Form 10-Q
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
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 þ 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 þ 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 o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of October 15, 2011, there were 23,850,249 outstanding shares of the registrant’s shares of beneficial interest (excluding 1,562,499 shares held as treasury stock).
 
 

 

 


 

Table of Contents
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
FORM 10-Q
         
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 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 

 


Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.  
Interim Condensed Consolidated Financial Statements (Unaudited)
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, Except per Share Data)
                 
    September 30,     December 31,  
    2011     2010  
 
ASSETS
Current Assets:
               
Cash and Cash Equivalents
  $ 21,250     $ 22,134  
Accounts Receivable, net
    50,239       53,495  
Prepaid Expenses and Other Current Assets
    6,793       13,076  
Deferred Tax Asset, net
    2,328       551  
 
           
Total Current Assets
    80,610       89,256  
 
               
Restricted Cash
    1,222       1,045  
Premises and Equipment, net
    22,626       17,493  
Deferred Tax Asset, net
          1,206  
Intangible Assets, net
    67,066       72,428  
Goodwill
    14,915       11,836  
Investment in Equity Affiliate
    14,645        
Other Non-current Assets
    8,645       4,536  
 
           
Total Assets
  $ 209,729     $ 197,800  
 
           
 
               
LIABILITIES AND EQUITY
Current Liabilities:
               
Accounts Payable and Accrued Expenses
  $ 33,697     $ 35,384  
Capital Lease Obligations — Current
    643       680  
Other Current Liabilities
    8,151       5,616  
 
           
Total Current Liabilities
    42,491       41,680  
 
               
Capital Lease Obligations — Non-current
    345       852  
Deferred Tax Liability, net
    539        
Other Non-current Liabilities
    2,679       3,370  
 
               
Commitment and Contingencies
               
 
               
Equity:
               
Common Stock ($1.00 par value; 100,000 shares authorized; 25,413 shares issued and 23,979 outstanding in 2011; 25,413 shares issued and 24,881 outstanding in 2010)
    25,413       25,413  
Retained Earnings
    100,984       58,546  
Additional Paid-in-Capital
    81,406       79,297  
Treasury Stock, at cost ($1.00 par value; 1,434 and 532 shares in 2011 2010, respectively)
    (46,171 )     (14,418 )
 
           
Altisource Equity
    161,632       148,838  
 
               
Non-controlling Interests
    2,043       3,060  
 
           
Total Equity
    163,675       151,898  
 
           
 
               
Total Liabilities and Equity
  $ 209,729     $ 197,800  
 
           
See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, Except Per Share Data)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
 
Revenue
  $ 109,793     $ 77,580     $ 291,731     $ 209,901  
Cost of Revenue
    73,339       48,913       191,385       132,642  
 
                       
 
                               
Gross Profit
    36,454       28,667       100,346       77,259  
Selling, General and Administrative Expenses
    15,329       14,730       45,487       39,275  
 
                       
 
                               
Income from Operations
    21,125       13,937       54,859       37,984  
 
                               
Other Income (Expense), net
    (320 )     698       294       666  
 
                       
 
                               
Income Before Income Taxes and Non-controlling Interests
    20,805       14,635       55,153       38,650  
Income Tax Provision
    (1,843 )     (2,751 )     (5,377 )     (2,029 )
 
                       
 
                               
Net Income
    18,962       11,884       49,776       36,621  
 
                               
Net Income Attributable to Non-controlling Interests
    (1,791 )     (2,052 )     (4,395 )     (4,136 )
 
                       
 
                               
Net Income Attributable to Altisource
  $ 17,171     $ 9,832     $ 45,381     $ 32,485  
 
                       
 
                               
Earnings Per Share:
                               
Basic
  $ 0.71     $ 0.39     $ 1.84     $ 1.30  
 
                       
Diluted
  $ 0.67     $ 0.37     $ 1.76     $ 1.24  
 
                       
 
                               
Weighted Average Shares Outstanding:
                               
Basic
    24,341       25,318       24,602       25,080  
 
                       
Diluted
    25,489       26,544       25,720       26,168  
 
                       
 
                               
Transactions with Related Parties Included Above:
                               
Revenue
  $ 63,827     $ 39,459     $ 166,311     $ 104,494  
Selling, General and Administrative Expenses
  $ 506     $ 223     $ 1,352     $ 811  
See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)
                                                                 
    Altisource Equity     Non-                
                    Retained     Additional     Treasury     controlling             Comprehensive  
    Common Stock     Earnings     Paid-in Capital     Stock, at Cost     Interests     Total     Income  
 
                                                               
Balance, December 31, 2009
    24,145     $ 24,145     $ 11,665     $ 50,538     $     $     $ 86,348        
Net Income
                32,485                   4,136       36,621     $ 36,621  
Acquisition of MPA
    959       959             22,941             3,268       27,168        
Contributions from Non-controlling Interest Holders
                                  28       28        
Distributions to Non-controlling Interest Holders
                                  (5,207 )     (5,207 )      
 
                                                               
Share-based Compensation Expense
                      2,134                   2,134        
Exercise of Stock Options
    298       298             2,708                   3,006        
Delivery of Vested Restricted Stock
    11       11                               11        
Repurchase of Shares
                            (2,311 )           (2,311 )      
 
                                               
Balance, September 30, 2010
    25,413     $ 25,413     $ 44,150     $ 78,321     $ (2,311 )   $ 2,225     $ 147,798     $ 36,621  
 
                                               
 
                                                               
Balance, December 31, 2010
    25,413     $ 25,413     $ 58,546     $ 79,297     $ (14,418 )   $ 3,060     $ 151,898        
Net Income
                45,381                   4,395       49,776     $ 49,776  
Contributions from Non-controlling Interest Holders
                                  31       31        
Distributions to Non-controlling Interest Holders
                                  (5,443 )     (5,443 )      
Share-based Compensation Expense
                      2,109                   2,109        
Exercise of Stock Options
                (2,943 )           3,718             775        
Repurchase of Shares
                            (35,471 )           (35,471 )      
 
                                               
Balance, September 30, 2011
    25,413     $ 25,413     $ 100,984     $ 81,406     $ (46,171 )   $ 2,043     $ 163,675     $ 49,776  
 
                                               
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)
                 
    Nine Months Ended  
    September 30,  
    2011     2010  
Cash Flows from Operating Activities:
               
Net Income
  $ 49,776     $ 36,621  
Reconciling Items:
               
Depreciation and Amortization
    6,174       5,015  
Amortization of Intangible Assets
    3,952       4,089  
Share-based Compensation Expense
    2,109       2,134  
Equity in Losses of Affiliate
    355        
Bad Debt Expense
    999       988  
Deferred Income Taxes
    (32 )     (1,040 )
Changes in Operating Assets and Liabilities, net of Acquisitions:
               
Accounts Receivable
    2,546       (14,019 )
Prepaid Expenses and Other Current Assets
    5,066       (1,464 )
Other Assets
    (4,109 )     (2,594 )
Accounts Payable and Accrued Expenses
    71       1,422  
Other Current and Non-current Liabilities
    1,844       2,109  
 
           
 
               
Net Cash Flows from Operating Activities
    68,751       33,261  
 
           
 
               
Cash Flows from Investing Activities:
               
Additions to Premises and Equipment
    (11,291 )     (8,135 )
Acquisition of Business, net of Cash Acquired
    (2,515 )     (26,830 )
Investment in Equity Affiliate
    (15,000 )      
Change in Restricted Cash
    (177 )     (779 )
 
           
 
               
Net Cash Flows from Investing Activities
    (28,983 )     (35,744 )
 
           
 
               
Cash Flows from Financing Activities:
               
Principal Payments on Capital Lease Obligations
    (544 )     (463 )
Proceeds from Stock Option Exercises
    775       3,017  
Purchase of Treasury Stock
    (35,471 )     (2,311 )
Contributions from Non-controlling Interests
    31       28  
Distributions to Non-controlling Interests
    (5,443 )     (5,207 )
 
           
 
               
Net Cash Flows from Financing Activities
    (40,652 )     (4,936 )
 
           
 
               
Net Increase (Decrease) in Cash and Cash Equivalents
    (884 )     (7,419 )
Cash and Cash Equivalents at the Beginning of the Year
    22,134       30,456  
 
           
 
               
Cash and Cash Equivalents at the End of the Period
  $ 21,250     $ 23,037  
 
           
 
               
Supplemental Cash Flow Information
               
Interest Paid
  $ 65     $  
Income Taxes (Received) Paid, net
  $ (2,684 )   $ 1,724  
 
               
Non-Cash Investing and Financing Activities
               
Shares issued in Connection with Acquisition
  $     $ 23,900  
Reduction in Income Tax Payable from Tax Amortizable Goodwill
  $     $  
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
Altisource Portfolio Solutions S.A., together with its subsidiaries, (which may be referred to as Altisource, the Company, we, us or our) is a 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 publicly traded on the NASDAQ Global Select market under the symbol ASPS. We were incorporated under the laws of Luxembourg on November 4, 1999 as Ocwen Luxembourg S.à r.l., renamed Altisource Portfolio Solutions S.à r.l. on May 12, 2009 and converted into Altisource Portfolio Solutions S.A. on June 5, 2009. We became a publicly traded company as of August 10, 2009 (the “Separation”). Prior to the Separation, our businesses were wholly-owned by Ocwen Financial Corporation (“Ocwen”).
We conduct our operations through three reporting segments: Mortgage Services, Financial Services and Technology Services. In addition, we report our corporate related expenditures as a separate segment (see Note 17 for a description of our business segments).
Basis of Presentation
Our condensed consolidated financial statements include the assets and liabilities, revenues and expenses directly attributable to our operations. All significant inter-company and inter-segment transactions and accounts have been eliminated upon consolidation. Certain amounts disclosed in prior period statements have been reclassified to conform to the current period presentation.
In February 2010, we acquired the Mortgage Partnership of America, L.L.C. (“MPA”), the manager of a national alliance of community mortgage bankers, correspondent lenders and suppliers of mortgage products and services that does business as 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 determined it 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 condensed consolidated financial statements on a consolidated basis with the interests of the members reflected as Non-controlling Interest on the Condensed Consolidated Balance Sheets. At September 30, 2011, Lenders One had total assets of $3.6 million and liabilities of less than $0.1 million.
We have prepared our condensed consolidated financial statements 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 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, all normal recurring adjustments considered necessary to fairly state the results for the interim periods presented have been included. The preparation of 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 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.
These 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, 2010, filed with the SEC on February 18, 2011, which contains a summary of our significant accounting policies. Certain footnote detail is also omitted from the condensed consolidated financial statements unless there is a material change from the information included in the Form 10-K.
Investment in Equity Affiliate
We utilize the equity method to account for investments in equity securities where we have the ability to exercise significant influence over operating and financial policies of the investee. We include a proportionate share of earnings and/or losses of equity method investees in Equity Income (Loss) in Affiliates, net which is included in Other Income (Expense), net in the Condensed Consolidated Statements of Operations. See Note 8 for additional information.

 

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements
(continued)
Acquisitions
In April 2011, we acquired Springhouse, LLC (“Springhouse”) an appraisal management company that utilizes a nationwide panel of appraisers to provide real estate appraisals principally to mortgage originators, including the members of Lenders One, and real estate asset managers for $1.8 million.
In July 2011, we acquired the assembled workforce of a sub-contractror (“Tracmail”) in India that performed asset recovery services for $2.4 million.
See Note 3 for additional information.
Foreign Currency Translation
Our reporting currency is the U.S. dollar. Other foreign currency assets and liabilities that are considered monetary items are translated at exchange rates in effect at the balance sheet date. Foreign currency revenues and expenses are translated at transaction date exchange rates. These exchange gains and losses are included in the determination of net income.
Fair Value of Financial Instruments
The fair value of financial instruments, which primarily include Cash and Cash Equivalents, Accounts Receivable, net, Restricted Cash and Accounts Payable and Accrued Expenses at September 30, 2011 and December 31, 2010, are carried at amounts that approximate their fair value due to the short-term nature of these amounts.
Additionally, a put option arrangement was issued to the predecessor owners of MPA. The arrangement, which expires in February 2014, allows the holders to put a portion of the Altisource shares issued as consideration to Altisource at a predetermined price. The fair value calculation is deemed to be a Level 3 calculation. The fair value of the put option at September 30, 2011 of $0.1 million was valued using the following assumptions:
         
    Assumptions  
 
       
Risk-free Interest Rate
    0.110% – 0.430 %
Expected Stock Price Volatility
    25% – 37 %
Expected Dividend Yield
     
Expected Option Life (in years)
    0.5 – 2.5  
Contractual Life (in years)
     
Fair Value
     $0.0 – $0.63  
The put option agreement is a written derivative valued similar to stock options and is included within Other Non-current Liabilities on the Condensed Consolidated Balance Sheet. The fair value of the put option agreements will be determined each quarter until such puts are either exercised or forfeited. Any changes in value are included as a component of Other Income (Expense), net in the Condensed Consolidated Statements of Operations.
NOTE 2 — TRANSACTIONS WITH RELATED PARTIES
Ocwen remains our largest customer. Following the date of Separation, Ocwen is contractually obligated to purchase certain Mortgage Services and Technology Services from us under service agreements. These agreements extend for eight years from the Separation, subject to termination under certain provisions. Ocwen is not restricted from redeveloping these services. We settle amounts with Ocwen on a daily, weekly or monthly basis based upon the nature of the services and when the service is completed.

 

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements
(continued)
Ocwen, or services derived from Ocwen’s loan servicing portfolio, as a percentage of each of our segment revenues and as a percentage of consolidated revenues was as follows for the three and nine months ended September 30:
                                 
    Three Months Ended     Nine months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
 
                               
Mortgage Services
    71 %     70 %     73 %     73 %
Technology Services
    38 %     36 %     38 %     36 %
Financial Services
    <1 %     <1 %     <1 %     <1 %
Consolidated Revenue
    58 %     51 %     57 %     50 %
We record revenues we earn from Ocwen under the 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 rates Ocwen pays to other service providers; fees commensurate with market surveys prepared by unaffiliated firms; and prices charged by our competitors. As of January 1, 2011, we modified our pricing for IT Infrastructure Services within our Technology Services segment from a rate card model primarily based on headcount to a fully loaded costs plus mark-up methodology.
Transition Services
In connection with the Separation, Altisource and Ocwen entered into a Transition Services agreement under which services in such areas as human resources, vendor management, corporate services, six sigma, quality assurance, quantitative analytics, treasury, accounting, risk management, legal, strategic planning, compliance and other areas are provided to the counterparty for up to two years from the date of Separation. The agreement was subsequently extended in August 2011 for certain services for an additional year. For the nine months ended September 30, 2011 and 2010, Altisource billed Ocwen $1.7 million and $1.2 million respectively ($0.8 million and $0.5 million for the third quarter of 2011 and 2010, respectively), and Ocwen billed Altisource $1.4 million and $0.8 million respectively ($0.5 million and $0.2 million for the third quarter of 2011 and 2010, respectively) for services provided under this agreement. These amounts are reflected as a component of Selling, General and Administrative Expenses in the Condensed Consolidated Statements of Operations.
NOTE 3 — ACQUISITIONS
The results of operations of the following acquisitions have been included in our consolidated results from the respective acquisition dates. The acquisitions did not have a material effect on our financial position, results of operations or cash flows.
Acquisition-related transaction costs are included in Selling, General and Administrative Expenses in the Consolidated Statements of Operations.
Springhouse
In April 2011, we acquired Springhouse an appraisal management company that utilizes a nationwide panel of appraisers to provide real estate appraisals principally to mortgage originators, including the members of Lenders One, and real estate asset managers.

 

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements
(continued)
Consideration for the transaction consisted of the amounts provided in the table below. The working capital amount is subject to additional revision in the fourth quarter which is not expected to be material:
         
(in thousands)   Consideration  
 
       
Cash
  $ 1,900  
Non-compete agreement
    100  
Working Capital Adjustment
    (215 )
 
     
Total Consideration
  $ 1,785  
 
     
The purchase consideration based on estimates of fair value of the assets acquired and the liabilities assumed is follows:
         
(in thousands)        
 
Accounts Receivable
  $ 108  
Premises and Equipment
    16  
Identifiable Intangible Assets
    1,180  
Goodwill
    701  
 
     
 
    2,005  
Accounts Payable and Accrued Expenses
    (220 )
 
     
Total Purchase Price
  $ 1,785  
 
     
Management has assigned the following lives to identified assets acquired as a result of the acquisition:
         
    Estimated Life  
    (in Years)  
 
       
Premises and Equipment
    2 – 5  
Trademarks(1)
    4  
Customer Lists(1)
    6  
Non-compete(1)
    2  
Goodwill
  Indefinite  
     
(1)  
The identifiable assets are subject to amortization on a straight-line basis as this best approximates the benefit period related to these assets.
The goodwill arising from the Springhouse acquisition assigned to our Mortgage Services segment relates principally to in-place workforce and our ability to go to market more quickly with a retail origination appraisal business. All goodwill and intangible assets related to the acquisition are expected to be amortizable and deductible for income tax purposes.
Tracmail
In July 2011, we acquired the assembled workforce of a sub-contractror in India that performed asset recovery services. Prior to acquisition, the costs paid to the sub-contractor were included in Outside Fees and Services (included in Cost of Revenue in the Condensed Consolidated Financial Statements).

 

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements
(continued)
Consideration for the transaction consisted of:
         
(in thousands)   Consideration  
 
       
Total Consideration
  $ 2,378  
Obligations Assumed, net
    (1,648 )
 
     
Cash Consideration, net
  $ 730  
 
     
The purchase consideration based on estimates of fair value of the assets acquired and the liabilities assumed is follows:
         
(in thousands)        
 
Accounts Receivable
  $ 181  
Goodwill
    2,378  
 
     
 
    2,559  
Accounts Payable and Accrued Expenses
    (1,829 )
 
     
Cash Consideration, net
  $ 730  
 
     
Management has assigned the following lives to identified assets acquired as a result of the acquisition:
     
    Estimated Life
    (in Years)
 
   
Goodwill
  Indefinite
The goodwill arising from the Tracmail acquisition assigned to our Financial Services segment relates principally to in-place workforce and is expected to be amortizable and deductible for income tax purposes.
NOTE 4 — ACCOUNTS RECEIVABLE, NET
Accounts Receivable, net consists of the following:
                 
    September 30,     December 31,  
(in thousands)   2011     2010  
 
               
Third-party Accounts Receivable
  $ 17,268     $ 19,039  
Unbilled Fees
    30,564       32,055  
Receivable from Ocwen
    3,881       3,950  
Receivable from Correspondent One
    55        
Other Receivables
    548       583  
 
           
 
    52,316       55,627  
Allowance for Doubtful Accounts
    (2,077 )     (2,132 )
 
           
 
               
Total
  $ 50,239     $ 53,495  
 
           
Unbilled Fees consist primarily of Asset Management and Default Management Services for which we recognize revenues over the service delivery period but bill following completion of the service.

 

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements
(continued)
NOTE 5 — PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid Expenses and Other Current Assets consist of the following:
                 
    September 30,     December 31,  
(in thousands)   2011     2010  
 
               
Prepaid Expenses
  $ 5,954     $ 5,134  
Income Tax Receivable
          7,327  
Other Current Assets
    839       615  
 
           
 
               
Total
  $ 6,793     $ 13,076  
 
           
NOTE 6 — PREMISES AND EQUIPMENT, NET
Premises and Equipment, net which includes amounts recorded under capital leases, consists of the following:
                 
    September 30,     December 31,  
(in thousands)   2011     2010  
 
               
Computer Hardware and Software
  $ 37,287     $ 32,931  
Office Equipment and Other
    12,910       9,717  
Furniture and Fixtures
    3,628       2,226  
Leasehold Improvements
    6,843       4,501  
 
           
 
    60,668       49,375  
Less: Accumulated Depreciation and Amortization
    (38,042 )     (31,882 )
 
           
 
               
Total
  $ 22,626     $ 17,493  
 
           
Depreciation and amortization expense, inclusive of capital lease obligations, amounted to $6.2 million and $5.0 million for the nine months ended September 30, 2011 and 2010, respectively ($2.1 million and $1.8 million for the third quarter of 2011 and 2010, 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.

 

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements
(continued)
NOTE 7 — GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
The following is a summary showing the balance of goodwill by segment:
                                 
    Mortgage     Financial     Technology        
(in thousands)   Services     Services     Services     Total  
 
                               
Balance, December 31, 2010
  $ 10,218     $     $ 1,618     $ 11,836  
Acquisition of Springhouse
    701                   701  
Acquisition of Tracmail
          2,378             2,378  
 
                       
 
                               
Balance, September 30, 2011
  $ 10,919     $ 2,378     $ 1,618     $ 14,915  
 
                       
Intangible Assets, Net
Intangible Assets, net consists of the following:
                                                         
    Weighted                    
    Average                    
    Estimated     Gross Carrying Amount     Accumulated Amortization     Net Book Value  
    Useful Life     September 30,     December 31,     September 30,     December 31,     September 30,     December 31,  
(dollars in thousands)   (Years)     2011     2010     2011     2010     2011     2010  
 
                                                       
Definite-lived Intangible
                                                       
Assets
                                                       
Trademarks
    16     $ 10,614     $ 10,200     $ 3,095     $ 2,346     $ 7,519     $ 7,854  
Customer Lists
    19       38,366       37,700       11,677 (a)     7,447       26,689       30,253  
Operating Agreement
    20       35,000       35,000       2,917       1,604       32,083       33,396  
Non-compete Agreement
    4       1,300       1,200       525       275       775       925  
 
                                         
 
                                                       
Total Intangible Assets
          $ 85,280     $ 84,100     $ 18,214     $ 11,672     $ 67,066     $ 72,428  
 
                                         
     
(a)  
Prior to our acquisition of Nationwide Credit, Inc. (“NCI”) in 2007, NCI completed an acquisition which created tax-deductible goodwill that amortizes for tax purposes over time. When we acquired NCI in 2007, we recorded a lesser amount of goodwill for financial reporting purposes than what had previously been recorded at NCI for tax purposes. This difference between the amount of goodwill recorded for financial reporting purposes and the amount recorded for taxes is referred to as “Component 2” goodwill and it resulted in our recording periodic reductions first to our book goodwill balance in our consolidated financial statements. As our book goodwill balance was fully written off at December 31, 2010, we continue to amortize the remaining Component 2 goodwill for U.S. tax purposes by reducing certain intangible assets by the remaining tax benefits of the Component 2 goodwill as they are realized in our tax returns. The amount amortized was $2.6 million for the nine months ended September 30, 2011. The balance of Component 2 goodwill remaining was $7.1 million as of September 30, 2011 which should generate $4.3 million of reductions of intangible assets when the benefit can be realized for U.S. tax purposes.

 

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements
(continued)
Amortization expense for definite lived intangible assets was $4.0 million and $4.1 million for the nine months ended September 30, 2011 and 2010, respectively ($1.3 million and $1.4 million for the third quarter of 2011 and 2010, respectively). Amortization expense is estimated to be $5.3 million for 2011, $5.0 million for 2012, $4.8 million for 2013, $4.5 million for 2014 and $4.4 million for 2015.
NOTE 8 — INVESTMENT IN EQUITY AFFILIATE
Correspondent One S.A. (“Correspondent One”) facilitates the purchase of 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. We have significant influence over the general operations of Correspondent One consistent with our 49% ownership level and therefore account for our investment under the equity method. We have no additional funding commitments to Correspondent One.
Correspondent One is in the initial phases of building its operations and therefore is expected to operate at a loss into 2012. The Net loss on this investment using the equity method was $0.4 million for the nine months ended September 30, 2011 (all in the third quarter). The following table presents summarized financial information for Correspondent One which had no revenues as of September 30th as no loans were sold:
         
    Nine Months Ended  
(in thousands)   September 30, 2011  
 
       
Net loss
  $ (729 )
 
       
    September 30, 2011  
Current Assets
  $ 30,239  
Current Liabilities
    217  
Equity
    30,022  
NOTE 9 — OTHER NON-CURRENT ASSETS
Other Non-Current Assets consists of the following:
                 
    September 30,     December 31,  
(in thousands)   2011     2010  
 
               
Security Deposits
  $ 6,871     $ 3,047  
Unbilled Fees
    1,734       1,449  
Other
    40       40  
 
           
 
               
Total
  $ 8,645     $ 4,536  
 
           

 

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements
(continued)
NOTE 10 — ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts Payable and Accrued Expenses consists of the following:
                 
    September 30,     December 31,  
(in thousands)   2011     2010  
 
               
Accounts Payable
  $ 3,549     $ 5,960  
Accrued Expenses — General
    12,859       11,189  
Accrued Salaries and Benefits
    13,278       12,010  
Income Taxes Payable
    1,685       3,807  
Payable to Ocwen
    2,326       2,418  
 
           
 
               
Total
  $ 33,697     $ 35,384  
 
           
Other Current Liabilities consists of the following:
                 
    September 30,     December 31,  
(in thousands)   2011     2010  
 
               
Deferred Revenue
  $ 2,198     $ 2,542  
Facility Closure Cost Accrual, Current Portion
    129       253  
Collections Due to Clients
    672       726  
Other
    5,152       2,095  
 
           
 
               
Total
  $ 8,151     $ 5,616  
 
           
Facility Closure Costs
During 2009, we accrued facility closure costs (included in Other Current and Other Non-current Liabilities in the Condensed Consolidated Balance Sheet) primarily consisting of lease exit costs (expected to be paid through 2014) and severance for the closure of two facilities. The following table summarizes the activity, all recorded in our Financial Services segment, for the nine months ended September 30, 2011:
         
(in thousands)   Lease Costs  
 
       
Balance, December 31, 2010
  $ 672  
Payments
    (181 )
 
     
Balance, September 30, 2011
    491  
Less: Long-Term Portion
    362  
 
     
 
       
Facility Closure Cost Accrual, Current Portion
  $ 129  
 
     
We do not expect significant additional costs related to the closure of these facilities.

 

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements
(continued)
NOTE 11 — STOCK BASED COMPENSATION
We have issued stock-based awards in the form of stock options for certain employees and officers. We recorded total stock compensation expense of $2.1 million both for the nine months ended September 30, 2011 and 2010 ($0.7 million and $1.2 million for the third quarter of 2011 and 2010, respectively). The compensation expense is principally included in Selling, General and Administrative Expenses in the accompanying Condensed Consolidated Statements of Operations.
Below is a summary of the different types of stock-based awards issued under our stock plans:
Stock Options
Service-based Options. These options are granted at fair market 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 1.1 million service-based awards were outstanding at September 30, 2011.
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, so 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, so 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 September 30, 2011.
The Company granted 0.2 million stock options (at an average price of $33.15) and 0.9 million stock options (at an average price of $23.54) during the nine months ended September 30, 2011 and 2010, respectively.
The fair value of the service-based options was determined using the Black-Scholes options pricing model while 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:
                                 
    September 30, 2011     September 30, 2010  
    Black-Scholes     Binominal     Black-Scholes     Binominal  
 
                               
Risk-free Interest Rate
    1.69%–1.93 %     0.04%–3.03 %     2.82%–3.20 %     0.02%–3.66 %
 
                               
Expected Stock Price Volatility
    48 %     55.70%–55.80 %     48 %     52 %
Expected Dividend Yield
                       
 
                               
Expected Option Life (in years)
    6.25             7        
Contractual Life (in years)
          14             10  
 
                               
Fair Value
  $ 16.33–$17.85     $ 16.91–$20.39     $ 11.71–$13.00     $ 10.05–$12.35  
The following table summarizes the weighted-average fair value of stock options granted, and the total intrinsic value of stock options exercised:
                 
    September 30  
(in thousands, except per share amounts)   2011     2010  
 
               
Weighted-Average Fair Value at Date of Grant Per Share
  $ 17.66     $ 11.60  
Intrinsic Value of Options Exercised
  $ 4,193     $ 5,024  
Fair Value of Options Vested
  $ 2,240     $ 208  
Stock-based compensation expense is recorded net of estimated forfeiture rates ranging from 1% to 3%.

 

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements
(continued)
As of September 30, 2011, estimated unrecognized compensation costs related to share-based payments amounted to $7.7 million which we expect to recognize over a weighted-average remaining requisite service period of approximately 3.2 years.
The following table summarizes activity of our stock options:
                                 
                    Weighted        
            Weighted     Average        
            Average     Contractual     Aggregate  
    Number of     Exercise     Term     Intrinsic Value  
    Options     Price     (in years)     (in thousands)  
 
                               
Outstanding at December 31, 2010
    3,451,613     $ 13.46       7.3     $ 52,641  
 
                           
Granted
    181,000       33.15                  
Exercised
    (206,661 )     11.36                  
Forfeited
    (155,579 )     24.52                  
 
                             
Outstanding at September 30, 2011
    3,270,373     $ 14.15       6.9     $ 69,546  
 
                       
 
                               
Exercisable at September 30, 2011
    1,453,964     $ 10.27       5.9     $ 36,522  
 
                       
Stock Repurchase Authorization
On May 19, 2010, our shareholders authorized us to purchase up to 3.8 million shares of our common stock in the open market. From authorization through September 30, 2011, we have purchased 1.7 million shares of our common stock on the open market at an average price of $31.02, leaving 2.1 million shares still available for purchase under the program.
NOTE 12 — 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 provision of services, reimbursable expenses, technology and telephony expenses as well as depreciation and amortization of operating assets. The components of Cost of Revenue were as follows for the periods ended September 30, 2011 and 2010:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(in thousands)   2011     2010     2011     2010  
 
                               
Compensation and Benefits
  $ 22,497     $ 15,829     $ 59,296     $ 45,519  
Outside Fees and Services
    21,528       15,311       57,221       41,092  
Expense Reimbursements
    21,834       13,369       56,934       33,040  
Technology and Communications
    5,904       3,198       13,439       8,845  
Depreciation and Amortization
    1,576       1,206       4,495       4,146  
 
                       
 
                               
Total
  $ 73,339     $ 48,913     $ 191,385     $ 132,642  
 
                       

 

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements
(continued)
NOTE 13 — SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, General and Administrative Expenses include payroll for personnel employed in executive, sales, marketing, human resources and finance roles. This category also includes occupancy costs, professional fees, depreciation and amortization on non-operating assets. The components of Selling, General and Administrative Expenses were as follows for the periods ended September 30, 2011 and 2010:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(in thousands)   2011     2010     2011     2010  
 
                               
Compensation and Benefits
  $ 5,530     $ 5,250     $ 17,275     $ 13,255  
Professional Services
    1,479       1,812       4,636       5,869  
Occupancy Related Costs
    4,449       4,137       12,008       9,978  
Amortization of Intangible Assets
    1,339       1,450       3,952       4,089  
Depreciation and Amortization
    483       598       1,679       869  
Other
    2,049       1,483       5,937       5,215  
 
                       
 
                               
Total
  $ 15,329     $ 14,730     $ 45,487     $ 39,275  
 
                       
NOTE 14 — OTHER INCOME (EXPENSE), NET
Other Income (Expense), net consists of the following:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(in thousands)   2011     2010     2011     2010  
 
                               
Interest Income
  $ 5     $ 10     $ 27     $ 22  
Interest Expense
    (20 )     (36 )     (67 )     (87 )
Change in Fair Value of Put Option
    70       538       652       445  
Equity Loss in Affiliates, net
    (355 )           (355 )      
Other, net
    (20 )     186       37       286  
 
                       
 
                               
Total
  $ (320 )   $ 698     $ 294     $ 666  
 
                       

 

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements
(continued)
NOTE 15 — EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed by dividing income available to common stockholders 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 earnings per share for the three and nine months ended September 30, 2011 and 2010 are calculated as follows:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(in thousands)   2011     2010     2011     2010  
 
                               
Net Income Attributable to Altisource
  $ 17,171     $ 9,832     $ 45,381     $ 32,485  
 
                       
Weighted-Average Common Shares Outstanding, Basic
    24,341       25,318       24,602       25,080  
Dilutive Effect of Stock Options
    1,148       1,226       1,118       1,085  
Dilutive Effect of Restricted Shares
                      3  
 
                       
Weighted-Average Common Shares Outstanding, Diluted
    25,489       26,544       25,720       26,168  
 
                       
 
                               
Earnings Per Share
                               
Basic
  $ 0.71     $ 0.39     $ 1.84     $ 1.30  
 
                       
Diluted
  $ 0.67     $ 0.37     $ 1.76     $ 1.24  
 
                       
For the three and nine months ended September 30, 2011, an immaterial amount of options that were anti-dilutive have been excluded from the computation of diluted EPS (0.2 million for the three and nine months ended September 30, 2010). These options were anti-dilutive because their exercise price was greater than the average market price of our stock. Also excluded from the computation of diluted EPS for each of the three and nine months ended September 30, 2011 and 2010 are 0.7 million options granted for shares that are issuable upon the achievement of certain market and performance criteria related to our stock price and an annualized rate of return to investors that have not been met at this point.
NOTE 16 — COMMITMENTS AND CONTINGENCIES
Litigation
The Company is from time to time 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 the Company’s financial condition, results of operations or cash flows.
NOTE 17 — 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 that we use to evaluate operating performance and to assess the allocation of our resources by our Chief Executive Officer.

 

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements
(continued)
We classify our businesses into three reportable segments. Mortgage Services consists of mortgage portfolio management services that span the mortgage lifecycle. Financial Services principally consists of unsecured asset recovery and customer relationship management. Technology Services consists of modular, comprehensive integrated technological solutions for loan servicing, vendor management and invoice presentment and payment as well as providing infrastructure support. In addition, our Corporate Items and Eliminations segment includes eliminations of transactions between the reporting segments and this segment also includes costs recognized by us related to corporate support functions such as finance, legal, human resources, six sigma and quality assurances.
In 2011, we reorganized our reporting structure in that certain services that were originally part of the Mortgage Services Segment are now classified as part of Financial Services. Prior periods have been recast to conform with the current year presentation.
Financial information for our segments is as follows:
                                         
    Three Months Ended September 30, 2011  
                            Corporate        
    Mortgage     Financial     Technology     Items and     Consolidated  
(in thousands)   Services     Services     Services     Eliminations     Altisource  
 
                                       
Revenue
  $ 82,170     $ 17,303     $ 14,827     $ (4,507 )   $ 109,793  
Cost of Revenue
    55,106       12,676       9,700       (4,143 )     73,339  
 
                             
Gross Profit
    27,064       4,627       5,127       (364 )     36,454  
Selling, General and Administrative Expenses
    4,227       4,268       756       6,078       15,329  
 
                             
Income (Loss) from Operations
    22,837       359       4,371       (6,442 )     21,125  
Other Income (Expense), net
    (283 )     (9 )     (12 )     (16 )     (320 )
 
                             
Income (Loss) Before Income Taxes
  $ 22,554     $ 350     $ 4,359     $ (6,458 )   $ 20,805  
 
                             
 
                                       
Transactions with Related Parties:
                                       
Revenue
  $ 58,200     $ 66     $ 5,561     $     $ 63,827  
 
                             
Selling, General and Administrative Expenses
  $     $     $     $ 506     $ 506  
 
                             
                                         
    Nine Months Ended September 30, 2011  
                            Corporate        
    Mortgage     Financial     Technology     Items and     Consolidated  
(in thousands)   Services     Services     Services     Eliminations     Altisource  
 
                                       
Revenue
  $ 207,384     $ 54,779     $ 41,115     $ (11,547 )   $ 291,731  
Cost of Revenue
    135,670       39,738       26,479       (10,502 )     191,385  
 
                             
Gross Profit
    71,714       15,041       14,636       (1,045 )     100,346  
Selling, General and Administrative Expenses
    11,663       12,230       3,489       18,105       45,487  
 
                             
Income (Loss) from Operations
    60,051       2,811       11,147       (19,150 )     54,859  
Other Income (Expense), net
    340       (27 )     (39 )     20       294  
 
                             
Income (Loss) Before Income Taxes
  $ 60,391     $ 2,784     $ 11,108     $ (19,130 )   $ 55,153  
 
                             
 
                                       
Transactions with Related Parties:
                                       
Revenue
  $ 150,483     $ 213     $ 15,615     $     $ 166,311  
 
                             
Selling, General and Administrative Expenses
  $     $     $     $ 1,352     $ 1,352  
 
                             

 

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements
(continued)
                                         
    Three Months Ended September 30, 2010  
                            Corporate        
    Mortgage     Financial     Technology     Items and     Consolidated  
(in thousands)   Services     Services     Services     Eliminations     Altisource  
 
                                       
Revenue
  $ 49,523     $ 18,939     $ 12,963     $ (3,845 )   $ 77,580  
Cost of Revenue
    31,383       13,870       7,239       (3,579 )     48,913  
 
                             
Gross Profit
    18,140       5,069       5,724       (266 )     28,667  
Selling, General and Administrative Expenses
    3,899       4,692       1,610       4,529       14,730  
 
                             
Income (Loss) from Operations
    14,241       377       4,114       (4,795 )     13,937  
Other Income (Expense), net
    687       (9 )     (24 )     44       698  
 
                             
Income (Loss) Before Income Taxes
  $ 14,928     $ 368     $ 4,090     $ (4,751 )   $ 14,635  
 
                             
 
                                       
Transactions with Related Parties:
                                       
Revenue
  $ 34,765     $ 34     $ 4,660     $     $ 39,459  
 
                             
Selling, General and Administrative Expenses
  $     $     $     $ 223     $ 223  
 
                             
                                         
    Nine Months Ended September 30, 2010  
                            Corporate        
    Mortgage     Financial     Technology     Items and     Consolidated  
(in thousands)   Services     Services     Services     Eliminations     Altisource  
 
                                       
Revenue
  $ 124,570     $ 58,875     $ 37,422     $ (10,966 )   $ 209,901  
Cost of Revenue
    79,588       42,572       20,555       (10,073 )     132,642  
 
                             
Gross Profit
    44,982       16,303       16,867       (893 )     77,259  
Selling, General and Administrative Expenses
    9,826       12,854       4,040       12,555       39,275  
 
                             
Income (Loss) from Operations
    35,156       3,449       12,827       (13,448 )     37,984  
Other Income (Expense), net
    649       (38 )     (45 )     100       666  
 
                             
Income (Loss) Before Income Taxes
  $ 35,805     $ 3,411     $ 12,782     $ (13,348 )   $ 38,650  
 
                             
 
                                       
Transactions with Related Parties:
                                       
Revenue
  $ 90,749     $ 110     $ 13,635     $     $ 104,494  
 
                             
Selling, General and Administrative Expenses
  $     $     $     $ 811     $ 811  
 
                             

 

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Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis of results of operations (“MD&A”) is a supplement to the accompanying consolidated financial statements and provides additional information on our businesses, current developments, financial condition, cash flows and results of operations. Significant sections of the MD&A are as follows:
Overview. This section, beginning on page 23, provides a description of recent developments we believe are important in understanding the results of operations and financial condition or in understanding anticipated future trends.
Consolidated Results of Operations. This section, beginning on page 24, provides an analysis of our consolidated results of operations for the three and nine months ended September 30, 2011 and 2010. In addition, a brief description is provided of significant transactions and events that affect the comparability of results being analyzed.
Segment Results of Operations. This section, beginning on page 29, provides an analysis of each business segment for the three and nine months ended September 30, 2011 and 2010 as well as our Corporate segment. In addition, we discuss significant transactions, events and trends that may affect the comparability of the results being analyzed.
Liquidity and Capital Resources. This section, beginning on page 40, provides an analysis of our cash flows for the nine months ended September 30, 2011 and 2010. We also discuss restrictions on cash movements, future commitments and capital resources.
FORWARD-LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements that relate to, among other things, our future financial and operating results. In many cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms and other comparable terminology including, but not limited to, the following:
   
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.
Forward-looking statements are not guarantees of future performance and involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially. Important factors that could cause actual results to differ materially from those suggested by the forward-looking statements include, but are not limited to, the risks discussed in the “Risk Factors” section of our Form 10-K for the year ended December 31, 2010 and include the following:
   
our ability to retain and expand our existing customers and attract new customers; and
 
   
governmental regulations, taxes and policies.
We caution you not to place undue reliance on these forward-looking statements which reflect our view only as of the date of this report. We are under no obligation (and expressly disclaim any obligation) to update or alter any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any such statement is based.

 

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OVERVIEW
Our Business
We are a provider of 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 three reportable segments:
Mortgage Services: Consists of services that span the mortgage lifecycle and are typically outsourced by loan servicers and originators. In 2011, we reorganized our reporting structure in that certain services originally part of Component Services and Other in this segment are now classified as part of Customer Relationship Management in our Financial Services segment. Following this change, Component Service and Other was renamed Origination Management Services. Origination Management Services includes MPA, our legacy contract underwriting business and our origination fulfillment operations currently under development. Prior periods have been recast to conform to the current year presentation.
Financial Services: Consists primarily of unsecured asset recovery and customer relationship management. As discussed above, Customer Relationship Management now includes certain services that were originally recorded as part of Mortgage Services.
Technology Services: Consists of modular, comprehensive integrated technological solutions for loan servicing, vendor management, invoice presentment and payment as well as providing infrastructure support. In 2011 we began to report our Consumer Analytics group within Technology Services. Previously this group was included in Corporate.
Stock Repurchase Plan
In May 2010, our shareholders authorized us to purchase 15% of our outstanding share capital, or 3.8 million shares of common stock, in the open market. From authorization through September 30, 2011, we have purchased 1.7 million shares of common stock on the open market at an average price of $31.02, leaving 2.1 million shares available for purchase under the program.
Acquisitions
In April 2011, we acquired Springhouse, an appraisal management company that utilizes a nationwide panel of appraisers to provide real estate appraisals principally to mortgage originators, including the members of Lenders One, and real estate asset managers. In July 2011, we acquired the assembled workforce of a sub-contractor in India that performs asset recovery services. See Note 3 to the condensed consolidated financial statements.
Factors Affecting Comparability
The following additional items may impact the comparability of our results:
   
In February 2010, we acquired all of the outstanding membership interest of MPA which was formed with the purpose of managing Lenders One (see Note 1 to the condensed consolidated financial statements). The results of operations of Lenders One have been consolidated under the variable interest model since the acquisition date; and
 
   
Effective January 2011, we modified our pricing for IT Infrastructure Services within our Technology Services segment from a rate card model primarily based on headcount to a fully loaded cost plus mark-up methodology. This new model applies to the infrastructure amounts charged to Ocwen as well as internal allocations of infrastructure cost. The impact of this change is discussed further in the Technology Services segment.

 

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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. In evaluating performance, we neutralize the impact of pass-through items for which we earn no margin by excluding reimbursable expenses and non-controlling interests where appropriate and calculating all margins based upon Service Revenue.
The following table sets forth information regarding our results of operations for the periods ended September 30, 2011 and 2010:
                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
                    % Better                     % Better  
(in thousands, except per share amounts)   2011     2010     /(worse)     2011     2010     /(worse)  
 
                                               
Service Revenue
  $ 86,169     $ 62,159       39     $ 230,403     $ 172,725       33  
Reimbursable Expenses
    21,833       13,369       63       56,933       33,040       72  
Cooperative Non-controlling Interest
    1,791       2,052       (13 )     4,395       4,136       6  
 
                                       
Total Revenue
    109,793       77,580       42       291,731       209,901       39  
 
                                               
Cost of Revenue
    73,339       48,913       (50 )     191,385       132,642       (44 )
 
                                       
 
                                               
Gross Profit
    36,454       28,667       27       100,346       77,259       30  
 
                                               
Gross Profit/Service Revenue
    42 %     46 %             44 %     45 %        
 
                                               
Selling, General and Administrative Expenses
    15,329       14,730       (4 )     45,487       39,275       (16 )
 
                                       
Income from Operations
    21,125       13,937       52       54,859       37,984       44  
 
                                               
Income from Operations/Service Revenue
    25 %     22 %             24 %     22 %        
 
                                               
Other Expense, net
    (320 )     698       (146 )     294       666       (56 )
 
                                       
Income Before Income Taxes and Non-controlling Interests
    20,805       14,635       42       55,153       38,650       43  
Income Tax (Provision) Benefit
    (1,843 )     (2,751 )     33       (5,377 )     (2,029 )     (165 )
 
                                   
 
                                               
Net Income
    18,962       11,884       60       49,776       36,621       36  
 
                                               
Net Income Attributable to Non-controlling Interests
    (1,791 )     (2,052 )     13       (4,395 )     (4,136 )     (6 )
 
                                       
Net Income Attributable to Altisource
  $ 17,171     $ 9,832       75     $ 45,381     $ 32,485       40  
 
                                       
 
                                               
Earnings Per Share
                                               
Basic
  $ 0.71     $ 0.39       82     $ 1.84     $ 1.30       42  
 
                                       
Diluted
  $ 0.67     $ 0.37       81     $ 1.76     $ 1.24       42  
 
                                       
 
                                               
Transactions with Related Parties:
                                               
Revenue
  $ 63,827     $ 39,459       62     $ 166,311     $ 104,494       59  
 
                                       
Selling, General and Administrative Expenses
  $ 506     $ 223       127     $ 1,352     $ 811       67  
 
                                       

 

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We recognized $230.4 million of Service Revenue for the nine months ended September 30, 2011, a 33% increase over the prior year. For the quarter, we recognized $86.2 million of Service Revenue, a 19% increase when compared to the quarter ended June 30, 2011. This sequential growth in Service Revenue was primarily due to an increase in the fulfillment of services to properties in pre-foreclosure (e.g., valuation, pre-foreclosure inspections), seasonally higher sales of real estate owned (REO) properties and expansion of insurance services. Sequential growth in Service Revenue for Technology Services improved due to Ocwen’s acquisition of the Litton platform and completion of certain development projects. The decline for Financial Services was principally due to seasonality.
We recognized $45.4 million in Income Attributable to Altisource or $1.76 per diluted share, for the nine months ended September 30, 2011, a 42% increase in diluted earnings per share over the same period in 2010. For the quarter, Income Attributable to Altisource was $17.2 million or $0.67 per diluted share, a 29% increase in diluted earnings per share when compared to the quarter ended June 30, 2011.
Gross margin for the quarter remained flat when compared to the quarter ended June 30, 2011 as the increase in gross margin attributable to Technology Services was offset by a decline in gross margin attributable to Mortgage Services. This was due to Mortgage Services segment’s mix of services delivered and the build out of infrastructure to support Ocwen’s September 1, 2011 boarding of the Litton portfolio. As a result of the boarding of the Litton portfolio, we delivered in the third quarter a proportionately higher percentage of services to homes in pre-foreclosure. For these services, the margins are generally lower. The delivery of pre-foreclosure services, however, is a strong leading indicator of future referrals of higher margin foreclosure and asset management services.
From an operating margin perspective, margins on a consolidated basis improved in the quarter when compared to the quarter ended June 30, 2011 by 300 basis points to 25% of Service Revenue. This reflects faster growth in the higher margin Mortgage Services segment as well as leveraging of the Corporate infrastructure.
For the fourth quarter, Service Revenue should continue to improve when compared to the third quarter based principally upon the expected growth in foreclosure and asset management related referrals.
Revenue
The following table presents our Revenue for the periods ended September 30, 2011 and 2010:
                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
                    % Better                     % Better  
(in thousands)   2011     2010     /(worse)     2011     2010     /(worse)  
 
                                               
Mortgage Services:
                                               
Service Revenue
  $ 58,915     $ 34,909       69     $ 147,768     $ 89,623       65  
Reimbursable Expenses
    21,464       12,562       71       55,221       30,811       79  
Cooperative Non-controlling Interest
    1,791       2,052       (13 )     4,395       4,136       6  
 
                                       
Mortgage Services — Total Revenue
    82,170       49,523       66       207,384       124,570       66  
 
                                               
Financial Services:
                                               
Service Revenue
    16,934       18,132       (7 )     53,067       56,646       (6 )
Reimbursable Expenses
    369       807       (54 )     1,712       2,229       (23 )
 
                                       
Financial Services — Total Revenue
    17,303       18,939       (9 )     54,779       58,875       (7 )
 
                                               
Technology Services
    14,827       12,963       14       41,115       37,422       10  
 
                                               
Eliminations
    (4,507 )     (3,845 )     (17 )     (11,547 )     (10,966 )     (5 )
 
                                       
Total Revenue
  $ 109,793     $ 77,580       42     $ 291,731     $ 209,901       39  
 
                                       
 
                                               
Transactions with Related Parties:
                                               
Mortgage Services
  $ 58,200     $ 34,765       67     $ 150,483     $ 90,749       66  
Financial Services
    66       34       94       213       110       94  
Technology Services
    5,561       4,660       19       15,615       13,635       15  

 

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In evaluating our performance, we utilize Service Revenue which consists of amounts attributable to our fee based services. Reimbursable Expenses and Cooperative Non-controlling Interests are pass-through items for which we earn no margin. Reimbursable Expenses consists of amounts that 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. Cooperative Non-controlling Interests is attributable to the members of Lenders One.
The growth in Service Revenue continues to be primarily attributable to Mortgage Services for the periods presented and is the result of the development of mortgage and real estate portfolio management services across our national platform and the growth in loans serviced by Ocwen. The Technology Services segment also benefited from the growth in loans serviced by Ocwen principally due to revenue tied to loan volume. Financial Services revenue declined in both periods presented compared to the same periods in 2010 principally due to a decline in revenues from one of the segment’s largest customers. The decline was in part the result of the client shifting work to our global delivery platform.
Our revenues are seasonal. More specifically, Financial Services 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 fall and winter months and highest during spring and summer months.
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 telephony expenses as well as depreciation and amortization of operating assets. The components of Cost of Revenue were as follows for the periods ended September 30, 2011 and 2010:
                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
                    % Better                     % Better  
(in thousands)   2011     2010     /(worse)     2011     2010     /(worse)  
 
                                               
Compensation and Benefits
  $ 22,497     $ 15,829       (42 )   $ 59,296     $ 45,519       (30 )
Outside Fees and Services
    21,528       15,311       (41 )     57,221       41,092       (39 )
Reimbursable Expenses
    21,834       13,369       (63 )     56,934       33,040       (72 )
Technology and Communications
    5,904       3,198       (85 )     13,439       8,845       (52 )
Depreciation and Amortization
    1,576       1,206       (31 )     4,495       4,146       (8 )
 
                                       
Cost of Revenue
  $ 73,339       48,913       (50 )   $ 191,385       132,642       (44 )
 
                                       
 
                                               
Gross Profit Percentage:
                                               
Gross Profit/Service Revenue
    42 %     46 %             44 %     45 %        
 
                                       
For the nine months ended September 30, 2011, our gross margin percentage has remained fairly stable although we have and continue to make significant investments in personnel and technology to support our growth plans. Our gross margins are impacted by the timing and mix of services delivered which, in turn, are impacted by the timing of when loans are boarded by Ocwen. In the third quarter of 2011, we saw a significant increase in services related to homes in pre-foreclosure (e.g., valuation and inspection services) which is typical for newly boarded loan portfolios but for which gross margins are lower when compared to other types of services we deliver within our Mortgage Services segment. The provision of pre-foreclosure services though is generally a leading indicator for default and asset management referrals.
When compared to the same periods in 2010, the substantial increase in Cost of Revenue for the three and nine months ended September 30, 2011 is consistent with the growth in our Mortgage Services segment as we expanded our mortgage and real estate portfolio management services nationally and increased our personnel to support the growth in portfolios serviced by Ocwen.
Compensation and Benefits costs for the quarter ended September 30, 2011 increased sequentially as expected as we hired significant personnel to support the boarding of the Litton portfolio by Ocwen on September 1, 2011 and as we continue to invest in personnel for our new insurance and origination services that are under development and/or roll-out.

 

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Outside Fees and Services reflects external vendor costs for which we are not reimbursed. These costs are principally incurred by our Mortgage Services segment in the provision of valuation and pre-foreclosure services. The increase in both periods presented over the same periods in 2010 reflects the growth in Ocwen’s portfolio. Sequentially, these costs increased due to the delivery of pre-foreclosure services as a result of the boarding of the Litton platform by Ocwen.
Technology and Communication costs continue to increase due to ongoing investment in personnel and licenses to support the growth of the businesses.
Selling, General and Administrative Expenses
Selling, General and Administrative Expenses include payroll, employee benefits, occupancy and other costs associated with personnel employed in executive, sales, marketing, human resources and finance roles. This category also includes professional fees, depreciation and amortization on non-operating assets. The components of Selling, General and Administrative Expenses were as follows for the periods ended September 30, 2011 and 2010:
                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
                    % Better                     % Better  
(in thousands)   2011     2010     /(worse)     2011     2010     /(worse)  
 
                                               
Compensation and Benefits
  $ 5,530     $ 5,250       (5 )   $ 17,275     $ 13,255       (30 )
Professional Services
    1,479       1,812       18       4,636       5,869       21  
Occupancy Related Costs
    4,449       4,137       (8 )     12,008       9,978       (20 )
Amortization of Intangible Assets
    1,339       1,450       8       3,952       4,089       3  
Depreciation and Amortization
    483       598       19       1,679       869       (93 )
Other
    2,049       1,483       (38 )     5,937       5,215       (14 )
 
                                       
Total Selling, General & Administrative Expenses
  $ 15,329     $ 14,730       (4 )   $ 45,487     $ 39,275       (16 )
 
                                       
 
                                               
Operating Percentage:
                                               
Income from Operations/Service Revenue
    25 %     22 %             24 %     22 %        
 
                                       
Our operating margin percentage in both periods increased over the same periods in 2010. Selling, General and Administrative costs have stabilized during 2011 even as our businesses have substantially grown. Thus leveraging of our Corporate infrastructure costs along with growth in our more profitable segments has contributed to the increase in margins.

 

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Income Before Income Tax
The following table presents income before income tax including the amount attributable to Altisource by segment:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(in thousands)   2011     2010     2011     2010  
 
                               
Mortgage Services:
                               
Income Before Income Taxes
  $ 22,554     $ 14,928     $ 60,391     $ 35,805  
Non-controlling Interests
    (1,791 )     (2,052 )     (4,395 )     (4,136 )
 
                       
Pretax Income
  $ 20,763     $ 12,876     $ 55,996     $ 31,669  
As Percent of Service Revenue
    35 %     37 %     38 %     35 %
 
                               
Financial Services:
                               
Income Before Income Taxes
  $ 350     $ 368     $ 2,784     $ 3,411  
As Percent of Service Revenue
    2 %     2 %     5 %     6 %
 
                               
Technology Services:
                               
Income Before Income Taxes
  $ 4,359     $ 4,090     $ 11,108     $ 12,782  
As Percent of Revenue
    29 %     32 %     27 %     34 %
 
                               
Corporate:
                               
Loss Before Income Taxes
  $ (6,458 )   $ (4,751 )   $ (19,130 )   $ (13,348 )
 
                               
Consolidated:
                               
Income Before Income Taxes
  $ 20,805     $ 14,635     $ 55,153     $ 38,650  
Non-controlling Interests
    (1,791 )     (2,052 )     (4,395 )     (4,136 )
 
                       
Pretax Income
  $ 19,014     $ 12,583     $ 50,758     $ 34,514  
 
                       
 
                               
As Percent of Service Revenue
    22 %     20 %     22 %     20 %
 
                       
On a consolidated basis, income before income tax attributable to Altisource grew in both periods over the same periods in 2010 principally as a result of the development of mortgage and real estate portfolio management services and the growth of Ocwen’s servicing portfolio.
Income Tax Provision
The Company recognized an income tax provision of $5.4 million for the nine months ended September 30, 2011 representing an effective tax rate of 9.7%. The income tax provision computed by applying the Luxembourg statutory tax rate of 28.8% differs from the effective tax rate primarily because of the effect of a favorable tax ruling as well as the mix of income and losses in multiple taxing jurisdictions.

 

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SEGMENT RESULTS OF OPERATIONS
The following section provides a discussion of pretax results of operations of our business segments for the three and nine months ended September 30, 2011 and 2010. Transactions between segments are accounted for as third-party arrangements for purposes of presenting Segment Results of Operations. Intercompany transactions primarily consist of information technology infrastructure services and charges for the use of certain REALSuite applications from our Technology Service segment to our other two segments. Generally, we reflect these charges within technology and communication in the segment receiving the services, except for consulting services, which we reflect in professional services.
Financial information for our segments is as follows:
                                         
    Three Months Ended September 30, 2011  
                            Corporate        
    Mortgage     Financial     Technology     Items and     Consolidated  
(in thousands)   Services     Services     Services     Eliminations     Altisource  
 
                                       
Revenue
  $ 82,170     $ 17,303     $ 14,827     $ (4,507 )   $ 109,793  
Cost of Revenue
    55,106       12,676       9,700       (4,143 )     73,339  
 
                             
Gross Profit
    27,064       4,627       5,127       (364 )     36,454  
Selling, General and Administrative Expenses
    4,227       4,268       756       6,078       15,329  
 
                             
Income (Loss) from Operations
    22,837       359       4,371       (6,442 )     21,125  
Other Income (Expense), net
    (283 )     (9 )     (12 )     (16 )     (320 )
 
                             
Income (Loss) Before Income Taxes
  $ 22,554     $ 350     $ 4,359     $ (6,458 )   $ 20,805  
 
                             
 
                                       
Transactions with Related Parties:
                                       
Revenue
  $ 58,200     $ 66     $ 5,561     $     $ 63,827  
 
                             
Selling, General and Administrative Expenses
  $     $     $     $ 506     $ 506  
 
                             
                                         
    Nine Months Ended September 30, 2011  
                            Corporate        
    Mortgage     Financial     Technology     Items and     Consolidated  
(in thousands)   Services     Services     Services     Eliminations     Altisource  
 
                                       
Revenue
  $ 207,384     $ 54,779     $ 41,115     $ (11,547 )   $ 291,731  
Cost of Revenue
    135,670       39,738       26,479       (10,502 )     191,385  
 
                             
Gross Profit
    71,714       15,041       14,636       (1,045 )     100,346  
Selling, General and Administrative Expenses
    11,663       12,230       3,489       18,105       45,487  
 
                             
Income (Loss) from Operations
    60,051       2,811       11,147       (19,150 )     54,859  
Other Income (Expense), net
    340       (27 )     (39 )     20       294  
 
                             
Income (Loss) Before Income Taxes
  $ 60,391     $ 2,784     $ 11,108     $ (19,130 )   $ 55,153  
 
                             
 
                                       
Transactions with Related Parties:
                                       
Revenue
  $ 150,483     $ 213     $ 15,615     $     $ 166,311  
 
                             
Selling, General and Administrative Expenses
  $     $     $     $ 1,352     $ 1,352  
 
                             

 

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    Three Months Ended September 30, 2010  
                            Corporate        
    Mortgage     Financial     Technology     Items and     Consolidated  
(in thousands)   Services     Services     Services     Eliminations     Altisource  
 
                                       
Revenue
  $ 49,523     $ 18,939     $ 12,963     $ (3,845 )   $ 77,580  
Cost of Revenue
    31,383       13,870       7,239       (3,579 )     48,913  
 
                             
Gross Profit
    18,140       5,069       5,724       (266 )     28,667  
Selling, General and Administrative Expenses
    3,899       4,692       1,610       4,529       14,730  
 
                             
Income (Loss) from Operations
    14,241       377       4,114       (4,795 )     13,937  
Other Income (Expense), net
    687       (9 )     (24 )     44       698  
 
                             
Income (Loss) Before Income Taxes
  $ 14,928     $ 368     $ 4,090     $ (4,751 )   $ 14,635  
 
                             
 
                                       
Transactions with Related Parties:
                                       
Revenue
  $ 34,765     $ 34     $ 4,660     $     $ 39,459  
 
                             
Selling, General and Administrative Expenses
  $     $     $     $ 223     $ 223  
 
                             
                                         
    Nine Months Ended September 30, 2010  
                            Corporate        
    Mortgage     Financial     Technology     Items and     Consolidated  
(in thousands)   Services     Services     Services     Eliminations     Altisource  
 
                                       
Revenue
  $ 124,570     $ 58,875     $ 37,422     $ (10,966 )   $ 209,901  
Cost of Revenue
    79,588       42,572       20,555       (10,073 )     132,642  
 
                             
Gross Profit
    44,982       16,303       16,867       (893 )     77,259  
Selling, General and Administrative Expenses
    9,826       12,854       4,040       12,555       39,275  
 
                             
Income (Loss) from Operations
    35,156       3,449       12,827       (13,448 )     37,984  
Other Income (Expense), net
    649       (38 )     (45 )     100       666  
 
                             
Income (Loss) Before Income Taxes
  $ 35,805     $ 3,411     $ 12,782     $ (13,348 )   $ 38,650  
 
                             
 
                                       
Transactions with Related Parties:
                                       
Revenue
  $ 90,749     $ 110     $ 13,635     $     $ 104,494  
 
                             
Selling, General and Administrative Expenses
  $     $     $     $ 811     $ 811  
 
                             

 

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Mortgage Services
The following table presents our results of operations for our Mortgage Services segment for the three and nine months ending September 30:
                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
                    % Better                     % Better  
(in thousands)   2011     2010     /(worse)     2011     2010     /(worse)  
 
                                               
Service Revenue
  $ 58,915     $ 34,909       69     $ 147,768     $ 89,623       65  
Reimbursable Expenses
    21,464       12,562       71       55,221       30,811       79  
Cooperative Non-controlling Interest
    1,791       2,052       (13 )     4,395       4,136       6  
 
                                       
Total Revenue
    82,170       49,523       66       207,384       124,570       66  
Cost of Revenue
    55,106       31,383       (76 )     135,670       79,588       (70 )
 
                                       
 
                                               
Gross Profit
    27,064       18,140       49       71,714       44,982       59  
 
                                               
Gross Profit/Service Revenue
    46 %     52 %             49 %     50 %        
 
                                               
Selling, General and Administrative Expenses
    4,227       3,899       (8 )     11,663       9,826       (19 )
 
                                       
Income from Operations
  $ 22,837     $ 14,241       60     $ 60,051     $ 35,156       71  
 
                                       
 
                                               
Income from Operations/Service Revenue
    39 %     41 %             41 %     39 %        
 
                                               
Transactions with Related Parties Included Above:
                                               
Revenue
  $ 58,200     $ 34,765       67     $ 150,483     $ 90,749       66  
 
                                       
Our Mortgage Services segment continues to be the primary driver of growth for both year to date and quarterly results. As previously discussed, in 2011 we reorganized our reporting structure in that certain services that were originally part of Component Services and Other are now classified as part of Customer Relationship Management in our Financial Services segment.
The growth in Mortgage Services in both periods presented over the same periods in 2010 was due to the development of mortgage and real estate portfolio services and growth in the loan portfolio serviced by Ocwen. On average, Ocwen serviced 482,973 loans for the nine months ended September 30, 2011 compared to 373,248 for the nine months ended September 30, 2010. The growth in loans was principally driven by Ocwen’s acquisition of the HomEq portfolio which boarded on REALServicing in September 2010 and the Litton portfolio which was partially boarded on September 1, 2011. We expect the remaining loans associated with the Litton portfolio to board on REALServicing in November 2011.
Sequentially, Service Revenue increased $13.4 million or 29% with each service group recognizing an increase in the quarter. Closing and insurance services recorded the most significant increases in Service Revenue sequentially driven by the development of services and increase in title searches attributable to pre-foreclosure activities. Additionally, asset management services and valuation services benefited from services attributable to pre-foreclosure activities. We continued to see elevated levels of REO sales as a result of seasonality and on-going process improvements meant to reduce the time to sell an REO.

 

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An initiative for 2011 is the formation of Correspondent One which 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. We anticipate this will result in improved capital markets execution for the members and facilitate the sale of our services to the members. As of July 2011, we fulfilled our funding obligations to Correspondent One and account for such investment under the equity method. In the third quarter of 2011, we recognized a net loss of $0.4 million attributable to Correspondent One. We expect Correspondent One to incur losses until the second half of 2012.
We continue to believe the development of origination services is important to balancing our service offerings and have invested significantly in personnel, technology and management to ensure we can perform these services in-line with customer expectations. When appropriate, we will consider small complementary acquisitions similar in nature to the second quarter acquisition of Springhouse to facilitate the growth of origination services. We will continue to leverage our global delivery model and our experience with technological based solutions, econometrics and behavioral science. These investments, the mix of services provided and the need to hire employees and lease facilities in advance of expected business referral growth, could limit our ability in the near term to significantly expand Mortgage Services margins calculated based upon Service Revenue.
Revenue
                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
                    % Better                     % Better  
(in thousands)   2011     2010     /(worse)     2011     2010     /(worse)  
 
                                               
Service Revenue
                                               
Asset Management Services
  $ 18,281     $ 10,450       75     $ 45,122     $ 25,171       79  
Origination Management Services
    4,760       4,802       (1 )     13,073       10,688       22  
Residential Property Valuation
    13,188       8,796       50       33,257       22,952       45  
Closing and Insurance Services
    15,013       6,359       136       34,505       17,703       95  
Default Management Services
    7,673       4,502       70       21,811       13,109       66  
 
                                       
Total Service Revenue
    58,915       34,909       69       147,768       89,623       65  
 
                                               
Reimbursable Expenses:
                                               
Asset Management Services
    20,643       11,899       73       52,288       29,027       80  
Default Management Services
    821       561       46       2,933       1,609       82  
Closing and Insurance Services
          102       (100 )           175       (100 )
 
                                       
Total Reimbursable Expenses
    21,464       12,562       71       55,221       30,811       79  
 
                                               
Non-controlling Interests:
    1,791       2,052       (13 )     4,395       4,136       6  
 
                                       
Total Revenue
  $ 82,170     $ 49,523       66     $ 207,384     $ 124,570       66  
 
                                       
 
                                               
Transactions with Related Parties:
                                               
Asset Management Services
  $ 38,924     $ 21,250       83     $ 97,410     $ 53,099       83  
Residential Property Valuation
    12,158       8,729       39       31,358       22,182       41  
Closing and Insurance Services
    4,557       3,428       33       13,140       10,818       21  
Default Management Services
    2,561       1,358       89       8,575       4,650       84  
 
                                       
Total
  $ 58,200     $ 34,765       67     $ 150,483     $ 90,749       66  
 
                                       
In our Mortgage Services segment, we generate the majority of our revenue by providing outsourced services that span the lifecycle of a mortgage loan primarily for Ocwen or with respect to the loan portfolio serviced by Ocwen. In addition to our relationship with Ocwen, we have longstanding relationships with some of the leading capital markets firms, commercial banks, hedge funds, insurance companies, and lending institutions.
Asset Management Services. Asset Management Services principally include property preservation, property inspection, REO asset management and REO brokerage. Asset Management Services has been the largest contributor to Service Revenue growth year to date which reflects increased sales of REO properties, increased number of properties for which we provide property preservation services and an increase in pre-foreclosure inspection services. We expect to receive additional property preservation and brokerage referrals beginning in the fourth quarter as a result of Ocwen’s recent acquisition of the Litton portfolio for which the revenue will begin to be recognized in the 2012.

 

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Origination Management Services. Origination Management Services includes MPA and our developing fulfillment business. The increase year over year is principally due to the inclusion of MPA’s results for an entire period in 2011 as compared to a partial period in 2010 from the date of acquisition. Sequentially, Revenue increased due to the performance of MPA and the slow but incremental roll-out of new origination services. For the nine months ended September 30, 2011, MPA experienced a net increase of 26 members (net increase of 12 members in the third quarter) and as of September 30, 2011 had 202 members.
Residential Property Valuation. The increase in both periods presented as compared to the same periods in 2010 was primarily a result of Ocwen’s residential loan portfolio growth and to a lesser degree results from the Springhouse acquisition in April 2011. Sequentially, Revenue increased significantly as expected due to Ocwen’s recent acquisition of the Litton portfolio and the aforementioned acquisition of Springhouse. We expect elevated levels of valuation referrals to continue into the fourth quarter.
Closing and Insurance Services. Closing and Insurance Services principally consists of title search, title agency and insurance services. During 2011, we remain focused on increasing our referral capture rate in our operational states and rolling out insured title services nationwide, similar to what we accomplished with our title search and asset management businesses in 2010. The continued focus on completing the rollout drove the year over year increase. Sequentially, Revenue increased principally as we continue to expand our title agency and other insurance services offerings.
Default Management Services. We provide non-legal back-office support for foreclosure, bankruptcy and eviction attorneys as well as foreclosure trustee services. The increase in both periods presented as compared to the same periods in 2010 was a result of our continued rollout of a national platform as well as Ocwen’s servicing portfolio growth. Sequentially, we saw an increase in Revenue primarily due to an increase in foreclosure referrals received in the second quarter. We expect referrals to further increase late in the fourth quarter due to the addition of Litton. These referrals will translate into revenue in the first half of 2012.
Cost of Revenue
                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
                    % Better                     % Better  
(in thousands)   2011     2010     /(worse)     2011     2010     /(worse)  
 
                                               
Expenditures
  $ 14,216     $ 7,287       (95 )   $ 33,498     $ 19,343       (73 )
Outside Fees and Services
    19,426       11,534       (68 )     46,951       29,434       (60 )
Reimbursable Expenses
    21,464       12,562       (71 )     55,221       30,811       (79 )
 
                                       
 
                                               
Cost of Revenue
  $ 55,106     $ 31,383       (76 )   $ 135,670     $ 79,588       (70 )
 
                                       
 
                                               
Gross Margin Percentage:
                                               
Gross Profit/Service Revenue
    46 %     52 %             49 %     50 %        
 
                                       
Expenditures, which consists primarily of compensation and technology costs, increased in both periods presented as compared to the same periods in 2010 due to the growth in default oriented mortgage services. Sequentially, Expenditures increased principally as a result of employee costs to support the roll-out of our title agency operations, development of origination services and hiring of employees to support expected growth. We would expect Expenditures to continue to increase in the fourth quarter as we continue to hire to support anticipated growth in referrals.
Outside Fees and Services increased over the same periods in 2010 due to the increase in default oriented services for the periods presented. Sequentially, Outside Fees and Services increased principally due to the provision of pre-foreclosure related services (e.g., valuation, property inspection services) for which vendor costs are generally not considered reimbursable expenses. We anticipate that Outside Fees and Services will continue to increase in the fourth quarter given the recent boarding of loans associated with the Litton platform and the subsequent boarding on to REALServicing of the remaining Litton loans in November.
Several factors impact our gross margins from period to period including seasonality, the mix of services delivered, timing of investments in new services, hiring of staff and leasing of facilities in advance of new business and the timing of when loans are boarded by our customers. Sequentially, our gross margin decreased principally as a result of increased Outside Fees and Services attributable to pre-foreclosure activities for which we earn a lower margin when compared to other services offered.

 

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Selling, General and Administrative Expenses
                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
                    % Better                     % Better  
(in thousands)   2011     2010     /(worse)     2011     2010     /(worse)  
 
                                               
Total Selling, General and Administrative Expenses
  $ 4,227     $ 3,899       (8 )   $ 11,663     $ 9,826       (19 )
 
                                       
 
                                               
Operating Percentage:
                                               
Income from Operations/Service Revenue
    39 %     41 %             41 %     39 %        
 
                                       
Selling, General and Administrative Expenses increased in both periods presented over the same periods in 2010 principally due to the exponential growth in the segment which required investments in facilities, technology and other general and administrative costs. Sequentially, Selling, General and Administrative Expenses increased primarily due to reduced reserves for bad debt, reversal of stock compensation expense due to the departure of certain executives and lower expenses for professional services in the second quarter. Selling, General and Administrative Expenses for the third quarter in 2011 are consistent with the first quarter. As this segment continues to grow, we should begin to leverage Selling, General and Administrative Expenses resulting in increased margins.
Financial Services
The following table presents our results of operations for our Financial Services segment for the three and nine months ending September 30:
                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
                    % Better                     % Better  
(in thousands)   2011     2010     /(worse)     2011     2010     /(worse)  
 
                                               
Service Revenue
  $ 16,934     $ 18,132       (7 )   $ 53,067     $ 56,646       (6 )
Reimbursable Expenses
    369       807       (54 )     1,712       2,229       (23 )
 
                                       
Total Revenue
    17,303       18,939       (9 )     54,779       58,875       (7 )
 
                                               
Cost of Revenue
    12,676       13,870       9       39,738       42,572       7  
 
                                       
Gross Profit
    4,627       5,069       (9 )     15,041       16,303       (8 )
 
                                               
Gross Profit/Service Revenue
    27 %     28 %             28 %     29 %        
 
                                               
Selling, General and Administrative Expenses
    4,268       4,692       9       12,230       12,854       5  
 
                                       
Income from Operations
  $ 359     $ 377       (5 )   $ 2,811     $ 3,449       (18 )
 
                                       
 
                                               
Income from Operations/Service Revenue
    2 %     2 %             5 %     6 %        
 
                                               
Transactions with Related Parties Above:
                                               
Revenue
  $ 66     $ 34       94     $ 213     $ 110       94  
 
                                       

 

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As discussed above, Customer Relationship Management now includes certain services that were originally recorded as part of Mortgage Services.
Financial Services revenue declined in both periods as compared to the same periods in 2010 due to a decline in revenues attributable to asset recovery management and primarily from one of the segment’s largest customers. The decline was in part (i) a result of the client shifting work to the Company’s global delivery platform which resulted in lower revenue and (ii) the general economic environment which has kept collection rates depressed. This decline was partially offset by growth in new asset recovery management accounts and growth in customer relationship management revenues. Sequentially, Revenue was down due principally to seasonality associated with asset recovery management services, partially offset by a sequential increase in customer relationship management revenues.
Our new leadership team is focused on disciplined floor management and cost containment as well as improving the analytics to determine which accounts to contact, what offer to make and what to say. In addition, we are focused on delivering more services over our global delivery platform, expanding our quality initiatives and investing in new technology.
In July 2011, we purchased the assembled workforce of a sub-contractor in India that performs asset recovery services. For periods prior to the acquisition, the costs paid to the sub-contractor were included as a component of Outside Fees and Services. Since acquisition, the costs have been recorded as employee costs, technology or occupancy as appropriate which has resulted in some movement between Cost of Revenue and Selling, General and Administrative Expense categories.
Revenue
                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
                    % Better                     % Better  
(in thousands)   2011     2010     /(worse)     2011     2010     /(worse)  
 
                                               
Service Revenue
                                               
Asset Recovery Management
  $ 8,778     $ 10,735       (18 )   $ 29,220     $ 34,708       (16 )
Customer Relationship Management
    8,156       7,397       10       23,847       21,938       9  
 
                                       
Total Service Revenue
    16,934       18,132       (7 )     53,067       56,646       (6 )
 
                                               
Reimbursable Expenses:
                                               
Asset Recovery Management
    369       807       (54 )     1,712       2,229       (23 )
 
                                       
Total Reimbursable Expenses
    369       807       (54 )     1,712       2,229       (23 )
 
                                       
 
                                               
Total Revenue
  $ 17,303     $ 18,939       (9 )   $ 54,779     $ 58,875       (7 )
 
                                       
 
                                               
Transactions with Related Parties:
                                               
Asset Recovery Management
  $ 66     $ 34       94     $ 213     $ 110       94  
 
                                       
In our Financial Services segment, we generate revenue from asset recovery services and customer relationship management.
Asset Recovery Management. Our revenue associated with contingency collections declined in both periods when compared to the same periods in 2010 due to a decline in revenue from one of the segment’s largest customers. The decline was in part a result of the client shifting work to the Company’s global delivery platform which resulted in lower revenue although generally at higher margins. In general, we have seen improved performance of our collectors which we believe will translate into increased placements in the future should such performance continue.
Customer Relationship Management. Our revenue associated with customer relationship management increased in both periods as compared to the same periods in 2010 as a result of increased services to two key customers. We recently strengthened the management team for customer relationship services with the intention of growing these services.

 

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Cost of Revenue
                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
                    % Better                     % Better  
(in thousands)   2011     2010     /(worse)     2011     2010     /(worse)  
 
                                               
Expenditures
  $ 10,435     $ 9,287       (12 )   $ 28,241     $ 28,685       2  
Outside Fees and Services
    1,872       3,776       50       9,785       11,658       16  
Reimbursable Expenses
    369       807       54       1,712       2,229       23  
 
                                       
 
                                               
Cost of Revenue
  $ 12,676     $ 13,870       9     $ 39,738     $ 42,572       7  
 
                                       
 
                                               
Gross Margin Percentage:
                                               
Gross Profit/Service Revenue
    27 %     28 %             28 %     29 %        
 
                                       
Our gross margin increased sequentially from 26% to 27% principally as a result of the acquisition of Tracmail which resulted in changes to how costs were categorized since the date of acquisition. When compared to the same periods in 2010, Expenditures in both periods declined principally as a result of lower employee costs as we expanded the use of our global delivery footprint.
Selling, General and Administrative Expenses
                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
                    % Better                     % Better  
(in thousands)   2011     2010     /(worse)     2011     2010     /(worse)  
 
                                               
Total Selling, General and Administrative Expenses
  $ 4,268     $ 4,692       9     $ 12,230     $ 12,854       5  
 
                                       
 
                                               
Operating Percentage:
                                               
Income from Operations/Service Revenue
    2 %     2 %             5 %     6 %        
 
                                       
Selling, General and Administrative Expenses in both periods decreased slightly compared to the same periods in 2010 principally as a result of reduced legal costs. Sequentially, Selling, General and Administrative Expenses increased due to the previously mentioned acquisition and its impact on cost classifications.

 

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Technology Services
The following table presents our results of operations for our Technology Services segment for the three and nine months ending September 30:
                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
                    % Better                     % Better  
(in thousands)   2011     2010     /(worse)     2011     2010     /(worse)  
 
                                               
Revenue
  $ 14,827     $ 12,963       14     $ 41,115     $ 37,422       10  
Cost of Revenue
    9,700       7,239       (34 )     26,479       20,555       (29 )
 
                                       
Gross Profit
    5,127       5,724       (10 )     14,636       16,867       (13 )
 
                                               
Gross Profit/Revenue
    35 %     44 %             36 %     45 %        
 
                                               
Selling, General and Administrative Expenses
    756       1,610       53       3,489       4,040       14  
 
                                       
Income from Operations
  $ 4,371     $ 4,114       6     $ 11,147     $ 12,827       (13 )
 
                                       
 
                                               
Income from Operations/Revenue
    29 %     32 %             27 %     34 %        
 
                                               
Transactions with Related Parties Above:
                                               
Revenue
  $ 5,561     $ 4,660       19     $ 15,615     $ 13,635       15  
 
                                       
The primary focus of the Technology Services segment today is to support the growth of Mortgage Services and Ocwen. In addition, Technology Services is assisting in the cost reduction and quality initiatives on-going within the Financial Services segment. In 2011, we are expending significant resources, principally personnel costs and external consulting costs to accomplish three key objectives:
   
The re-architecture and enhancement of our REALSuite of services;
   
The deployment of business process management and business intelligence reporting systems to more effectively and efficiently manage our operations; and
   
The development and early stage incubation of technology solutions.
Effective January 1, 2011, we modified our pricing for IT Infrastructure Services within our Technology Services segment from a model based principally on headcount to a fully loaded costs plus mark-up methodology. This new model applies to the infrastructure amounts charged to Ocwen as well as internal allocations of infrastructure costs.

 

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Revenue
                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
                    % Better                     % Better  
(in thousands)   2011     2010     /(worse)     2011     2010     /(worse)  
 
                                               
Revenue:
                                               
REALSuite
  $ 8,964     $ 7,864       14     $ 25,395     $ 22,415       13  
IT Infrastructure Services
    5,863       5,099       15       15,720       15,007       5  
 
                                       
Total Revenue
  $ 14,827     $ 12,963       14     $ 41,115     $ 37,422       10  
 
                                       
 
                                               
Transactions with Related Parties:
                                               
REALSuite
    3,493       2,744       27       9,506       7,952       20  
IT Infrastructure Services
    2,068       1,916       8       6,109       5,683       7  
 
                                       
Revenue
  $ 5,561     $ 4,660       19     $ 15,615     $ 13,635       15  
 
                                       
REALSuite. Our REALSuite revenue is primarily driven by our REALServicing® product which is our comprehensive residential loan servicing platform. The primary driver for the growth in revenue is the increase in Ocwen’s residential loan portfolio.
IT Infrastructure Services. Our IT infrastructure services revenues in both periods were generally declining when compared to the same periods in 2010 due to our change in pricing for infrastructure services; however this trend reversed in the third quarter 2011 as a result of the growth in Ocwen’s personnel as its servicing business has grown. Mark-ups for infrastructure services are based upon economic studies performed that are generally consistent with our transfer pricing methodology.
Cost of Revenue
                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
                    % Better                     % Better  
(in thousands)   2011     2010     /(worse)     2011     2010     /(worse)  
 
                                               
Cost of Revenue
  $ 9,700     $ 7,239       (34 )   $ 26,479     $ 20,555       (29 )
 
                                       
 
                                               
Gross Margin Percentage:
                                               
Gross Profit/Total Revenue
    35 %     44 %             36 %     45 %        
 
                                       
Our gross margin declined to 36% for the nine months ended September 30, 2011 as we now report our Consumer Analytics group within Technology Services during 2011 (previously reported in our Corporate Segment). Our Consumer Analytics group seeks to expand our use of behavioral sciences by building proprietary algorithms and psychologically-optimized communications through a customized technology platform. In addition, we have seen an increase in licensing fees given the increase in personnel both at Ocwen and Altisource.

 

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Selling, General and Administrative Expenses
                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
                    % Better                     % Better  
(in thousands)   2011     2010     /(worse)     2011     2010     /(worse)  
 
                                               
Total Selling, General and Administrative Expenses
  $ 756     $ 1,610       53     $ 3,489     $ 4,040       14  
 
                                       
 
                                               
Operating Percentage:
                                               
Operating Income/Total Revenue
    29 %     32 %             27 %     34 %        
 
                                       
Selling, General and Administrative Expenses decreased sequentially principally as a result of reduction in bad debt reserves due to improved collections. This as well as the increase in Revenues led to a significant increase in sequential margins.
Corporate
Our Corporate Segment includes costs related to corporate support functions such as finance, legal, human resources, compliance and quality assurance.
                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
                    % Better                     % Better  
(in thousands)   2011     2010     /(worse)     2011     2010     /(worse)  
 
                                               
Total Selling, General and Administrative Expenses
  $ 6,078     $ 4,529       (34 )   $ 18,105     $ 12,555       (44 )
 
                                       
Corporate costs rose throughout 2010 as we invested in staff to support our growing operations.
During 2011, we hired additional resources principally focused on legal, compliance and quality assurance. In addition, lease costs increased related to the build out of new facilities to support the growth we expect from Ocwen’s acquisition of the Litton portfolio. Typically, we include new leases costs within Corporate until the facility is put into use at which time the prospective lease cost is included within the appropriate segment. Lastly, we continue to invest in an enterprise resource planning system that we expect will increase the quality of our support functions and over time reduce costs. When compared to the second quarter, corporate costs remained flat.

 

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LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We seek to deploy excess cash generated in a disciplined manner. Principally, we will continue to invest in compelling services that we believe will generate high margins. In addition, we may seek to acquire a limited number of complementary companies that fit our strategic objectives. Finally, given the tax inefficiency of dividends, the low returns earned on cash held and our current belief to pursue a limited number of acquisitions, we believe one of the best ways to return value to shareholders is a stock repurchase program.
In May 2010, our shareholders authorized us to purchase up to 3.8 million shares of our common stock in the open market. Through September 30, 2011, we purchased 1.7 million shares of our common stock on the open market at an average price of $31.02, leaving 2.1 million shares still available for purchase under the program.
Cash Flows
The following table presents our cash flows for the nine months ended September 30:
                         
    Nine Months Ended September 30,  
                    %  
(dollars in thousands)   2011     2010     Better/(worse)  
 
                       
Net Income Adjusted for Non-Cash Items
  $ 62,757     $ 46,819       34  
Working Capital
    5,994       (13,558 )     144  
 
                   
Cash Flow from Operating Activities
    68,751       33,261       107  
Cash Flow from Investing Activities
    (28,983 )     (35,744 )     19  
Cash Flow from Financing Activities
    (40,652 )     (4,936 )     N/M  
 
                   
Net Change in Cash
    (884 )     (7,419 )     88  
Cash at Beginning of Period
    22,134       30,456       (27 )
 
                   
Cash at End of Period
  $ 21,250     $ 23,037       (8 )
 
                   
N/M — Not meaningful.
Cash Flow from Operating Activities
Cash flow from operating activities consists of two components: (i) net income adjusted for depreciation, amortization and certain other non-cash items and (ii) working capital. In 2011, we generated $68.8 million in positive cash flow from operations or approximately $0.30 per every dollar of Service Revenue. This primarily reflects our profitability adjusted for non-cash items in the period primarily as a result of our year-over-year growth in mortgage related services.
Cash Flow from Investing Activities
During the nine months ended September 30, 2011, we invested $15.0 million in Correspondent One to facilitate the establishment of this business. In 2011, we acquired Springhouse for net consideration of $1.8 million and Tracmail for net consideration of $0.7 million. We estimate our capital expenditures for the full year 2011 to be at the lower end of our previously provided range of $16 million to $18 million. Our cash flow from investing activities in 2010 includes the acquisition of MPA for which the purchase consideration included $29.0 million in cash.
Cash Flow from Financing Activities
Cash flow from financing activities in 2011 primarily includes activity associated with stock option exercises, share repurchases and payments to non-controlling interests as a result of the acquisition of MPA. We utilized significantly more cash in 2011 from financing activities as a result of our stock repurchase program. In the third quarter, we returned $22.9 million to shareholders through our stock repurchase program.
Liquidity Requirements after September 30, 2011
During the fourth quarter, we expect to distribute $1.8 million to the Lenders One members representing non-controlling interests. Between October 1 and 21, 2011, we purchased 0.1 million shares at a total cost of $4.1 million.
Management is not aware of any other trends or events, commitments or uncertainties which have not otherwise been disclosed that will or are likely to impact liquidity in a material way.

 

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Capital Resources
Given our ability to generate cash flow which is sufficient to fund current operations as well as expansion activities, we require very limited capital. Were we to need additional capital, we believe we have adequate access to both debt and equity capital markets.
Contractual Obligation, Commitments and Contingencies
For the nine months ended September 30, 2011, there were no significant changes to our contractual obligations from those identified in our Form 10-K for the fiscal year ended December 31, 2010, other than those which occur in the normal course of business (primarily the addition of operating leases due to our growth). See also Note 16 to the condensed consolidated financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our 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 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 in our Form 10-K for the year ended December 31, 2010. Such policies have not changed during the quarter ended September 30, 2011.
OTHER MATTERS
Related Party — Ocwen
For the nine months ended September 30, 2011, approximately $150.5 million of the Mortgage Services ($58.2 million for the third quarter), $0.2 million ($0.1 million for the third quarter) of the Financial Services and $15.6 million ($5.5 million for the third quarter) of the Technology Services segment revenue were from services provided to Ocwen or sales derived from Ocwen’s loan servicing portfolio. Services provided to Ocwen included residential property valuation, real estate asset management and sales, trustee management services, property inspection and preservation, closing and title services, charge-off second 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.
In connection with the Separation, Altisource and Ocwen entered into a Transition Services agreement under which services in such areas as human resources, vendor management, corporate services, six sigma, quality assurance, quantitative analytics, treasury, accounting, risk management, legal, strategic planning, compliance and other areas are provided to the counterparty for up to two years from the date of Separation. For the nine months ended September 30, 2011 and 2010, Altisource billed Ocwen $1.7 million and $1.2 million respectively ($0.8 million and $0.5 million for the third quarter of 2011 and 2010, respectively), and Ocwen billed Altisource $1.4 million and $0.8 million respectively ($0.5 million and $0.2 million for the third quarter of 2011 and 2010, respectively) for services provided under this agreement. These amounts are reflected as a component of Selling, General and Administrative Expenses in the Condensed Consolidated Statements of Operations.

 

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Item 3.  
Quantitative and Qualitative Disclosures about Market Risk.
Our financial market risk consists primarily of foreign currency exchange risk. We are exposed to foreign currency exchange rate risk in connection with our investment in non-U.S. dollar functional currency operations, which are very limited, to the extent that our foreign exchange positions remain un-hedged.
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 ending September 30, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II — OTHER INFORMATION
Item 1.  
Legal Proceedings.
We are subject to routine litigation 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.
Item 1A.  
Risk Factors.
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, 2010.
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 September 30, 2011:
                                 
                    Total number     Maximum  
                    of shares     number  
                    purchased as     of shares  
                    part of     that may  
                    publicly     yet be  
    Total     Weighted     announced     purchased  
    number of     average     plans     under the  
    shares     price paid     or     plans or  
Period   purchased(1)     per share     programs(2)     programs  
 
                               
Common shares:
                               
July 1 – 31, 2011
    89,459     $ 37.01       89,459       2,655,074  
August 1 – 31, 2011
    256,091       32.26       245,003       2,410,071  
September 1 – 30, 2011
    310,000       35.59       310,000       2,100,071  
 
                       
 
                               
Total common shares
    655,550     $ 34.48       644,462       2,100,071  
 
                       
     
(1)  
Includes shares withheld from employees to satisfy tax withholding obligations that arose from the exercise of stock options.
 
(2)  
In the second quarter of 2010, our shareholders authorized us to purchase up to 3.8 million shares of our common stock in the open market.
Item 3.  
Defaults upon Senior Securities. None
Item 4.  
(Removed and Reserved)
Item 5.  
Other Information. None

 

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Item 6.  
Exhibits.
         
  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 September 30, 2011, is formatted in XBRL interactive data files: (i) Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010; (ii) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010; (iii) Condensed Consolidated Statements of Equity for the nine months ended September 30, 2011 and 2010; (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010; and (iv) Notes to Condensed Consolidated Financial Statements (As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Act of 1934)

 

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SIGNATURES
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: October 27, 2011  By:   /s/ Robert D. Stiles    
    Robert D. Stiles   
    Chief Financial Officer
(On behalf of the Registrant and
as its principal financial officer) 
 

 

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