

 

 

 

 

(2,083

)

(2,083

)

Share-based compensation expense

 

 

 

(184

)

 

 

 

(184

)

Exercise of stock options

 

 

 

 

(4,364

)

6,341

 

 

1,977

 

Repurchase of shares

 

 

 

 

 

(16,781

)

 

(16,781

)

Balance, March 31, 2012

 

25,413

 

$

25,413

 

$

83,045

 

$

147,026

 

$

(82,488

)

$

3,008

 

$

176,004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

25,413

 

$

25,413

 

$

86,873

 

$

124,127

 

$

(77,954

)

$

1,370

 

$

159,829

 

Net income

 

 

 

 

27,518

 

 

1,009

 

28,527

 

Contributions from non-controlling interest holders

 

 

 

 

 

 

12

 

12

 

Distributions to non-controlling interest holders

 

 

 

 

 

 

(1,090

)

(1,090

)

Share-based compensation expense

 

 

 

1,424

 

 

 

 

1,424

 

Exercise of stock options

 

 

 

 

(204

)

660

 

 

456

 

Repurchase of shares

 

 

 

 

 

(21,997

)

 

(21,997

)

Balance, March 31, 2013

 

25,413

 

$

25,413

 

$

88,297

 

$

151,441

 

$

(99,291

)

$

1,301

 

$

167,161

 

 

See accompanying notes to condensed consolidated financial statements.

 

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Three months ended
March 31,

 

 

 

2013

 

2012

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

28,527

 

$

27,121

 

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

 

 

 

 

 

Depreciation and amortization

 

4,724

 

2,279

 

Amortization of intangible assets

 

1,200

 

1,340

 

Share-based compensation expense

 

1,424

 

(184

)

Equity in losses of affiliate

 

176

 

324

 

Bad debt expense

 

224

 

649

 

Amortization of debt discount

 

95

 

 

Amortization of debt issuance costs

 

215

 

 

Loss on sale or disposal of fixed assets

 

 

394

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(12,968

)

(10,956

)

Prepaid expenses and other current assets

 

(1,147

)

(377

)

Other assets

 

(1,741

)

684

 

Accounts payable and accrued expenses

 

(7,805

)

2,930

 

Other current and non-current liabilities

 

(3,368

)

3,568

 

Net cash provided by operating activities

 

9,556

 

27,772

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Additions to premises and equipment

 

(6,960

)

(16,154

)

Acquisition of business, net of cash acquired

 

(82,450

)

 

Investment in equity affiliate

 

(50

)

 

Repayment of loan to Ocwen

 

75,000

 

 

Net cash used in investing activities

 

(14,460

)

(16,154

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Repayment of long-term debt

 

(500

)

 

Principal payments on capital lease obligations

 

(176

)

(201

)

Proceeds from stock option exercises

 

456

 

1,977

 

Purchase of treasury stock

 

(21,997

)

(16,781

)

Contributions from non-controlling interests

 

12

 

11

 

Distributions to non-controlling interests

 

(1,090

)

(2,083

)

Net cash used in financing activities

 

(23,295

)

(17,077

)

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(28,199

)

(5,459

)

Cash and cash equivalents at the beginning of the period

 

105,502

 

32,125

 

Cash and cash equivalents at the end of the period

 

$

77,303

 

$

26,666

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

Interest paid

 

$

2,799

 

$

15

 

Income taxes paid, net

 

402

 

694

 

 

 

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

Amortization of tax-deductible goodwill

 

$

 

$

842

 

Premises and equipment purchased on account

 

700

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.

Notes to Condensed Consolidated Financial Statements

 

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION

 

Description of Business

 

Altisource Portfolio Solutions S.A., together with its subsidiaries, (which may be referred to as Altisource™, the Company, we, us or our) is a global provider of services focused on high-value, technology-enabled, knowledge-based 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 March 31, 2013, Lenders One had total assets of $1.7 million and liabilities of $0.4 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, accounts receivable, restricted cash, accounts payable and accrued expenses and long-term debt.  The carrying amount of cash and cash equivalents, accounts receivable, restricted cash and accounts payable and accrued expenses are carried at amounts that approximate their fair value due to the short-term nature of these instruments.  The carrying amount of the long-term debt approximates fair value due to the variable interest rate.

 

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.  In connection with our

 

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acquisition of the fee-based businesses of Homeward Residential, Inc. (“Homeward”) from Ocwen on March 29, 2013 (see Note 3) and the agreement we entered into on April 12, 2013 to establish additional terms related to our agreements with Ocwen in connection with Ocwen’s acquisition of the fee-based businesses of Residential Capital, LLC (“ResCap”) (see Note 19), our agreements with Ocwen were amended to extend the term from 2020 to August 2025.  Further, as part of the amendments, we will be the exclusive provider of services to Ocwen with respect to the Homeward and ResCap servicing portfolios, and Ocwen will not 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 its subsidiaries and revenue earned from the loans serviced by Ocwen or its subsidiaries when Ocwen determines the service provider.  We earn additional revenue on the portfolios serviced by Ocwen or its subsidiaries that are not considered related party revenue when a party other than Ocwen selects the service provider.  As a percentage of each of our segment revenue and as a percentage of consolidated revenue, related party revenue was as follows for the three months ended March 31:

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Mortgage Services

 

68

%

69

%

Technology Services

 

50

%

39

%

Financial Services

 

<1

%

<1

%

Consolidated revenue

 

61

%

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 based on the fully-allocated cost of providing the service based on an estimate of the time and expense of providing the service.  For the three months ended March 31, 2013 and 2012, we billed Ocwen $0.6 million and $0.8 million, respectively, and Ocwen billed us $0.7 million and $0.6 million, 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.  Interest income related to this loan was $0.8 million for the three months ended March 31, 2013.

 

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), and Altisource entered into an agreement with Ocwen on April 12, 2013 to establish additional terms related to our services in connection with Ocwen’s acquisition of the ResCap fee-based businesses (see Note 19).

 

Correspondent One and HLSS

 

In July 2011, we acquired an equity interest in Correspondent One S.A. (“Correspondent One”) (see Note 8).  We provided Correspondent One certain finance, human resources, legal support, facilities, technology, vendor management and risk management services.  For the three months ended March 31, 2013 and 2012, we billed Correspondent One less than $0.1 million, for each period, under a services agreement.  On March 31, 2013, we sold our 49% interest in Correspondent One to

 

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Ocwen for $12.6 million and recorded a current asset of $12.6 million.  We received $12.6 million from Ocwen on April 2, 2013.  We also provide certain origination related services to Correspondent One.  We earned revenue of $0.1 million for the three months ended March 31, 2013 for these services (no comparative amount in 2012).

 

Home Loan Servicing Solutions, Ltd. (“HLSS”) is a public 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.  We provide HLSS certain finance, human resources and legal support services.  For the three months ended March 31, 2013 and 2012, we billed HLSS $0.2 million and less than $0.1 million, respectively, under a services agreement.

 

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 distributed to our shareholders on December 21, 2012 and are each separate public companies (the “Separation of the Residential Asset Businesses”).   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.

 

Residential and AAMC have entered the growing residential single family rental market.  We have agreements to provide certain services to Residential and/or AAMC related to renovation management, lease management and property management and support services such as finance, human resources, legal support, facilities, technology, vendor management and risk management pursuant to a Master Services Agreement and a Support Services Agreement.  In addition, certain services related to income tax matters, trademark licenses and technology products and services are described in separate agreements.  For the three months ended March 31, 2013, we billed Residential less than $0.1 million, and we billed AAMC less than $0.1 million under these agreements (no comparative amounts in 2012).

 

NOTE 3 — ACQUISITIONS

 

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 certain service agreements between Altisource and Ocwen were amended to extend the term from 2020 to August 2025 (see Note 2).  We paid $87.0 million, subject to a working capital and net income adjustment within 90 days, for the Homeward fee-based businesses.

 

Management has prepared a preliminary purchase price allocation and assigned associated asset lives based upon available information at the time of closing.  This preliminary allocation and assessment of asset lives will be revised as additional information about the fair value of assets and liabilities becomes available but will not exceed 12 months from the acquisition date.

 

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

 

(in thousands)

 

 

 

 

 

 

 

Cash

 

$

4,500

 

Accounts receivable

 

7,221

 

Receivable from Ocwen

 

318

 

Prepaid expenses and other current assets

 

347

 

Premises and equipment

 

9

 

Customer relationship

 

80,388

 

 

 

92,783

 

Accounts payable and accrued expenses

 

(3,352

)

Payable to Ocwen

 

(2,481

)

Purchase price

 

$

86,950

 

 

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(in thousands)

 

Estimated
life
(in years)

 

 

 

 

 

Premises and equipment

 

2 - 5

 

Customer relationship

 

7

 

 

The following tables present the unaudited pro forma condensed consolidated results of operations as if the acquisition had occurred at the beginning of the periods presented.

 

 

 

Three months ended
March 31, 2013

 

(in thousands, except per share amounts)

 

As reported

 

Pro forma

 

Revenue

 

$

148,827

 

$

170,485

 

Net income attributable to Altisource

 

27,518

 

32,815

 

Earnings per share — diluted

 

1.10

 

1.31

 

 

 

 

Three months ended
March 31, 2012

 

(in thousands, except per share amounts)

 

As reported

 

Pro forma

 

Revenue

 

$

139,066

 

$

163,695

 

Net income attributable to Altisource

 

25,229

 

32,868

 

Earnings per share — diluted

 

1.02

 

1.32

 

 

The unaudited pro forma information presents the combined operating results of Altisource and Homeward.  The Homeward operating results were derived from its historical financial statements for the most comparable periods available.  The results prior to the acquisition date have been adjusted to include the pro forma impact of the adjustment of amortization of the acquired intangible asset based on the preliminary purchase price allocation, the adjustment of interest expense reflecting the portion of our $200.0 million senior secured term loan (the “Senior Secured Term Loan”) used in the Homeward acquisition (i.e., the pro forma impact of borrowing $87.0 million for the three months ended March 31, 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.  It is management’s intent to transition the majority of the Homeward fee-based businesses to Altisource’s platform.  Certain revenue opportunities and cost savings may result from the transaction 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 transaction 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.

 

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NOTE 4 — ACCOUNTS RECEIVABLE, NET

 

Accounts receivable, net consists of the following:

 

 

 

March 31,

 

December 31,

 

(in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Billed

 

 

 

 

 

Non-related parties

 

$

35,987

 

$

25,950

 

Ocwen

 

32,898

 

19,817

 

Correspondent One

 

 

27

 

HLSS

 

142

 

163

 

AAMC

 

209

 

14

 

Residential

 

12

 

 

Other receivables

 

404

 

353

 

 

 

69,652

 

46,324

 

Unbilled

 

 

 

 

 

Non-related parties

 

33,844

 

39,496

 

Ocwen

 

9,243

 

6,377

 

Correspondent One

 

 

32

 

 

 

112,739

 

92,229

 

Allowance for doubtful accounts

 

(3,501

)

(3,274

)

 

 

 

 

 

 

Total

 

$

109,238

 

$

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:

 

 

 

March 31,

 

December 31,

 

(in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Maintenance agreements, current portion

 

$

5,457

 

$

3,636

 

Income taxes receivable

 

 

1,814

 

Prepaid expenses

 

2,954

 

1,640

 

Cash held for clients

 

594

 

447

 

Due from Ocwen on sale of Correspondent One

 

12,648

 

 

Other current assets

 

107

 

81

 

 

 

 

 

 

 

Total

 

$

21,760

 

$

7,618

 

 

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NOTE 6 — PREMISES AND EQUIPMENT, NET

 

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

 

 

 

March 31,

 

December 31,

 

(in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Computer hardware and software

 

$

74,211

 

$

68,329

 

Office equipment and other

 

14,386

 

15,592

 

Furniture and fixtures

 

5,692

 

5,344

 

Leasehold improvements

 

15,570

 

12,982

 

 

 

109,859

 

102,247

 

Less: Accumulated depreciation and amortization

 

(56,515

)

(51,848

)

 

 

 

 

 

 

Total

 

$

53,344

 

$

50,399

 

 

Depreciation and amortization expense, inclusive of capital leases, amounted to $4.7 million and $2.3 million for the three months ended March 31, 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 three months ended March 31, 2013. The following is a summary of goodwill by segment:

 

 

 

Mortgage

 

Financial

 

Technology

 

 

 

(in thousands)

 

Services

 

Services

 

Services

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 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

 

March 31,

 

December 31,

 

March 31,

 

December 31,

 

March 31,

 

December 31,

 

(dollars in thousands)

 

(years)

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Definite-lived intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

16

 

$

10,614

 

$

10,614

 

$

(4,179

)

$

(4,060

)

$

6,435

 

$

6,554

 

Customer-related intangible assets

 

11

 

118,754

 

38,366

 

(19,123

)

(18,567

)

99,631

 

19,799

 

Operating agreement

 

20

 

35,000

 

35,000

 

(5,542

)

(5,104

)

29,458

 

29,896

 

Non-compete agreement

 

4

 

1,300

 

1,300

 

(1,050

)

(963

)

250

 

337

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

$

165,668

 

$

85,280

 

$

(29,894

)

$

(28,694

)

$

135,774

 

$

56,586

 

 

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Amortization expense for definite lived intangible assets was $1.2 million and $1.3 million for the three months ended March 31, 2013 and 2012, respectively. Expected annual definite lived intangible asset amortization for 2013 through 2017, is $16.3 million, $24.2 million, $19.5 million, $16.1 million and $13.3 million, respectively, including preliminary amounts associated with the Homeward acquisition (see Note 3).

 

NOTE 8 — INVESTMENT IN EQUITY AFFILIATE

 

Correspondent One purchases closed conforming and government guaranteed residential mortgages from approved mortgage bankers.  Correspondent One provides members of Lenders One additional avenues to sell loans beyond Lenders One’s preferred investor arrangements and the members’ own network of loan buyers. Prior to the sale of our interest in Correspondent One to Ocwen on March 31, 2013 (see Note 2), we had significant influence over the general operations of Correspondent One consistent with our 49% ownership level, and therefore, accounted for our investment under the equity method. We had no funding commitments to Correspondent One as of March 31, 2013.

 

Our net loss on this investment using the equity method was $0.2 million and $0.3 million for the three months ended March 31, 2013 and 2012, respectively.

 

NOTE 9 — OTHER ASSETS

 

Other assets consist of the following:

 

 

 

March 31,

 

December 31,

 

(in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Security deposits, net

 

$

6,279

 

$

5,019

 

Debt issuance costs, net

 

4,230

 

4,260

 

Maintenance agreements, non-current portion

 

2,363

 

1,614

 

Unbilled fees

 

 

423

 

Restricted cash

 

158

 

158

 

Other

 

220

 

200

 

 

 

 

 

 

 

Total

 

$

13,250

 

$

11,674

 

 

 

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

 

Accounts payable and accrued expenses consist of the following:

 

 

 

March 31,

 

December 31,

 

(in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Accounts payable

 

$

10,128

 

$

5,079

 

Accrued expenses - general

 

19,161

 

16,528

 

Accrued salaries and benefits

 

13,553

 

19,613

 

Income taxes payable

 

8,606

 

8,750

 

Payable to Ocwen

 

6,248

 

8,865

 

Payable to AAMC

 

8

 

141

 

 

 

 

 

 

 

Total

 

$

57,704

 

$

58,976

 

 

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Other current liabilities consist of the following:

 

 

 

March 31,

 

December 31,

 

(in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Deferred revenue

 

$

1,519

 

$

2,482

 

Facility closure cost accrual, current portion

 

139

 

138

 

Collections due to clients

 

594

 

447

 

Book overdrafts

 

2,857

 

5,229

 

Other

 

2,076

 

2,127

 

 

 

 

 

 

 

Total

 

$

7,185

 

$

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 three months ended March 31, 2013:

 

(in thousands)

 

Lease Costs

 

 

 

 

 

Balance, December 31, 2012

 

$

294

 

Payments

 

(60

)

Balance, March 31, 2013

 

234

 

Less: Long-term portion

 

(95

)

 

 

 

 

Facility closure cost accrual, current portion

 

$

139

 

 

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

 

NOTE 11 — LONG-TERM DEBT

 

Long-term debt consists of the following:

 

 

 

March 31,

 

December 31,

 

(in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Senior Secured Term Loan

 

$

199,500

 

$

200,000

 

Less: Unamortized discount

 

(1,878

)

(1,973

)

Net long-term debt

 

197,622

 

198,027

 

Less: Current portion

 

(2,000

)

(2,000

)

 

 

 

 

 

 

Long-term debt, less current portion

 

$

195,622

 

$

196,027

 

 

Legal fees and other direct expenses relating to the Senior Secured Term Loan were capitalized.  At March 31, 2013, total debt issuance costs were $4.2 million, net of $0.3 million of accumulated amortization.  At December 31, 2012, total 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.

 

Interest expense on the Senior Secured Term Loan, including amortization of debt issuance costs and the debt discount, totaled $3.2 million for the three months ended March 31, 2013 (no comparative amount in 2012). The interest rate at March 31, 2013 was 5.75%.

 

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NOTE 12 — EQUITY AND SHARE-BASED COMPENSATION

 

Stock Repurchase Plan

 

In May 2012, our shareholders approved a stock repurchase program, which replaced the previous stock repurchase program. Under the plan, we are authorized to purchase up to 3.5 million shares of our common stock in the open market in addition to amounts previously purchased under the prior plan. From authorization of the prior plan in May 2010 through March 31, 2013, we have purchased approximately 2.8 million shares of our common stock in the open market at an average price of $41.76 per share.  We purchased 0.3 million shares of common stock (at an average price of $82.58 per share) during the three months ended March 31, 2013 and 0.3 million shares of common stock (at an average price of $63.25 per share) during the three months ended March 31, 2012.  There are 3.2 million shares of common stock remaining 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.  At March 31, 2013, approximately $40.0 million was available to repurchase our common stock under Luxembourg law.  Our Senior Secured Term Loan agreement 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 March 31, 2013, there was no capacity available to repurchase our common stock under our Senior Secured Term Loan agreement.

 

Share-Based Compensation

 

We issue share-based awards in the form of stock options for certain employees and officers. We recorded share-based compensation expense of $1.4 million for the three months ended March 31, 2013 and $(0.2) million for the three months ended March 31, 2012. The amount in 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 March 31, 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 realizes a compounded annual gain of at least 20% over the exercise price, as long as the stock price is at least double the exercise price. The remaining third of the market-based options, which we refer to internally as “extraordinary performance” grants, begins to vest if the stock price realizes a compounded annual gain of at least 25% over the exercise price, as long as it is at least triple the exercise price. The vesting schedule for all market-based awards is 25% upon achievement of the criteria and the remaining 75% in three equal annual installments. A total of 2.2 million market-based awards were outstanding at March 31, 2013.

 

The Company granted less than 0.1 million stock options (at a weighted average exercise price of $88.56 per share) during the three months ended March 31, 2013 and 0.2 million stock options (at a weighted average exercise price of $63.32 per share) during the three months ended March 31, 2012.

 

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:

 

 

 

Three months ended March 31, 2013

 

Three months ended March 31, 2012

 

 

 

Black-Scholes

 

Binomial

 

Black-Scholes

 

Binomial

 

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

1.02%–1.13%

 

0.08%–2.02%

 

1.16% – 1.17%

 

0.09% – 2.04%

 

Expected stock price volatility

 

36.35%–36.50%

 

36.40%–36.50%

 

34.62% – 34.65%

 

34.50% – 34.60%

 

Expected dividend yield

 

 

 

 

 

Expected option life (in years)

 

6.25

 

 

6.25

 

 

Contractual life (in years)

 

 

14

 

 

14

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$31.33–$34.74

 

$16.12–$30.34

 

$22.74 – $22.80

 

$11.65 – $17.27

 

 

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Table of Contents

 

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:

 

 

 

Three months ended March 31,

 

(in thousands, except per share amounts)

 

2013

 

2012

 

Weighted-average fair value at grant date per share

 

$

25.22

 

$

17.23

 

Intrinsic value of options exercised

 

918

 

8,242

 

Fair value of options vested

 

838

 

275

 

 

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

 

As of March 31, 2013, estimated unrecognized compensation costs related to share-based payments amounted to $4.2 million, which we expect to recognize over a weighted-average remaining requisite service period of approximately 2.3 years.

 

The following table summarizes the activity related to our stock options:

 

 

 

Number of
options

 

Weighted
average
exercise
price

 

Weighted
average
contractual
term
(in years)

 

Aggregate
intrinsic value
(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2012

 

3,058,309

 

$

17.69

 

6.1

 

$

211,072

 

Granted

 

30,000

 

88.56

 

 

 

 

 

Exercised

 

(16,450

)

27.73

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

Outstanding at March 31, 2013

 

3,071,859

 

18.32

 

5.9

 

159,433

 

 

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2013

 

2,261,878

 

12.20

 

5.3

 

130,326

 

 

Restricted Shares in AAMC

 

Prior to the separation of AAMC, certain Altisource employees were granted 0.1 million restricted AAMC shares. The restricted shares will vest in three tranches, subject to the achievement of the following performance hurdles:

 

·                  25% of the grant will vest in accordance with the vesting schedule set forth below if the market value of AAMC common stock meets all three of the following conditions: (i) the market value is at least equal to $250 million; (ii) the market value has realized a compounded annual gain of at least 20% over the market value on the date of the grant; and (iii) the market value is at least double the market value on the date of the grant;

 

·                  50% of the grant will vest in accordance with the vesting schedule set forth below if the market value of AAMC common stock meets all three of the following conditions: (i) the market value is at least equal to $500 million; (ii) the market value has realized a compounded annual gain of at least 22.5% over the market value on the date of the grant; and (iii) the market value is at least triple the market value on the date of the grant; and

 

·                  25% of the grant will vest in accordance with the vesting schedule set forth below if the market value of AAMC common stock meets all three of the following conditions: (i) the market value is at least equal to $750 million; (ii) the market value has realized a compounded annual gain of at least 25% over the market value on the date of the grant; and (iii) the market value is at least quadruple the market value on the date of the grant.

 

After the performance hurdles for a tranche have been achieved, 25% of the restricted shares in that tranche will vest on each of the first four anniversaries of the date that the performance hurdles for that tranche were met.

 

If an award recipient’s service with Altisource is terminated prior to full vesting of the restricted shares, then the award recipient will forfeit all unvested restricted shares except that if (i) an award recipient’s service is terminated without cause or due to death or disability and (ii) the performance hurdles for a tranche have already been achieved or are achieved within 90 days of termination, unvested restricted stock for the corresponding tranche will continue to vest according to the above vesting schedule.

Expense related to these restricted shares for the three months ended March 31, 2013 was less than $0.1 million.

 

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Table of Contents

 

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 for the three months ended March 31:

 

(in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Compensation and benefits

 

$

32,579

 

$

27,485

 

Outside fees and services

 

34,895

 

28,653

 

Reimbursable expenses

 

20,266

 

28,706

 

Technology and telecommunications

 

5,491

 

5,124

 

Depreciation and amortization

 

3,731

 

1,792

 

 

 

 

 

 

 

Total

 

$

96,962

 

$

91,760

 

 

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 for the three months ended March 31:

 

(in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Compensation and benefits

 

$

5,457

 

$

4,383

 

Professional services

 

1,632

 

1,655

 

Occupancy related costs

 

6,576

 

6,509

 

Amortization of intangible assets

 

1,200

 

1,340

 

Depreciation and amortization

 

993

 

487

 

Other

 

2,822

 

2,641

 

 

 

 

 

 

 

Total

 

$

18,680

 

$

17,015

 

 

NOTE 15 — OTHER INCOME (EXPENSE), NET

 

Other income (expense), net consists of the following for the three months ended March 31:

 

(in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Equity loss in affiliate

 

$

(176

)

$

(324

)

Interest expense

 

(3,212

)

(15

)

Interest income

 

856

 

16

 

Other, net

 

25

 

(28

)

 

 

 

 

 

 

Total

 

$

(2,507

)

$

(351

)

 

Equity loss in affiliate represents our proportional share of the losses in Correspondent One (see Note 8).

 

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Table of Contents

 

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.

 

Basic and diluted EPS are calculated as follows for the three months ended March 31:

 

(in thousands, except per share data)

 

2013

 

2012

 

 

 

 

 

 

 

Net income attributable to Altisource

 

$

27,518

 

$

25,229

 

 

 

 

 

 

 

Weighted-average common shares outstanding, basic

 

23,374

 

23,381

 

Dilutive effect of stock options

 

1,684

 

1,463

 

 

 

 

 

 

 

Weighted-average common shares outstanding, diluted

 

25,058

 

24,844

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

Basic

 

$

1.18

 

$

1.08

 

Diluted

 

$

1.10

 

$

1.02

 

 

For the three months ended March 31, 2013 and 2012, 0.1 million and less than 0.1 million options, respectively, 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 three months ended March 31, 2013 and 2012 are 0.1 million and 0.4 million options, 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 $42.1 million and $47.2 million as of March 31, 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, mortgages) and the utility and insurance industries. The Technology Services segment principally consists of our REALSuiteTM applications as well as our information technology (“IT”)

 

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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 March 31, 2013

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

Mortgage

 

Financial

 

Technology

 

Items and

 

Consolidated

 

(in thousands)

 

Services

 

Services

 

Services

 

Eliminations

 

Altisource

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

117,448

 

$

16,336

 

$

20,231

 

$

(5,188

)

$

148,827

 

Cost of revenue

 

72,369

 

12,026

 

17,112

 

(4,545

)

96,962

 

Gross profit

 

45,079

 

4,310

 

3,119

 

(643

)

51,865

 

Selling, general and administrative expenses

 

5,458

 

2,850

 

1,865

 

8,507

 

18,680

 

Income from operations

 

39,621

 

1,460

 

1,254

 

(9,150

)

33,185

 

Other income (expense), net

 

(173

)

(3

)

4

 

(2,335

)

(2,507

)

Income before income taxes and non-controlling interests

 

$

39,448

 

$

1,457

 

$

1,258

 

$

(11,485

)

$

30,678

 

 

 

 

Three months ended March 31, 2012

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

Mortgage

 

Financial

 

Technology

 

Items and

 

Consolidated

 

(in thousands)

 

Services

 

Services

 

Services

 

Eliminations

 

Altisource

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

109,661

 

$

18,016

 

$

17,022

 

$

(5,633

)

$

139,066

 

Cost of revenue

 

73,039

 

12,333

 

11,466

 

(5,078

)

91,760

 

Gross profit

 

36,622

 

5,683

 

5,556

 

(555

)

47,306

 

Selling, general and administrative expenses

 

5,691

 

3,830

 

1,849

 

5,645

 

17,015

 

Income from operations

 

30,931

 

1,853

 

3,707

 

(6,200

)

30,291

 

Other expense, net

 

(321

)

(14

)

(11

)

(5

)

(351

)

Income before income taxes and non-controlling interests

 

$

30,610

 

$

1,839

 

$

3,696

 

$

(6,205

)

$

29,940

 

 

NOTE 19 — SUBSEQUENT EVENT

 

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.  In exchange for $128.8 million to be paid by Altisource to Ocwen, Altisource will be the exclusive provider of certain services related to the ResCap servicing portfolio.  We paid $80.0 million at closing and the remaining $48.8 million will be paid in monthly installments for up to five months following the closing.  We acquired no tangible assets and assumed no liabilities in connection with the agreement.  However, certain employees as well as practices and processes developed to support the ResCap servicing portfolio are components of the transaction.  We anticipate the transaction will be accounted for as a business combination in accordance with Financial Accounting Standards Board Accounting Standards Codification section 805, Business Combinations. We have not completed a preliminary price allocation since the transaction was recently completed.

 

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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;

 

·                  our business is dependent on the trend toward outsourcing;

 

·                  our ability to raise debt;

 

·                  success is dependent on 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.

 

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We, through our subsidiaries, are a global provider of fee-based services focused on high-value, technology-enabled, knowledge-based 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 (“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 operations.  In connection with the spin-off of Altisource Residential Corporation (“Residential”) and Altisource Asset Management Corporation (“AAMC”), we also plan to 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 and mortgage bankers.

 

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 began providing 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 business. 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, mortgages) and the utility and insurance industries.  Within the Financial Services segment, we provide the following services:

 

Asset recovery management — Asset recovery management principally includes post-charge-off consumer debt collection services on a contingency fee basis.

 

Customer relationship management — Customer relationship management 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 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.

 

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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.

 

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 March 31, 2013, we have purchased approximately 2.8 million shares of our common stock in the open market at an average price of $41.76 per share.  We purchased 0.3 million shares of common stock (at an average price of $82.58 per share) during the three months ended March 31, 2013 and 0.3 million shares of common stock (at an average price of $63.25 per share) during the three months ended March 31, 2012.  There are 3.2 million shares of common stock remaining 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.  At March 31, 2013, approximately $40.0 million was available to repurchase our common stock under Luxembourg law.  Our $200.0 million senior secured term loan (the “Senior Secured Term Loan”) agreement 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 March 31, 2013, there was no capacity available to repurchase our common stock under our Senior Secured Term Loan agreement.

 

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 - We believe Ocwen’s anticipated servicing portfolio growth will continue to provide a meaningful contribution to our revenue even as delinquency rates decline.  Delinquencies are not going to go away.  According to Moody’s CreditForecast.com, even pre-financial crisis, non-Government-Sponsored Enterprise (“non-GSE”) delinquency rates averaged 6.7%.  As delinquencies and the opportunities for Ocwen to acquire the servicing on large non-performing loan portfolios return to a more normal level, we may experience a flattening in our revenue in the short term.  In the long term, however, 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.  For example, in our Mortgage Services segment, we are developing new default related services, like mortgage modification insurance, short sales services and

 

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mortgage charge-off collections.  We believe these services will not only accelerate our growth but will also help Ocwen extend its performance leadership.

 

With respect to Ocwen’s servicing portfolio growth, the Mortgage Services segment is almost fully staffed to support the anticipated near doubling of the non-GSE loans on REALServicing by the fourth quarter of 2013.  This growth is expected based on Ocwen’s acquisition of the Homeward Residential, Inc. (“Homeward”) servicing platform and Ocwen’s acquisition of the Residential Capital, LLC (“ResCap”) and the Ally Financial Inc. (“Ally”) servicing rights.  We accomplished our first quarter 2013 results with only modest benefit from the Homeward servicing portfolio and no benefit from the ResCap and Ally servicing portfolios.  This bolsters our confidence that our default businesses’ operating margins will increase by approximately seven percentage points by year-end 2013, even after amortizing the intangible assets associated with the Homeward and ResCap transactions.

 

Mortgage origination related services — In the first quarter of 2013, the members of Lenders One originated approximately $53.0 billion of loans representing approximately 11.1% of the United States residential origination market.  As the manager of the cooperative, we leverage the size of Lenders One, 252 members strong as of March 31, 2013, to help the members obtain better execution on the sale of closed loans with third parties and to achieve lower costs on origination related services.

 

We are just beginning to roll out many of our services to the members of Lenders One as well as Ocwen’s origination operation to leverage our vendor network, technology, scale, global workforce and lower sales costs.  We believe our growth will continue irrespective of the overall volume of originations in the U.S. market.  With the potential slowdown in origination volume and declining origination margins, Lenders One members are beginning to focus on the cost side of the profitability equation, and we believe that this will serve us well.  We are currently providing origination related services to the members at a lower cost to help them save money.  Given the expected decline in origination volume, we are also working on establishing relationships with investors to provide additional sales channels for our members.  These products could include jumbo, reverse and non-prime mortgage loans.

 

Our service revenue from origination related services was $10.8 million for the three months ended March 31, 2013, an increase of 33% over the first quarter of 2012, outpacing the growth of the other Mortgage Services segment businesses.  This is reflective of Lenders One membership growth, origination volume growth and an increasing number of the Lenders One members retaining Altisource to provide them with origination related services.  As of March 31, 2013, Lenders One membership increased to 252 members compared to 241 members as of December 31, 2012, and the number of signed agreements for origination related services with the members increased from 158 to 165 from December 31, 2012 to March 31, 2013.

 

Hubzu — We continue to focus on deploying 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.  To develop Hubzu as a marketplace for non-distressed home sales, we not only want homeowners to purchase their homes on Hubzu, but also for homeowners and their agents to list their homes for sale on Hubzu.  Today, we are focused on attracting real estate brokers and agents to list their homes for sale on Hubzu, and in time, we will target individual homeowners to use our real estate brokerage to list their homes for sale as well.  Over $40.0 billion per year is spent on real estate brokerage commissions in the United States, according to REAL Trends, Inc.  If we capture just a small percentage of this incredibly large market, we can substantially accelerate our growth.  For the three months ended March 31, 2013, we sold more than 5,500 homes, and our revenue has grown to $14.6 million, compared to $10.7 million in the first quarter of 2012 (Hubzu is part of our asset management services business in our Mortgage Services segment).

 

Our 2013 efforts to grow Hubzu are centered on offering Hubzu to other servicers and asset managers to sell their REO and providing Hubzu to individual listing agents and brokers for their distressed and non-distressed home sales, including short sales.  In this regard, we are making progress in our sales conversations with servicers and asset management companies to add them to our marketplace and further extend our leadership position in online home sales.  Additionally, to lay the foundation for a broader entry into the non-distressed home sale market, we recently completed a successful pilot of Hubzu’s direct to broker program.  By the end of April, Hubzu will be available to all licensed real estate agents and brokers.

 

In the medium to longer term, we intend to explore the possibility of distributing our ownership interest in the Hubzu business creating, a new public company.   The consumer real estate portal has many of the same characteristics as some of the other publicly-traded real estate related technology companies.  Similar to these companies, we believe that we can create greater shareholder value with Hubzu operating as a separate stand-alone company.   As a stand-alone company, Hubzu would have a singularly focused management team, and the performance of the business would be easier to compare with like companies.  With regard to Hubzu, there is no certainty at this time that a separation will occur. Further, the consummation of any spin-off or similar transaction will be subject to our reaching satisfactory conclusions with our financial, tax and legal advisors on all applicable issues and the receipt of any necessary approvals.

 

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Property management, lease management and renovation management services — In 2012, we enhanced our property management, lease management and renovation management capabilities to position us to provide services to the single family rental market.  In the fourth quarter of 2012, we entered into a 15-year service agreement with Residential to be its exclusive provider of property management, lease management and renovation management services.  Residential began acquiring loans in the first quarter of 2013 and as of April 5, 2013 owned 1,410 loans, substantially all of which were non-performing.  As these non-performing loans move through the foreclosure process and as Residential continues to acquire assets, we expect the number of rental assets and our revenue to grow accordingly.  In time, we also intend to offer our services to other single family property owners.

 

Financial Services segment — This segment includes our receivables management and customer relationship management businesses. We are focused on transitioning the Financial Services business from a low growth, lower margin business into a modest growth and higher margin business by expanding our higher margin customer relationship management and charged-off mortgage businesses.  In this regard, we began providing services for a new customer relationship management client in the first quarter and expect to start providing services to another new client early in the third quarter.   In addition, we continued to expand our relationship with two existing customer relationship management clients.   With respect to the charged-off mortgage business, in April we executed a services agreement with Ocwen to perform these services and have begun to receive additional referrals.

 

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 three months ended March 31, 2013 compared to 0.7 million loans for the three months ended March 31, 2012.  The average number of delinquent non-GSE loans serviced by Ocwen on REALServicing totaled 234,000 loans for the three months ended March 31, 2013 compared to 192,000 loans for the three months ended March 31, 2012.  During the first quarter of 2013 and through April 1, 2013, all of the Homeward non-GSE loans were boarded on REALServicing.  We anticipate boarding the ResCap non-GSE loans on REALServicing before the end of the third quarter of 2013.  We also expect to board all Homeward and ResCap GSE loans on REALServicing in the first quarter of 2014;

 

·                  In November 2012, we borrowed $200.0 million under a Senior Secured Term Loan agreement.  Interest expense, including amortization of debt issuance costs and debt discount, totaled $3.2 million for the three months ended March 31, 2013 (no comparative amount for the three months ended March 31, 2012);

 

·                  We repurchased 0.3 million shares of our common stock under our stock repurchase program in each of the three months ended March 31, 2013 and 2012;

 

·                  On March 29, 2013, we acquired certain fee-based businesses from Ocwen for $87.0 million related to Ocwen’s recent acquisition of Homeward, subject to a working capital and net income adjustment to be determined within 90 days of the closing; 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.

 

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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 for the three months ended March 31:

 

 

 

 

 

 

 

% Increase

 

(dollars in thousands, except per share data)

 

2013

 

2012

 

/ (decrease)

 

 

 

 

 

 

 

 

 

Service revenue

 

 

 

 

 

 

 

Mortgage Services

 

$

96,377

 

$

79,320

 

22

 

Financial Services

 

16,132

 

17,760

 

(9

)

Technology Services

 

20,231

 

17,022

 

19

 

Eliminations

 

(5,188

)

(5,633

)

8

 

 

 

127,552

 

108,469

 

18

 

Reimbursable expenses

 

20,266

 

28,705

 

(29

)

Non-controlling interests

 

1,009

 

1,892

 

(47

)

Total revenue

 

148,827

 

139,066

 

7

 

Cost of revenue

 

96,962

 

91,760

 

6

 

Gross profit

 

51,865

 

47,306

 

10

 

Selling, general and administrative expenses

 

18,680

 

17,015

 

10

 

Income from operations

 

33,185

 

30,291

 

10

 

Other income (expense), net:

 

 

 

 

 

 

 

Interest expense

 

(3,212

)

(15

)

N/M

 

Other income (expense), net

 

705

 

(336

)

N/M

 

Total other income (expense), net

 

(2,507

)

(351

)

N/M

 

Income before income taxes and non-controlling interests

 

30,678

 

29,940

 

2

 

Income tax provision

 

(2,151

)

(2,819

)

24

 

Net income

 

28,527

 

27,121

 

5

 

Net income attributable to non-controlling interests

 

(1,009

)

(1,892

)

47

 

Net income attributable to Altisource

 

$

27,518

 

$

25,229

 

9

 

 

 

 

 

 

 

 

 

Margins:

 

 

 

 

 

 

 

Gross profit/service revenue

 

41

%

44

%

 

 

Income from operations/service revenue

 

26

%

28

%

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

Basic

 

$

1.18

 

$

1.08

 

9

 

Diluted

 

$

1.10

 

$

1.02

 

8

 

 

N/M — not meaningful.

 

Revenue

 

We recognized service revenue of $127.6 million for the three months ended March 31, 2013, an 18% increase when compared to the three months ended March 31, 2012.  The continued growth in service revenue was driven by Ocwen’s servicing portfolio growth and growth in the average number of delinquent loans serviced by Ocwen on REALServicing in the three months ended March 31, 2013 compared to the three months ended March 31, 2012, coupled with our ongoing expansion of mortgage and real estate portfolio management services.  Service revenue growth was also driven by an increase in origination related services provided to Lenders One members and growth in the Financial Services segment’s customer relationship management business.  Partially offsetting our service revenue growth was a decline in Financial Services segment revenue in our asset recovery management business. This business was impacted primarily by lower credit card charge-off placements, as credit card delinquencies remain at 18-year lows, according to a report by the American Bankers Association.

 

The decrease in revenue from reimbursable expenses is 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 three months ended March 31, 2013 compared to the three months ended March 31, 2012.

 

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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.

 

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 $97.0 million and $91.8 million for the three months ended March 31, 2013 and 2012, respectively.  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 and ResCap portfolios, 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.  These cost increases were partially offset by lower reimbursable expenses discussed above.

 

Gross profit increased from $47.3 million, representing 44% of service revenue, for the three months ended March 31, 2012 to $51.9 million, representing 41% of service revenue, for the three months ended March 31, 2013.  The increase in gross profit was driven by revenue growth and margin expansion in the Mortgage Services segment, even after incurring the carrying costs to support Mortgage Services’ anticipated growth, partially offset by 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.  Gross profit margins in the Mortgage Services segment improved from 46% for the three months ended March 31, 2012 to 47% for the three months ended March 31, 2013 primarily from workforce and vendor efficiencies.  The higher Technology Services costs offset the improved gross profit margins in our Mortgage Services segment, resulting in a decline in our consolidated gross profit margin.  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 $18.7 million for the three months ended March 31, 2013, a 10% increase when compared to the three months ended March 31, 2012 as 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 three months ended March 31, 2012 to 26% for the three months ended March 31, 2013 as a result of lower gross margins for the reasons mentioned above, partially offset by the slower growth of SG&A compared to service revenue.

 

Other Income (Expense), net

 

Other income (expense), net principally includes interest expense, interest income and equity loss in affiliate.  Interest expense for the three months ended March 31, 2013 increased by $3.2 million from the $200.0 million Senior Secured Term Loan borrowed in the fourth quarter of 2012 (no comparative amount in 2012).  Interest income of $0.9 million from a $75.0 million loan to Ocwen in the fourth quarter of 2012 partially offset the higher interest expense (no comparative amount in 2012).

 

Income Tax Provision

 

We recognized an income tax provision of $2.2 million for the three months ended March 31, 2013.  The 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 three months ended March 31, 2013 was 7.0% compared to 9.4% for the three months ended March 31, 2012. The lower effective tax rate in 2013 is 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.

 

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Table of Contents

 

SEGMENT RESULTS OF OPERATIONS

 

The following section provides a discussion of pretax results of operations of our business segments for the three months ended March 31, 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 professional 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 March 31, 2013

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

Mortgage

 

Financial

 

Technology

 

Items and

 

Consolidated

 

(dollars in thousands)

 

Services

 

Services

 

Services

 

Eliminations

 

Altisource

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

Service revenue

 

$

96,377

 

$

16,132

 

$

20,231

 

$

(5,188

)

$

127,552

 

Reimbursable expenses

 

20,062

 

204

 

 

 

20,266

 

Non-controlling interests

 

1,009

 

 

 

 

1,009

 

 

 

117,448

 

16,336

 

20,231

 

(5,188

)

148,827

 

Cost of revenue

 

72,369

 

12,026

 

17,112

 

(4,545

)

96,962

 

Gross profit

 

45,079

 

4,310

 

3,119

 

(643

)

51,865

 

Selling, general and administrative expenses

 

5,458

 

2,850

 

1,865

 

8,507

 

18,680

 

Income from operations

 

39,621

 

1,460

 

1,254

 

(9,150

)

33,185

 

Other income (expense), net

 

(173

)

(3

)

4

 

(2,335

)

(2,507

)

Income before income taxes and non-controlling interests

 

$

39,448

 

$

1,457

 

$

1,258

 

$

(11,485

)

$

30,678

 

 

 

 

 

 

 

 

 

 

 

 

 

Margins:

 

 

 

 

 

 

 

 

 

 

 

Gross profit/service revenue

 

47

%

27

%

15

%

N/M

 

41

%

Income from operations/service revenue

 

41

%

9

%

6

%

N/M

 

26

%

 

 

 

 

 

 

 

 

 

 

 

 

Transactions with related parties: