|
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is a supplement to the accompanying consolidated financial statements and is intended to provide a reader of our financial statements with a narrative from the perspective of management on our businesses, current developments, financial condition, results of operations and liquidity. Significant sections of the MD&A are as follows:
Overview.
This section, beginning below, provides a description of recent developments we believe are important in understanding our results of operations and financial condition as well as understanding anticipated future trends. It also provides a brief description of significant transactions and events that affect the comparability of financial results and a discussion of the progress being made on our strategic initiatives.
Consolidated Results of Operations.
This section, beginning on page 37, provides an analysis of our consolidated results of operations for the three years ended
December 31, 2017
.
Segment Results of Operations.
This section, beginning on page 43, provides an analysis of each business segment for the three years ended
December 31, 2017
as well as Other Businesses, Corporate and Eliminations. 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 52, provides an analysis of our cash flows for the three years ended
December 31, 2017
. We also discuss restrictions on cash movements, future commitments and capital resources.
Critical Accounting Policies, Estimates and Recent Accounting Pronouncements.
This section, beginning on page 55, identifies those accounting principles we believe are most important to our financial results and that require significant judgment and estimates on the part of management in application. We provide all of our significant accounting policies in
Note 2
to the accompanying consolidated financial statements.
Other Matters.
This section, beginning on page 58, provides a discussion of off-balance sheet arrangements to the extent they exist. In addition, we provide a tabular discussion of contractual obligations, discuss any significant commitments or contingencies and customer concentration.
OVERVIEW
Our Business
We are an integrated service provider and marketplace for the real estate and mortgage industries. Combining operational excellence with a suite of innovative services and technologies, Altisource helps solve the demands of the ever-changing markets we serve.
Effective January 1, 2017, our reportable segments changed as a result of a change in the way our Chief Executive Officer (our chief operating decision maker) manages our businesses, allocates resources and evaluates performance, and the related changes in our internal organization. We now report our operations through two new reportable segments:
Mortgage Market
and
Real Estate Market
. In addition, we report
Other Businesses, Corporate and Eliminations
separately. Prior to the January 1, 2017 change in reportable segments, our reportable segments were
Mortgage Services, Financial Services
and
Technology Services
. Prior year comparable period segment disclosures have been restated to conform to the current year presentation.
The
Mortgage Market
segment provides loan servicers and originators with marketplaces, services and technologies that span the mortgage lifecycle. The
Real Estate Market
segment provides real estate consumers and rental property investors with marketplaces and services that span the real estate lifecycle. In addition, the
Other Businesses, Corporate and Eliminations
segment includes businesses that provide post-charge-off consumer debt collection services primarily to debt originators (e.g., credit card, auto lending and retail credit), customer relationship management services primarily to the utility, insurance and hotel industries and IT infrastructure management services.
Other Businesses, Corporate and Eliminations
also includes interest expense and costs related to corporate support functions including executive, finance, law, compliance, human resources, vendor management, facilities, risk management, and sales and marketing costs not allocated to the business units, as well as eliminations between the reportable segments. In addition, the
Other Businesses, Corporate and Eliminations
segment includes the cost of certain facilities not allocated to the business units.
We classify revenue in three categories: service revenue, revenue from reimbursable expenses and non-controlling interests. In evaluating our performance, we focus on service revenue. Service revenue consists of amounts attributable to our fee-based services and sales of short-term investments in real estate. Reimbursable expenses and non-controlling interests are pass-through items for which we earn no margin. Reimbursable expenses consist of amounts we incur on behalf of our customers in performing our fee-based services that we pass directly on to our customers without a markup. Non-controlling interests represent the earnings
of Lenders One. Lenders One is a mortgage cooperative managed, but not owned, by Altisource. Lenders One is included in revenue and reduced from net income to arrive at net income attributable to Altisource.
We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Strategy and Growth Businesses
We are focused on becoming one of the premier providers of mortgage and real estate marketplaces and related services to a broad and diversified customer base. Within the mortgage and real estate market segments, we facilitate transactions and provide products, solutions and services related to home sales, home purchases, home rentals, home maintenance, mortgage originations and mortgage servicing.
Each of our strategic businesses provides Altisource the potential to grow and diversify our customer and revenue base. We believe these businesses operate in very large markets and directly leverage our core competencies and distinct competitive advantages. A further description of our four strategic businesses follows.
Servicer Solutions:
Through this business, we provide a suite of services and technologies to meet the evolving and growing needs of loan servicers. We are focused on growing referrals from our existing customer base, expanding the service and proprietary technology offerings to our customer base, and attracting new customers to our offerings. We have a customer base that includes Ocwen, a GSE, NRZ, several large bank and non-bank servicers and asset managers. We believe we are one of only a few providers with a broad suite of servicer solutions, nationwide coverage and demonstrated scalability. Further, we believe we are well positioned to gain market share as existing customers and prospects consolidate to larger, full-service providers and outsource services that have historically been performed in-house.
Origination Solutions:
Through this business, we provide a suite of services and technologies to meet the evolving and growing needs of loan originators and correspondents. We are focused on growing referrals from our existing customer base, expanding the service and proprietary technology offerings to our customer base, and attracting new customers to our offerings. We have a customer base that includes the Lenders One cooperative mortgage bankers, the Mortgage Builder
®
loan origination system customers and mid-size and larger bank and non-bank loan originators. We believe our suite of services and technologies positions us to grow our relationships with our existing customer base by providing additional products, services and solutions to these customers. Further, we believe we are well positioned to attract new customers as prospects consolidate to larger, full-service providers and outsource services that have historically been performed in-house.
Consumer Real Estate Solutions:
Through this business, we provide real estate buyers and sellers with a technology enabled real estate brokerage and the integrated services to support them in buying and selling a home. Our offerings include local real estate agent services and loan brokerage as well as closing and title services. We are focused on continuing to develop this business by capitalizing on Altisource’s experience in online real estate marketing and loan origination services, as well as on recently developed agile execution competencies.
Real Estate Investor Solutions:
Through this business, we provide a suite of services and technologies to support buyers and sellers of single-family investment homes, including our purchase, renovation, leasing and sale of short-term investments in real estate. We are focused on growing referrals from our existing customer base, expanding the service and proprietary technology offerings to our customer base, and attracting new customers to our offerings. We have a customer base that includes RESI and other institutional and smaller single-family rental investors. The single-family rental market is large, geographically distributed and has fragmented ownership. We believe our acquisition, renovation, property management, leasing and disposition platform provides a strong value proposition for institutional and retail investors and positions us well for growth.
There can be no assurance that growth from some or all of our strategic businesses will be successful or our operations will be profitable.
Share Repurchase Program
On May 17, 2017, our shareholders approved the renewal of the share repurchase program previously approved by the shareholders on May 18, 2016, which replaced the previous share repurchase program. We are authorized to purchase up to
4.6 million
shares
of our common stock, based on a limit of
25%
of the outstanding shares of common stock on the date of approval, at a minimum price of
$1.00
per share and a maximum price of
$500.00
per share, for a period of
five
years from the date of approval. As of
December 31, 2017
, approximately
3.4 million
shares of common stock remain available for repurchase under the program. We purchased
1.6 million
shares of common stock at an average price of
$23.84
per share during the year ended
December 31, 2017
,
1.4 million
shares at an average price of
$26.81
per share during the year ended
December 31, 2016
and
2.1 million
shares at an average price of
$27.60
per share during the year ended
December 31, 2015
. Luxembourg law limits share repurchases to the balance of Altisource Portfolio Solutions S.A. (unconsolidated parent company) retained earnings, less the value of shares repurchased. As of
December 31, 2017
, we can repurchase up to approximately
$178 million
of our common stock under Luxembourg law. Our senior secured term loan limits the amount we can spend on share repurchases, which was approximately
$446 million
as of
December 31, 2017
, and may prevent repurchases in certain circumstances.
Ocwen Related Matters
During the year ended
December 31, 2017
, Ocwen was our largest customer, accounting for
58%
of our total revenue. Additionally,
16%
of our revenue for the year ended
December 31, 2017
was earned on the portfolios serviced by Ocwen, when a party other than Ocwen or the MSR owner selected Altisource as the service provider.
As of June 30, 2017, we estimate that NRZ owned certain economic rights in, but not legal title to, approximately 78% of the Subject MSRs. In July 2017, Ocwen and NRZ entered into agreements to convert NRZ’s economic rights to the Subject MSRs into fully-owned MSRs in exchange for payments from NRZ to Ocwen when such MSRs were transferred. The transfers are subject to certain third party consents. Ocwen disclosed that under these agreements, Ocwen would subservice the transferred Subject MSRs for an initial term of five years, and the agreements provided for the conversion of the existing arrangements into a more traditional subservicing arrangement.
In January 2018, Ocwen disclosed that it and NRZ entered into new agreements to accelerate the implementation of certain parts of their July 2017 arrangement in order to achieve the intent of the July 2017 agreements sooner while Ocwen continues the process of obtaining the third party consents necessary to transfer the Subject MSRs to NRZ.
On August 28, 2017, Altisource, through its licensed subsidiaries, entered into the Brokerage Agreement with NRZ which extends through August 2025. Under this agreement and related amendments, Altisource remains the exclusive provider of brokerage services for REO associated with the Subject MSRs when Ocwen transfers such MSRs to NRZ or when NRZ acquires both an additional economic interest in such MSRs and the right to designate the broker for REO properties in such portfolios. The Brokerage Agreement provides that Altisource is the exclusive provider of brokerage services for REO associated with the Subject MSRs, irrespective of the sub-servicer. NRZ’s brokerage subsidiary will receive a cooperative brokerage commission on the sale of certain REO properties from these portfolios subject to certain exceptions.
On August 28, 2017, Altisource and NRZ also entered into the Services LOI to enter into a Services Agreement, setting forth the terms pursuant to which Altisource would remain the exclusive service provider of fee-based services for the Subject MSRs through August 2025. The Services LOI was amended to continue through February 28, 2018 (with a further automatic extension through March 31, 2018 provided that the parties continue to negotiate the Services Agreement in good faith).
The Brokerage Agreement can be terminated by Altisource if the Services Agreement is not signed between Altisource and NRZ during the term of the Services LOI. The Brokerage Agreement may otherwise only be terminated upon the occurrence of certain specified events. Termination events include, but are not limited to, a breach of the terms of the Brokerage Agreement (including, without limitation, the failure to meet performance standards and non-compliance with law in a material respect), the failure to maintain licenses which failure materially prevents performance of the contract, regulatory allegations of non-compliance resulting in an adversarial proceeding against NRZ, voluntary or involuntary bankruptcy, appointment of a receiver, disclosure in a Form 10-K or Form 10-Q that there is significant uncertainty about Altisource’s ability to continue as a going concern, failure to maintain a specified level of cash and an unapproved change of control.
Following the execution of the Services Agreement, we anticipate that revenue from NRZ would increase and revenue from Ocwen would decrease. As Subject MSRs continue to transfer from Ocwen to NRZ, we anticipate that NRZ will become our largest customer. Had all of the Subject MSRs been transferred to NRZ and the Brokerage Agreement and the Services Agreement with NRZ were in place as of January 1, 2017, we estimate that approximately 50% of our 2017 revenue would have been related to NRZ. There can be no assurance that the parties will reach an agreement with respect to the terms of the Services Agreement or that a Services Agreement will be entered into on a timely basis or at all.
Ocwen has disclosed that it is subject to a number of ongoing federal and state regulatory examinations, cease and desist orders, consent orders, inquiries, subpoenas, civil investigative demand, requests for information and other actions and is subject to pending legal proceedings, some of which include claims against Ocwen for substantial monetary damages. For example, on May 15,
2017, Ocwen disclosed that on April 20, 2017, the CFPB and the State of Florida filed separate complaints in the United States District Court for the Southern District of Florida against Ocwen alleging violations of Federal consumer financial law and, in the case of Florida, Florida statutes. As another example, on May 15, 2017, Ocwen also disclosed that on April 28, 2017, the Commonwealth of Massachusetts filed a lawsuit against Ocwen in the Superior Court for the Commonwealth of Massachusetts alleging violations of state consumer financial laws relating to Ocwen’s servicing business, including lender-placed insurance and property preservation fees. Ocwen disclosed that the complaints seek to obtain permanent injunctive relief, consumer redress, refunds, restitution, disgorgement, damages, civil penalties, costs and fees and other relief. The forgoing or other matters could result in, and in some cases, have resulted in, adverse regulatory or other actions against Ocwen. Previous regulatory actions against Ocwen resulted in subjecting Ocwen to independent oversight of its operations and placing certain restrictions on its ability to acquire servicing rights.
In addition to the above, Ocwen may become subject to future federal and state regulatory investigations, cease and desist orders, consent orders, inquiries, subpoenas, civil investigative demands, requests for information, other matters or legal proceedings, any of which could also result in adverse regulatory or other actions against Ocwen.
The foregoing may have significant adverse effects on Ocwen’s business and/or our continuing relationship with Ocwen. For example, Ocwen may be required to alter the way it conducts business, including the parties it contracts with for services (including IT and software services), it may be required to seek changes to its existing pricing structure with us, it may lose its non-GSE servicing rights or subservicing arrangements or may lose one or more of its state servicing or origination licenses. Additional regulatory actions or adverse financial developments may impose additional restrictions on or require changes in Ocwen’s business that could require it to sell assets or change its business operations. Any or all of these effects could result in our eventual loss of Ocwen as a customer or a reduction in the number and/or volume of services they purchase from us or the loss of other customers.
If any of the following events occurred, Altisource’s revenue could be significantly lower and our results of operations could be materially adversely affected, including from the possible impairment or write-off of goodwill, intangible assets, property and equipment, other assets and accounts receivable:
|
|
•
|
Altisource loses Ocwen as a customer or there is a significant reduction in the volume of services they purchase from us
|
|
|
•
|
Ocwen loses, sells or transfers a significant portion or all of its remaining non-GSE servicing rights or subservicing arrangements and Altisource fails to be retained as a service provider
|
|
|
•
|
Ocwen loses state servicing licenses in states with a significant number of loans in Ocwen’s servicing portfolio
|
|
|
•
|
Altisource fails to be retained as a service provider
|
|
|
•
|
The contractual relationship between Ocwen and Altisource changes significantly or there are significant changes to our pricing to Ocwen for services from which we generate material revenue
|
Additionally, Ocwen has notified us, disclosed in its filings and stated in connection with resolving several state administrative actions discussed above, that it plans to transition from REALServicing to another mortgage servicing software platform. We anticipate that such a transition could be a multi-year project and Altisource would support Ocwen through such a transition. We do not anticipate that a servicing technology transition would impact the other services we provide to Ocwen. For the years ended
December 31, 2017
,
2016
and
2015
, service revenue from REALServicing was
$26.4 million
,
$29.8 million
and
$50.3 million
, respectively. We estimate, with respect to income before income tax, that the REALServicing business currently operates at approximately break-even.
Management cannot predict the outcome of these matters or the amount of any impact they may have on Altisource. However, in the event these matters materially negatively impact Altisource, we believe the variable nature of our cost structure would allow us to realign our cost structure in line with remaining revenue. Furthermore, in the event of a significant reduction in the volume of services purchased or loans serviced by Ocwen (such as a transfer of Ocwen’s remaining servicing rights to a successor servicer), we believe the impact to Altisource could occur over an extended period of time. During this period, we believe that we will continue to generate revenue from all or a portion of Ocwen’s portfolio.
Additionally, our Servicer Solutions, Origination Solutions, Consumer Real Estate Solutions and Real Estate Investor Solutions businesses are focused on diversifying and growing our revenue and customer base and we have a sales and marketing strategy to support these businesses.
Management believes our plans, together with current liquidity and cash flows from operations, would be sufficient to meet our working capital, capital expenditures, debt service and other cash needs. However, there can be no assurance that our plans will be successful or our operations will be profitable.
Factors Affecting Comparability
The following items may impact the comparability of our results:
|
|
•
|
The average number of loans serviced by Ocwen on REALServicing (including those MSRs owned by NRZ and subserviced by Ocwen) was approximately
1.3 million
,
1.5 million
and
2.0 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. The average number of delinquent non-GSE loans serviced by Ocwen on REALServicing was approximately
199 thousand
,
219 thousand
and
279 thousand
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
|
|
|
•
|
The effective income tax rates for the years ended December 31, 2017, 2016 and 2015 were
(780.9)%
,
29.2%
and
15.6%
, respectively. The Company’s effective income tax rate for the year ended
December 31, 2017
was impacted by three significant items. On December 27, 2017, two of the Company’s wholly-owned subsidiaries, Altisource Solutions S.à r.l. and Altisource Holdings S.à r.l., merged, with Altisource Holdings S.à r.l. as the surviving entity. Altisource Holdings S.à r.l. was subsequently renamed Altisource S.à r.l. The merger is part of a larger subsidiary restructuring plan designed to simplify the Company’s corporate structure, allow it to operate more efficiently and reduce administrative costs. For Luxembourg tax purposes, the merger was recognized at fair value and generated a net operating loss (“NOL”) of $1.3 billion and a deferred tax asset, net of valuation allowance, of $300.9 million as of
December 31, 2017
. The NOL has a 17 year life. This deferred tax asset was partially offset by the impact of other changes in U.S. and Luxembourg income tax rates of
$6.3 million
and an increase in certain foreign income tax reserves (and related interest) of
$10.5 million
. Excluding these three items, the Company’s adjusted effective income tax rate would have been
22.2%
(see non-GAAP measures defined and reconciled on pages
29
to
31
). Other than the three items discussed above, the variability in the effective income tax rate is primarily from changes in the mix of taxable income across the jurisdictions in which we operate.
|
|
|
•
|
During
2017
, we repurchased portions of our senior secured term loan with an aggregate par value of
$60.1 million
at a weighted average discount of
10.7%
, recognizing a net gain of
$5.6 million
on the early extinguishment of debt. During
2016
, we repurchased portions of our senior secured term loan with an aggregate par value of
$51.0 million
at a weighted average discount of
13.2%
, recognizing a net gain of
$5.5 million
on the early extinguishment of debt. During
2015
, we repurchased portions of our senior secured term loan with an aggregate par value of
$49.0 million
at a weighted average discount of
10.3%
, recognizing a net gain of
$3.8 million
on the early extinguishment of debt.
|
|
|
•
|
In the fourth quarter of 2016, we recorded a litigation settlement loss of
$28.0 million
, net of a
$4.0 million
insurance recovery, related to an agreed settlement of a class action lawsuit (no comparative amounts in
2017
and
2015
).
|
|
|
•
|
During the year ended
December 31, 2016
, we purchased
4.1 million
shares of RESI common stock for
$48.2 million
. During the years ended
December 31, 2017
and
2016
, we earned dividends of
$2.5 million
and
$2.3 million
related to this investment (no comparative amount in 2015). In addition, during the year ended
December 31, 2016
, we incurred expenses of
$3.4 million
related to this investment (no comparative amounts in
2017
and 2015).
|
|
|
•
|
In the fourth quarter of 2015, we recorded non-cash impairment losses of
$71.8 million
in our Mortgage Market and Other Businesses, Corporate and Eliminations segments primarily driven by our projected technology services revenue from Ocwen and investment in technologies provided to Ocwen (no comparative amounts in
2017
and
2016
).
|
|
|
•
|
On July 29, 2016, we acquired certain assets and assumed certain liabilities of Granite for
$9.5 million
.
|
|
|
•
|
On October 9, 2015, we acquired RentRange and Investability for
$24.8 million
composed of
$17.5 million
in cash at closing and
247 thousand
shares of restricted common stock of the Company with a value of
$7.3 million
as of the closing date.
|
|
|
•
|
On July 17, 2015, we acquired CastleLine for
$33.4 million
. The purchase consideration was composed of
$12.3 million
of cash at closing,
$10.5 million
of cash payable to the seller over
four years
from the acquisition date and
495 thousand
shares of restricted common stock of the Company with a value of
$14.4 million
as of the closing date. Of the cash payable following acquisition,
$3.8 million
is contingent on certain future employment conditions of certain of the sellers, and therefore excluded from the purchase price.
|
|
|
•
|
In 2015, we paid the former owners of Equator
$0.5 million
to extinguish any liability for the Equator Earn Out. In connection with this settlement, we reduced the liability for the Equator Earn Out to
$0
and recognized a
$7.6 million
increase in earnings (no comparative amounts in
2017
and
2016
).
|
|
|
•
|
During 2015, we recognized a loss on the sale of equity securities of HLSS, net of dividends received, of
$1.9 million
.
|
|
|
•
|
Effective March 31, 2015, we terminated the Data Access and Services Agreement with Ocwen (“Data Access Agreement”) (no comparative amounts in 2017 and 2016).
|
CONSOLIDATED RESULTS OF OPERATIONS
Summary Consolidated Results
Following is a discussion of our consolidated results of operations for the years ended
December 31, 2017
,
2016
and
2015
. For a more detailed discussion of the factors that affected the results of our business segments in these periods, see “
Segment Results of Operations
” below.
The following table sets forth information on our results of operations for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
2017
|
|
% Increase (decrease)
|
|
2016
|
|
% Increase (decrease)
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue
|
|
|
|
|
|
|
|
|
|
|
Mortgage Market
|
|
$
|
754,058
|
|
|
(3
|
)
|
|
$
|
774,514
|
|
|
(1
|
)
|
|
$
|
781,984
|
|
Real Estate Market
|
|
86,821
|
|
|
2
|
|
|
84,805
|
|
|
81
|
|
|
46,963
|
|
Other Businesses, Corporate and Eliminations
|
|
58,682
|
|
|
(30
|
)
|
|
83,280
|
|
|
(26
|
)
|
|
111,973
|
|
Total service revenue
|
|
899,561
|
|
|
(5
|
)
|
|
942,599
|
|
|
—
|
|
|
940,920
|
|
Reimbursable expenses
|
|
39,912
|
|
|
(23
|
)
|
|
52,011
|
|
|
(52
|
)
|
|
107,344
|
|
Non-controlling interests
|
|
2,740
|
|
|
2
|
|
|
2,693
|
|
|
(16
|
)
|
|
3,202
|
|
Total revenue
|
|
942,213
|
|
|
(6
|
)
|
|
997,303
|
|
|
(5
|
)
|
|
1,051,466
|
|
Cost of revenue
|
|
699,865
|
|
|
1
|
|
|
690,045
|
|
|
—
|
|
|
687,327
|
|
Gross profit
|
|
242,348
|
|
|
(21
|
)
|
|
307,258
|
|
|
(16
|
)
|
|
364,139
|
|
Selling, general and administrative expenses
|
|
192,642
|
|
|
(10
|
)
|
|
214,155
|
|
|
(3
|
)
|
|
220,868
|
|
Litigation settlement loss, net of $4,000
insurance recovery
|
|
—
|
|
|
(100
|
)
|
|
28,000
|
|
|
N/M
|
|
|
—
|
|
Impairment losses
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(100
|
)
|
|
71,785
|
|
Change in the fair value of Equator Earn Out
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(100
|
)
|
|
(7,591
|
)
|
Income from operations
|
|
49,706
|
|
|
(24
|
)
|
|
65,103
|
|
|
(18
|
)
|
|
79,077
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(22,253
|
)
|
|
(9
|
)
|
|
(24,412
|
)
|
|
(13
|
)
|
|
(28,208
|
)
|
Other income (expense), net
|
|
7,922
|
|
|
118
|
|
|
3,630
|
|
|
66
|
|
|
2,191
|
|
Total other income (expense), net
|
|
(14,331
|
)
|
|
(31
|
)
|
|
(20,782
|
)
|
|
(20
|
)
|
|
(26,017
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and non-controlling interests
|
|
35,375
|
|
|
(20
|
)
|
|
44,321
|
|
|
(16
|
)
|
|
53,060
|
|
Income tax benefit (provision)
|
|
276,256
|
|
|
N/M
|
|
|
(12,935
|
)
|
|
57
|
|
|
(8,260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
311,631
|
|
|
N/M
|
|
|
31,386
|
|
|
(30
|
)
|
|
44,800
|
|
Net income attributable to non-controlling interests
|
|
(2,740
|
)
|
|
2
|
|
|
(2,693
|
)
|
|
(16
|
)
|
|
(3,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Altisource
|
|
$
|
308,891
|
|
|
N/M
|
|
|
$
|
28,693
|
|
|
(31
|
)
|
|
$
|
41,598
|
|
|
|
|
|
|
|
|
|
|
|
|
Margins:
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit/service revenue
|
|
27
|
%
|
|
|
|
|
33
|
%
|
|
|
|
39
|
%
|
Income from operations/service revenue
|
|
6
|
%
|
|
|
|
|
7
|
%
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
16.99
|
|
|
N/M
|
|
|
$
|
1.53
|
|
|
(28
|
)
|
|
$
|
2.13
|
|
Diluted
|
|
$
|
16.53
|
|
|
N/M
|
|
|
$
|
1.46
|
|
|
(28
|
)
|
|
$
|
2.02
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
18,183
|
|
|
(3
|
)
|
|
18,696
|
|
|
(4
|
)
|
|
19,504
|
|
Diluted
|
|
18,692
|
|
|
(5
|
)
|
|
19,612
|
|
|
(5
|
)
|
|
20,619
|
|
_____________________________________
N/M — not meaningful.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
2017
|
|
% Increase (decrease)
|
|
2016
|
|
% Increase (decrease)
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measures
(1)
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income attributable to Altisource
|
|
$
|
52,306
|
|
|
(42
|
)
|
|
$
|
90,095
|
|
|
(37
|
)
|
|
$
|
143,475
|
|
Adjusted diluted earnings per share
|
|
$
|
2.80
|
|
|
(39
|
)
|
|
$
|
4.59
|
|
|
(34
|
)
|
|
$
|
6.96
|
|
Adjusted EBITDA
|
|
$
|
126,432
|
|
|
(29
|
)
|
|
$
|
178,313
|
|
|
(19
|
)
|
|
$
|
219,732
|
|
_____________________________________
|
|
(1)
|
These are non-GAAP measures that are defined and reconciled to the corresponding GAAP measures on pages
29
to
31
.
|
Revenue
We recognized service revenue of
$899.6 million
,
$942.6 million
and
$940.9 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. The decrease in service revenue for the year ended
December 31, 2017
was primarily due to lower service revenue in our IT infrastructure services and customer relationship management businesses in the Other Businesses, Corporate and Eliminations segment and, in the Mortgage Market segment, a reduction in the size of Ocwen’s portfolio and number of delinquent loans in its portfolio resulting from loan repayments, loan modifications, short sales, REO sales and other forms of resolution. IT infrastructure services revenue declined from the transition of resources supporting Ocwen’s technology infrastructure to Ocwen. Beginning in the fourth quarter of 2015 and continuing through 2017, we transitioned resources supporting Ocwen’s technology infrastructure from Altisource to Ocwen. The decrease in the customer relationship management service revenue was primarily due to severed client relationships with certain non-profitable clients and a reduction in volume from the transition of services from one customer to another. The declines in the Mortgage Market segment were partially offset by growth in property preservation and inspection business from Ocwen as well as non-Ocwen customers and the impact of the 2015 change in the billing model for preservation services on new Ocwen REO referrals that resulted in certain services that were historically reimbursable expenses revenue becoming service revenue. Furthermore, Mortgage Market service revenue from loan disbursement processing services increased from the full year impact of the Granite acquisition in July 2016. Service revenue in the Real Estate Market was lower as a result of RESI’s smaller portfolio of non-performing loans and REO, which was largely offset by increased service revenue from home sales in the buy-renovate-lease-sell business, which began operations in the second half of 2016, and an increase in the renovation management business.
The increase in service revenue in 2016 compared to 2015 was primarily driven by revenue growth in the Real Estate Market, primarily due to growth in the volume of homes sold and the percentage of homes sold through auction on Hubzu and increased volumes of higher value property preservation referrals. The increase in service revenue in the Mortgage Market was driven by the change in the billing model for new Ocwen REO referrals in the Servicer Solutions business and revenue growth in the Origination Solutions business from new customers and volume growth with existing customers. However, these increases were more than offset by lower rates charged to Ocwen for certain software services. Also, service revenue was lower in the Other Businesses, Corporate and Eliminations segment, primarily due to lower customer relationship management revenue as we severed relationships with and reduced the volume of services provided to certain clients that were not profitable to us, and we experienced a reduction in volume from the transition of services from one customer to another. IT infrastructure services also declined due to the transition of resources supporting Ocwen’s technology infrastructure to Ocwen. During the fourth quarter of 2015, we began transitioning resources supporting Ocwen’s technology infrastructure to Ocwen as a part of the previously announced separation of technology infrastructure.
We recognized reimbursable expense revenue of
$39.9 million
,
$52.0 million
and
$107.3 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. The decreases in reimbursable expenses revenue were primarily due to a reduction in the size of Ocwen’s portfolio and number of delinquent loans in its portfolio resulting from loan repayments, loan modifications, short sales, REO sales and other forms of resolution and a change in 2015 in the billing model for preservation services on new Ocwen REO referrals described above, which impacted reimbursable expense revenue in the Mortgage Market.
Certain of our revenues are impacted by seasonality. More specifically, revenues from property sales, loan originations and certain property preservation services typically tend to be at their lowest level during the fall and winter months and at their highest level during the spring and summer months. In addition, revenue in the asset recovery management business tends to be higher in the first quarter, as borrowers may utilize tax refunds and bonuses to pay debts, and generally declines throughout the rest of the year.
Cost of Revenue and Gross Profit
Cost of revenue principally includes payroll and employee benefits associated with personnel employed in customer service and operations roles, fees paid to external providers related to the provision of services, cost of real estate sold, reimbursable expenses, technology and telecommunications costs and depreciation and amortization of operating assets.
Cost of revenue consists of the following for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
% Increase (decrease)
|
|
2016
|
|
% Increase (decrease)
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
240,487
|
|
|
(9
|
)
|
|
$
|
264,796
|
|
|
1
|
|
|
$
|
261,839
|
|
Outside fees and services
|
|
325,459
|
|
|
8
|
|
|
301,116
|
|
|
21
|
|
|
248,278
|
|
Cost of real estate sold
|
|
24,398
|
|
|
N/M
|
|
|
1,040
|
|
|
N/M
|
|
|
—
|
|
Reimbursable expenses
|
|
39,912
|
|
|
(23
|
)
|
|
52,011
|
|
|
(52
|
)
|
|
107,344
|
|
Technology and telecommunications
|
|
42,340
|
|
|
(4
|
)
|
|
44,295
|
|
|
3
|
|
|
43,177
|
|
Depreciation and amortization
|
|
27,269
|
|
|
2
|
|
|
26,787
|
|
|
—
|
|
|
26,689
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
699,865
|
|
|
1
|
|
|
$
|
690,045
|
|
|
—
|
|
|
$
|
687,327
|
|
N/M — not meaningful.
We recognized cost of revenue of
$699.9 million
,
$690.0 million
and
$687.3 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. The increase in cost of revenue in
2017
compared to
2016
was primarily driven by higher outside fees and services and cost of real estate sold, partially offset by decreases in compensation and benefits and reimbursable expenses. Outside fees and services increased in the Mortgage Market due to growth in referrals of certain higher cost property preservation services in the Servicer Solutions business and the change in the billing model discussed in the revenue section above, partially offset by lower costs related to RESI’s smaller portfolio of non-performing loans and REO in the Real Estate Investor Solutions business. The decrease in reimbursable expenses in the Mortgage Market was primarily due to fewer REO properties under the prior billing model discussed in the revenue section above. The increases in cost of real estate sold were the result of properties sold in connection with our buy-renovate-lease-sell program, which began operations in the second half of 2016.
Compensation and benefits declined in the Mortgage Market segment as we reduced headcount in certain of the Servicer Solutions businesses from the decline in Ocwen’s portfolio discussed in the revenue section above as well as from the implementation of efficiency initiatives. In the Other Businesses, Corporate and Eliminations segment, compensation and benefits decreased in connection with the transition of resources supporting Ocwen’s technology infrastructure to Ocwen and lower headcount levels in our customer relationship management business, consistent with the decline in service revenues. In the Real Estate Market, compensation and benefits increased in the Consumer Real Estate Solutions business to support growth of this business, partially offset by lower headcount levels in the Real Estate Investor Solutions business driven by lower customer volumes in certain business units.
The increase in cost of revenue in 2016 compared to
2015
was primarily attributable to higher outside fees and services, largely offset by decreases in reimbursable expenses in the Mortgage Market. Outside fees and services increased and reimbursable expenses declined primarily due to higher volumes of property preservation referrals and the change in billing model discussed in the revenue section above. In addition, the increase in outside fees and services was partially offset by the March 31, 2015 termination of the Data Access Agreement.
Gross profit decreased to
$242.3 million
, representing
27%
of service revenue, for the year ended
December 31, 2017
compared to
$307.3 million
, representing
33%
of service revenue, for the year ended
December 31, 2016
and
$364.1 million
, representing
39%
of service revenue, for the year ended
December 31, 2015
.
Gross profit as a percentage of service revenue decreased in
2017
compared to
2016
primarily due to revenue mix and investments in our growth businesses. Revenue mix changed from growth in the lower margin property preservation services, buy-renovate-lease-sell and renovation management businesses and declines in other higher margin businesses.
Gross profit as a percentage of service revenue decreased in
2016
compared to
2015
primarily due to higher growth in the lower margin property preservation services, higher compensation and benefits in the Real Estate Market to support our growth initiatives and reductions in volumes and prices in certain technology businesses in the Mortgage Market which exceeded the decline in costs. These decreases were partially offset by the March 31, 2015 termination of the Data Access Agreement.
Selling, General and Administrative Expenses
Selling, general and administration expenses (“SG&A”) include payroll for personnel employed in executive, finance, law, compliance, human resources, vendor management, facilities, risk management, sales and marketing roles. This category also includes professional fees, occupancy costs, marketing costs, depreciation and amortization of non-operating assets and other expenses.
SG&A expenses consist of the following for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
% Increase (decrease)
|
|
2016
|
|
% Increase (decrease)
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
58,157
|
|
|
5
|
|
|
$
|
55,577
|
|
|
1
|
|
|
$
|
54,897
|
|
Professional services
|
|
13,421
|
|
|
(42
|
)
|
|
23,284
|
|
|
—
|
|
|
23,183
|
|
Occupancy related costs
|
|
36,371
|
|
|
(3
|
)
|
|
37,370
|
|
|
(6
|
)
|
|
39,917
|
|
Amortization of intangible assets
|
|
35,367
|
|
|
(26
|
)
|
|
47,576
|
|
|
16
|
|
|
41,135
|
|
Depreciation and amortization
|
|
9,178
|
|
|
(8
|
)
|
|
10,001
|
|
|
2
|
|
|
9,781
|
|
Marketing costs
|
|
16,171
|
|
|
(42
|
)
|
|
27,847
|
|
|
1
|
|
|
27,499
|
|
Other
|
|
23,977
|
|
|
92
|
|
|
12,500
|
|
|
(49
|
)
|
|
24,456
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
192,642
|
|
|
(10
|
)
|
|
$
|
214,155
|
|
|
(3
|
)
|
|
$
|
220,868
|
|
We recognized SG&A of
$192.6 million
,
$214.2 million
and
$220.9 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. The decrease in SG&A in
2017
compared to
2016
was primarily due to lower amortization of intangible assets driven by an increase in total projected revenue to be generated by the Homeward Residential, Inc. (“Homeward”) and Residential Capital, LLC (“ResCap”) portfolios over the lives of these portfolios (revenue-based amortization) and lower marketing costs, driven by initial non-recurring Owners.com market launch costs incurred during 2016 and the reduction in Owners.com recurring marketing spend as the business unit focuses on improving the lead to closing conversion rate. In addition, legal costs in professional services were lower in connection with the resolution of, and reduction in activities related to, several litigation and regulatory matters. These decreases were partially offset by an increase in Other, primarily due to facility closures, litigation related costs, an increase in bad debt expense and a $3.0 million favorable loss accrual adjustment in Other in 2016.
The decrease in SG&A in
2016
compared to
2015
was primarily due to a decrease in Other driven by an estimated loss recorded in the fourth quarter of 2015 in connection with an anticipated payment to Ocwen for obtaining a release of liability for Altisource related to Ocwen’s settlement of a particular case and lower bad debt expense in 2016. The decrease was partially offset by higher amortization of intangible assets from increased revenues from the Homeward and ResCap portfolios (revenue-based amortization).
Other Operating Expenses
Other operating expenses include the litigation settlement loss, net of insurance recovery for the year ended December 31, 2016 and impairment losses and changes in the fair value of the Equator Earn Out for the year ended December 31, 2015 (no comparative amounts in 2017).
Other operating expenses consist of the following for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
% Increase (decrease)
|
|
2016
|
|
% Increase (decrease)
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Litigation settlement loss, net of $4,000
insurance recovery
|
|
$
|
—
|
|
|
(100
|
)
|
|
$
|
28,000
|
|
|
N/M
|
|
|
$
|
—
|
|
Impairment losses
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(100
|
)
|
|
71,785
|
|
Change in the fair value of Equator Earn Out
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(100
|
)
|
|
(7,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
$
|
—
|
|
|
(100
|
)
|
|
$
|
28,000
|
|
|
(56
|
)
|
|
$
|
64,194
|
|
N/M — not meaningful.
For the
year ended
December 31, 2016
, other operating expenses of
$28.0 million
included a litigation settlement loss, which consists of a legal settlement accrual of
$28.0 million
, net of a $4.0 million insurance recovery. The litigation settlement loss related to the agreed settlement of the putative class action litigation designated
In
re: Altisource Portfolio Solutions, S.A. Securities Litigation
in the United States District Court for the Southern District of Florida. Altisource Portfolio Solutions S.A. and the officer and director defendants denied all claims of wrongdoing or liability. The settlement loss was recorded in 2016 and paid in 2017.
For the
year ended
December 31, 2015
, other operating expenses of
$64.2 million
included impairment losses and changes in the fair value of the Equator Earn Out. The non-cash impairment losses of
$71.8 million
were primarily driven by the Company’s projected technology revenue from Ocwen and investment in technologies provided to Ocwen. These losses are composed of $55.7 million impairment of goodwill, $11.9 million impairment of intangible assets from the 2013 Homeward and ResCap fee-
based business acquisitions and $4.1 million impairment of software assets included in premises and equipment. These impairment losses were attributable to our Mortgage Market and Other Businesses, Corporate and Eliminations segments.
We recognized a gain on the change in the fair value of the Equator Earn Out of
$7.6 million
in 2015 in our Mortgage Market segment. The liability for contingent consideration was reflected at fair value and adjusted each reporting period with the change in fair value recognized in earnings. In 2015, we reached an agreement with the former owners of Equator to extinguish any liability for the Equator Earn Out. In connection with this settlement, we reduced the liability for the Equator Earn Out to $0 and recognized a
$7.6 million
increase in earnings.
Income from Operations
Income from operations decreased to
$49.7 million
, representing
6%
of service revenue, for the year ended
December 31, 2017
compared to
$65.1 million
, representing
7%
of service revenue, for the year ended
December 31, 2016
. The decrease was primarily due to 2017 revenue mix changes and investments in our growth businesses, partially offset by the 2016 litigation settlement loss of
$28.0 million
and the decrease in SG&A, as discussed above.
Income from operations decreased to $
65.1 million
, representing
7%
of service revenue, for the year ended
December 31, 2016
compared to
$79.1 million
, representing
8%
of service revenue, for the year ended
December 31, 2015
. The decrease was primarily due to a lower gross profit margin in 2016, the litigation settlement loss, net of insurance recovery, and the 2015 Equator Earn Out gain, partially offset by the 2015 impairment losses and lower SG&A in 2016, as discussed above.
Because the Mortgage Market is our largest and highest margin segment and Ocwen is our largest customer in this segment, declines in service revenue from Ocwen and the changes in mix of revenue from Ocwen have had a negative impact on our operating income.
Other Income (Expense), net
Other income (expense), net principally includes interest expense and other non-operating gains and losses. Other income (expense), net was
$(14.3) million
,
$(20.8) million
and
$(26.0) million
for the years ended
December 31, 2017
, 2016 and 2015, respectively. The decrease in other income (expense), net in 2017 was primarily due to lower interest expense and higher other income. Interest expense was $(22.3) million in 2017 compared to $(24.4) million in 2016, driven by the repurchase of portions of our senior secured term loan, partially offset by an increase in the senior secured term loan interest rate from 4.50% as of
December 31, 2016
to 5.07% as of
December 31, 2017
. During 2017, we repurchased portions of our senior secured term loan with an aggregate par value of
$60.1 million
at a weighted average discount of
10.7%
, recognizing a net gain of
$5.6 million
on the early extinguishment of debt in other income. During 2016, we repurchased portions of our senior secured term loan with an aggregate par value of
$51.0 million
at a weighted average discount of
13.2%
, recognizing a net gain of
$5.5 million
on the early extinguishment of debt in other income. Also, during 2017 and 2016, we earned dividends of $2.5 million and $2.3 million, respectively, related to our investment in RESI and in 2016 we incurred expenses of $3.4 million related to this investment (no comparative amount in 2017).
The decrease in other income (expense), net in 2016 was primarily due to lower interest expense and higher other income. Interest expense was $(24.4) million in 2016 compared to $(28.2) million in 2015, driven by the repurchase of portions of our senior secured term loan. During 2016, we repurchased portions of our senior secured term loan with an aggregate par value of $51.0 million at a weighted average discount of 13.2%, recognizing a net gain of $5.5 million on the early extinguishment of debt in other income. During 2015, we repurchased portions of our senior secured term loan with an aggregate par value of $49.0 million at a weighted average discount of
10.3%
, recognizing a net gain of
$3.8 million
on the early extinguishment of debt in other income. Also, during 2016, we earned dividends of $2.3 million and incurred expenses of $(3.4) million related to our investment in RESI (no comparative amounts in 2015). During March 2015, we purchased 1.6 million shares of HLSS common stock in the open market for $30.0 million. During 2015, we received liquidating dividends and other dividends from HLSS totaling $20.4 million and sold all of our 1.6 million shares of HLSS common stock in the open market for $7.7 million. As a result of these transactions, we recognized a net loss of $(1.9) million for the year ended December 31, 2015 in connection with our investment in HLSS (no comparative amount in 2016).
Income Tax Provision
We recognized an income tax benefit (provision) of $276.3 million, $(12.9) million and $(8.3) million for the years ended December 31, 2017, 2016 and 2015, respectively, and our effective income tax rates for the years ended
December 31, 2017
,
2016
and
2015
were
(780.9)%
,
29.2%
and
15.6%
, respectively. On December 27, 2017, two of the Company’s wholly-owned subsidiaries, Altisource Solutions S.à r.l. and Altisource Holdings S.à r.l., merged, with Altisource Holdings S.à r.l. as the surviving entity. Altisource Holdings S.à r.l. was subsequently renamed Altisource S.à r.l. The merger is part of a larger subsidiary restructuring plan designed to simplify the Company’s corporate structure, allow it to operate more efficiently and reduce administrative costs. For Luxembourg tax purposes, the merger was recognized at fair value and generated an NOL of $1.3 billion and a deferred tax
asset, net of valuation allowance, of $300.9 million as of December 31, 2017. The NOL has a 17 year life. This deferred tax asset was partially offset by the impact of other changes in U.S. and Luxembourg income tax rates of
$6.3 million
and an increase in certain foreign income tax reserves (and related interest) of
$10.5 million
. Excluding these three items, the Company’s adjusted effective income tax rate would have been 22.2% (see non-GAAP measures defined and reconciled on pages
29
to
31
). Our effective tax rate differs from the Luxembourg statutory tax rate of 27.1% for the year ended December 31, 2017 and 29.2% for the years ended December 31, 2016 and 2015, primarily due to the effect of the three significant items discussed above, certain deductions in Luxembourg and the mix of income and losses with varying tax rates in multiple taxing jurisdictions. The higher effective income tax rate for the year ended December 31, 2016 compared to the year ended December 31, 2015 was primarily the result of lower pretax income, including the impact of the litigation settlement loss, net of insurance recovery, which changed the mix of taxable income across the jurisdictions in which we operate.
SEGMENT RESULTS OF OPERATIONS
Effective January 1, 2017, our reportable segments changed as a result of a change in the way our chief operating decision maker manages our businesses, allocates resources and evaluates performance, and the related changes in our internal organization. See Item 1 of Part I, “
Reportable Segments
,” for additional information regarding changes in our reportable segments. Prior year comparable period segment disclosures have been restated to conform to the current year presentation.
The following section provides a discussion of pretax results of operations of our business segments. Transactions between segments are accounted for as third party arrangements for purposes of presenting segment results of operations.
Financial information for our segments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2017
|
(in thousands)
|
|
Mortgage Market
|
|
Real Estate Market
|
|
Other Businesses, Corporate and Eliminations
|
|
Consolidated Altisource
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue
|
|
$
|
754,058
|
|
|
$
|
86,821
|
|
|
$
|
58,682
|
|
|
$
|
899,561
|
|
Reimbursable expenses
|
|
36,886
|
|
|
2,966
|
|
|
60
|
|
|
39,912
|
|
Non-controlling interests
|
|
2,740
|
|
|
—
|
|
|
—
|
|
|
2,740
|
|
|
|
793,684
|
|
|
89,787
|
|
|
58,742
|
|
|
942,213
|
|
Cost of revenue
|
|
545,507
|
|
|
96,967
|
|
|
57,391
|
|
|
699,865
|
|
Gross profit (loss)
|
|
248,177
|
|
|
(7,180
|
)
|
|
1,351
|
|
|
242,348
|
|
Selling, general and administrative expenses
|
|
114,215
|
|
|
18,718
|
|
|
59,709
|
|
|
192,642
|
|
Income (loss) from operations
|
|
133,962
|
|
|
(25,898
|
)
|
|
(58,358
|
)
|
|
49,706
|
|
Total other income (expense), net
|
|
72
|
|
|
(4
|
)
|
|
(14,399
|
)
|
|
(14,331
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and non-controlling interests
|
|
$
|
134,034
|
|
|
$
|
(25,902
|
)
|
|
$
|
(72,757
|
)
|
|
$
|
35,375
|
|
|
|
|
|
|
|
|
|
|
Margins:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)/service revenue
|
|
33
|
%
|
|
(8
|
)%
|
|
2
|
%
|
|
27
|
%
|
Income (loss) from operations/service revenue
|
|
18
|
%
|
|
(30
|
)%
|
|
(99
|
)%
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2016
|
(in thousands)
|
|
Mortgage Market
|
|
Real Estate Market
|
|
Other Businesses, Corporate and Eliminations
|
|
Consolidated Altisource
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue
|
|
$
|
774,514
|
|
|
$
|
84,805
|
|
|
$
|
83,280
|
|
|
$
|
942,599
|
|
Reimbursable expenses
|
|
50,117
|
|
|
1,785
|
|
|
109
|
|
|
52,011
|
|
Non-controlling interests
|
|
2,693
|
|
|
—
|
|
|
—
|
|
|
2,693
|
|
|
|
827,324
|
|
|
86,590
|
|
|
83,389
|
|
|
997,303
|
|
Cost of revenue
|
|
546,540
|
|
|
64,566
|
|
|
78,939
|
|
|
690,045
|
|
Gross profit
|
|
280,784
|
|
|
22,024
|
|
|
4,450
|
|
|
307,258
|
|
Selling, general and administrative expenses
|
|
121,508
|
|
|
23,291
|
|
|
69,356
|
|
|
214,155
|
|
Litigation settlement loss, net of $4,000 insurance recovery
|
|
—
|
|
|
—
|
|
|
28,000
|
|
|
28,000
|
|
Income (loss) from operations
|
|
159,276
|
|
|
(1,267
|
)
|
|
(92,906
|
)
|
|
65,103
|
|
Total other income (expense), net
|
|
154
|
|
|
(5
|
)
|
|
(20,931
|
)
|
|
(20,782
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and non-controlling interests
|
|
$
|
159,430
|
|
|
$
|
(1,272
|
)
|
|
$
|
(113,837
|
)
|
|
$
|
44,321
|
|
|
|
|
|
|
|
|
|
|
Margins:
|
|
|
|
|
|
|
|
|
Gross profit/service revenue
|
|
36
|
%
|
|
26
|
%
|
|
5
|
%
|
|
33
|
%
|
Income (loss) from operations/service revenue
|
|
21
|
%
|
|
(1
|
)%
|
|
(112
|
)%
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2015
|
(in thousands)
|
|
Mortgage Market
|
|
Real Estate Market
|
|
Other Businesses, Corporate and Eliminations
|
|
Consolidated Altisource
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue
|
|
$
|
781,984
|
|
|
$
|
46,963
|
|
|
$
|
111,973
|
|
|
$
|
940,920
|
|
Reimbursable expenses
|
|
99,988
|
|
|
7,236
|
|
|
120
|
|
|
107,344
|
|
Non-controlling interests
|
|
3,202
|
|
|
—
|
|
|
—
|
|
|
3,202
|
|
|
|
885,174
|
|
|
54,199
|
|
|
112,093
|
|
|
1,051,466
|
|
Cost of revenue
|
|
552,676
|
|
|
38,541
|
|
|
96,110
|
|
|
687,327
|
|
Gross profit
|
|
332,498
|
|
|
15,658
|
|
|
15,983
|
|
|
364,139
|
|
Selling, general and administrative expenses
|
|
132,334
|
|
|
7,514
|
|
|
81,020
|
|
|
220,868
|
|
Impairment losses
|
|
64,146
|
|
|
—
|
|
|
7,639
|
|
|
71,785
|
|
Change in the fair value of Equator Earn Out
|
|
(7,591
|
)
|
|
—
|
|
|
—
|
|
|
(7,591
|
)
|
Income (loss) from operations
|
|
143,609
|
|
|
8,144
|
|
|
(72,676
|
)
|
|
79,077
|
|
Total other income (expense), net
|
|
621
|
|
|
2
|
|
|
(26,640
|
)
|
|
(26,017
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and non-controlling interests
|
|
$
|
144,230
|
|
|
$
|
8,146
|
|
|
$
|
(99,316
|
)
|
|
$
|
53,060
|
|
|
|
|
|
|
|
|
|
|
Margins:
|
|
|
|
|
|
|
|
|
Gross profit/service revenue
|
|
43
|
%
|
|
33
|
%
|
|
14
|
%
|
|
39
|
%
|
Income (loss) from operations/service revenue
|
|
18
|
%
|
|
17
|
%
|
|
(65
|
)%
|
|
8
|
%
|
Mortgage Market
Revenue
Revenue by business unit was as follows for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
% Increase (decrease)
|
|
2016
|
|
% Increase (decrease)
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicer Solutions
|
|
$
|
704,848
|
|
|
(2
|
)
|
|
$
|
722,734
|
|
|
(2
|
)
|
|
$
|
739,991
|
|
Origination Solutions
|
|
49,210
|
|
|
(5
|
)
|
|
51,780
|
|
|
23
|
|
|
41,993
|
|
Total service revenue
|
|
754,058
|
|
|
(3
|
)
|
|
774,514
|
|
|
(1
|
)
|
|
781,984
|
|
|
|
|
|
|
|
|
|
|
|
|
Reimbursable expenses:
|
|
|
|
|
|
|
|
|
|
|
Servicer Solutions
|
|
36,636
|
|
|
(26
|
)
|
|
49,838
|
|
|
(50
|
)
|
|
99,832
|
|
Origination Solutions
|
|
250
|
|
|
(10
|
)
|
|
279
|
|
|
79
|
|
|
156
|
|
Total reimbursable expenses
|
|
36,886
|
|
|
(26
|
)
|
|
50,117
|
|
|
(50
|
)
|
|
99,988
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interests
|
|
2,740
|
|
|
2
|
|
|
2,693
|
|
|
(16
|
)
|
|
3,202
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
793,684
|
|
|
(4
|
)
|
|
$
|
827,324
|
|
|
(7
|
)
|
|
$
|
885,174
|
|
We recognized service revenue of
$754.1 million
for the year ended
December 31, 2017
, a
3%
decrease compared to the year ended
December 31, 2016
. The decrease in service revenue was primarily a result of the reduction in the size of Ocwen’s portfolio and number of delinquent loans in its portfolio resulting from loan repayments, loan modifications, short sales, REO sales and other forms of resolution in the Servicer Solutions business. This decline was partially offset by growth in the Servicer Solutions business in referrals of certain higher fee property preservation services, growth in non-Ocwen service revenues from new and existing customers and increases in loan disbursement processing services in connection with the Granite acquisition in July 2016. In addition, an increase in service revenue and a decrease in reimbursable expenses in the Servicer Solutions business was also the result of an early 2015 change in the billing model for preservation services on new Ocwen REO referrals that resulted in certain services that were historically reimbursable expenses revenue becoming service revenue.
We recognized service revenue of
$774.5 million
for the
year ended
December 31, 2016
, a
1%
decrease compared to the year ended
December 31, 2015
. The decrease in service revenue was primarily a result of the reduction in the size of Ocwen’s portfolio and number of delinquent loans in its portfolio resulting from loan repayments, loan modifications, short sales, REO sales and other forms of resolution and lower rates charged to Ocwen for certain software services in the Servicer Solutions business. This decline was partially offset by an increase in service revenue and a decrease in reimbursable expenses in the Servicer Solutions business as a result of an early 2015 change in the billing model for preservation services on new Ocwen REO referrals that resulted in certain services that were historically reimbursable expenses revenue becoming service revenue, as described above, and revenue growth in the Origination Solutions business from new customers and volume growth with existing customers.
We recognized reimbursable expense revenue of $36.9 million, $50.1 million and $100.0 million for the years ended
December 31, 2017
, 2016 and 2015, respectively. The decreases in reimbursable expenses revenue were primarily due to a reduction in the size of Ocwen’s portfolio and number of delinquent loans in its portfolio resulting from loan repayments, loan modifications, short sales, REO sales and other forms of resolution and a change in 2015 in the billing model for preservation services on new Ocwen REO referrals described above.
Certain of our Mortgage Market businesses are impacted by seasonality. Revenues from property sales, loan originations and certain property preservation services are generally lowest during the fall and winter months and highest during the spring and summer months.
Cost of Revenue and Gross Profit
Cost of revenue consisted of the following for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
% Increase (decrease)
|
|
2016
|
|
% Increase (decrease)
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
163,370
|
|
|
(8
|
)
|
|
$
|
177,473
|
|
|
—
|
|
|
$
|
177,091
|
|
Outside fees and services
|
|
295,533
|
|
|
9
|
|
|
272,124
|
|
|
20
|
|
|
227,281
|
|
Reimbursable expenses
|
|
36,886
|
|
|
(26
|
)
|
|
50,117
|
|
|
(50
|
)
|
|
99,988
|
|
Technology and telecommunications
|
|
30,467
|
|
|
1
|
|
|
30,017
|
|
|
(7
|
)
|
|
32,271
|
|
Depreciation and amortization
|
|
19,251
|
|
|
15
|
|
|
16,809
|
|
|
5
|
|
|
16,045
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
545,507
|
|
|
—
|
|
|
$
|
546,540
|
|
|
(1
|
)
|
|
$
|
552,676
|
|
Cost of revenue for the
year ended
December 31, 2017
of
$545.5 million
decreased by less than 1% compared to the year ended
December 31, 2016
. Compensation and benefits declined in certain of the Servicer Solutions businesses as we reduced headcount in certain businesses from the decline in Ocwen’s portfolio discussed in the revenue section above as well as the implementation of efficiency initiatives. In addition, reimbursable expenses decreased primarily as a result of the change in the billing model discussed in the revenue section above. These declines were largely offset by increases in outside fees and services, primarily due to growth in referrals of certain higher cost property preservation services and the change in the billing model in the Servicer Solutions business, consistent with the growth in service revenue discussed in the revenue section above.
Cost of revenue for the
year ended
December 31, 2016
of
$546.5 million
decreased by
1%
compared to the year ended
December 31, 2015
, primarily due to a decrease in reimbursable expenses, primarily as a result of the change in billing model discussed in the revenue section above, and the March 31, 2015 termination of the Data Access Agreement. These decreases were largely offset by an increase in outside fees and services, due to an increase in the average costs related to higher value property preservation referrals and the change in billing model discussed in the revenue section above.
Gross profit decreased to
$248.2 million
, representing
33%
of service revenue, for the year ended
December 31, 2017
compared to
$280.8 million
, representing
36%
of service revenue, for the
year ended
December 31, 2016
and
$332.5 million
representing
43%
of service revenue, for the
year ended
December 31, 2015
. Gross profit as a percentage of service revenue decreased in
2017
compared to
2016
, primarily due to revenue mix from growth in the lower margin property preservation services and declines in other higher margin businesses. Gross profit as a percentage of service revenue decreased in
2016
compared to
2015
, primarily due to a change in revenue mix, as a higher percentage of revenue in
2016
was from lower margin property preservation services, partially offset by the March 31, 2015 termination of the Data Access Agreement. Our margins can vary substantially depending upon service revenue mix.
Selling, General and Administrative Expenses
SG&A expenses consisted of the following for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
% Increase (decrease)
|
|
2016
|
|
% Increase (decrease)
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
23,089
|
|
|
5
|
|
|
$
|
22,087
|
|
|
52
|
|
|
$
|
14,511
|
|
Professional services
|
|
8,101
|
|
|
(31
|
)
|
|
11,771
|
|
|
(14
|
)
|
|
13,761
|
|
Occupancy related costs
|
|
23,275
|
|
|
12
|
|
|
20,737
|
|
|
(3
|
)
|
|
21,316
|
|
Amortization of intangible assets
|
|
32,715
|
|
|
(27
|
)
|
|
44,597
|
|
|
15
|
|
|
38,624
|
|
Depreciation and amortization
|
|
3,814
|
|
|
(5
|
)
|
|
4,030
|
|
|
21
|
|
|
3,328
|
|
Marketing costs
|
|
8,925
|
|
|
(19
|
)
|
|
10,980
|
|
|
(49
|
)
|
|
21,545
|
|
Other
|
|
14,296
|
|
|
96
|
|
|
7,306
|
|
|
(62
|
)
|
|
19,249
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
114,215
|
|
|
(6
|
)
|
|
$
|
121,508
|
|
|
(8
|
)
|
|
$
|
132,334
|
|
SG&A for the year ended
December 31, 2017
of
$114.2 million
decreased by
6%
compared to the year ended
December 31, 2016
. The decrease in SG&A was primarily driven by lower amortization of intangible assets, as a result of an increase in total projected revenue to be generated by the Homeward and ResCap portfolios over the lives of these portfolios (revenue-based amortization). In addition, legal costs in professional services were lower in connection with the resolution of, and reduction in activities related
to, several litigation and regulatory matters. The decrease in SG&A was partially offset by a $3.0 million favorable loss accrual adjustment in Other in 2016 and higher bad debt expense in 2017.
SG&A for the year ended
December 31, 2016
of
$121.5 million
decreased by
8%
compared to the year ended
December 31, 2015
primarily driven by a decrease in other SG&A and higher marketing costs in 2015, partially offset by increases in compensation and benefits and amortization of intangible assets. The decrease in other SG&A was primarily due to a favorable loss accrual adjustment during the first quarter of 2016 that was accrued in the fourth quarter of 2015, when Altisource recorded an estimated loss in connection with an anticipated payment to Ocwen for obtaining a release of liability for Altisource related to Ocwen’s settlement of a particular case, and lower bad debt expense from improved collections. The decrease in marketing costs in 2016 was primarily due to higher spending in 2015 to drive increased Hubzu website traffic and volumes. These decreases were partially offset by higher compensation and benefits due to growth of the sales and marketing organizations to support our revenue and customer diversification initiatives and higher headcount to support certain of our growth initiatives and an increase in amortization of intangible assets due to higher revenues from the Homeward and ResCap portfolios compared to projections (revenue-based amortization).
Other Operating Expenses
Other operating expenses include impairment losses and changes in the fair value of the Equator Earn Out.
Other operating expenses consist of the following for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
% Increase (decrease)
|
|
2016
|
|
% Increase (decrease)
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Impairment losses
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
(100
|
)
|
|
$
|
64,146
|
|
Change in the fair value of Equator Earn Out
|
|
—
|
|
|
—
|
|
—
|
|
|
(100
|
)
|
|
(7,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
(100
|
)
|
|
$
|
56,555
|
|
Other operating expenses in 2015 included non-cash impairment losses of
$64.1 million
, partially offset by a gain on the change in fair value of the Equator Earn Out of
$7.6 million
. The impairment loss was primarily driven by the Company’s projected technology revenue from Ocwen and investment in technologies provided to Ocwen. The liability for contingent consideration related to the acquisition of Equator was reflected at fair value and adjusted each reporting period with the change in fair value recognized in earnings. In 2015, we reached an agreement with the former owners of Equator to extinguish any liability for the Equator Earn Out. In connection with this settlement, we reduced the liability for the Equator Earn Out to
$0
and recognized a
$7.6 million
increase in earnings.
Income from Operations
Income from operations decreased to
$134.0 million
, representing
18%
of service revenue, for the year ended
December 31, 2017
compared to
$159.3 million
, representing
21%
of service revenue, for the year ended
December 31, 2016
. Income from operations increased to
$159.3 million
, representing
21%
of service revenue, for the year ended December 31, 2016 compared to
$143.6 million
, representing
18%
of service revenue, for the year ended
December 31, 2015
. Operating income as a percentage of service revenue decreased in
2017
compared to
2016
, primarily as a result of lower gross profit margins from revenue mix changes, partially offset by lower SG&A, as discussed above. Operating income as a percentage of service revenue increased in
2016
compared to
2015
, primarily due to the other operating expenses recorded in 2015 and lower SG&A, partially offset by lower gross profit margins from revenue mix changes, as discussed above.
Because the Mortgage Market is our largest and highest margin segment and Ocwen is our largest customer in this segment, declines in service revenue from Ocwen and the changes in mix of revenue from Ocwen have had a negative impact on our operating income.
Real Estate Market
Revenue
Revenue by business unit was as follows for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
% Increase (decrease)
|
|
2016
|
|
% Increase (decrease)
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Real Estate Solutions
|
|
$
|
4,713
|
|
|
326
|
|
|
$
|
1,106
|
|
|
(55
|
)
|
|
$
|
2,462
|
|
Real Estate Investor Solutions
|
|
82,108
|
|
|
(2
|
)
|
|
83,699
|
|
|
88
|
|
|
44,501
|
|
Total service revenue
|
|
86,821
|
|
|
2
|
|
|
84,805
|
|
|
81
|
|
|
46,963
|
|
|
|
|
|
|
|
|
|
|
|
|
Reimbursable expenses:
|
|
|
|
|
|
|
|
|
|
|
Real Estate Investor Solutions
|
|
2,966
|
|
|
66
|
|
|
1,785
|
|
|
(75
|
)
|
|
7,236
|
|
Total reimbursable expenses
|
|
2,966
|
|
|
66
|
|
|
1,785
|
|
|
(75
|
)
|
|
7,236
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
89,787
|
|
|
4
|
|
|
$
|
86,590
|
|
|
60
|
|
|
$
|
54,199
|
|
We recognized service revenue of
$86.8 million
for the
year ended
December 31, 2017
, a
2%
increase compared to the
year ended
December 31, 2016
. The increase in service revenue was primarily due to growth in the Consumer Real Estate Solutions business from higher transaction volumes. Significant growth in home sales revenue in our buy-renovate-lease-sell program in the Real Estate Investor Solutions business, which began operations in the second half of 2016, was largely offset by RESI’s lower property preservation referrals and REO sales in the Real Estate Investor Solutions business as RESI continues its transition from buying non-performing loans to directly acquiring rental homes.
We recognized service revenue of
$84.8 million
for the
year ended
December 31, 2016
, an
81%
increase compared to the
year ended
December 31, 2015
. The increase in service revenue was primarily due to growth in the percentage of RESI homes sold through auction on Hubzu, increased volumes of higher value RESI property preservation referrals and increased property management fees from the RESI portfolio.
Certain of our Real Estate Market businesses are impacted by seasonality. Revenues from property sales and certain property preservation services are generally lowest during the fall and winter months and highest during the spring and summer months.
Cost of Revenue and Gross Profit (Loss)
Cost of revenue consisted of the following for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
% Increase (decrease)
|
|
2016
|
|
% Increase (decrease)
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
35,642
|
|
|
20
|
|
$
|
29,625
|
|
|
161
|
|
|
$
|
11,334
|
|
Outside fees and services
|
|
26,642
|
|
|
2
|
|
26,167
|
|
|
42
|
|
|
18,460
|
|
Cost of real estate sold
|
|
24,398
|
|
|
N/M
|
|
1,040
|
|
|
N/M
|
|
|
—
|
|
Reimbursable expenses
|
|
2,966
|
|
|
66
|
|
1,785
|
|
|
(75
|
)
|
|
7,236
|
|
Technology and telecommunications
|
|
5,812
|
|
|
12
|
|
5,208
|
|
|
330
|
|
|
1,212
|
|
Depreciation and amortization
|
|
1,507
|
|
|
103
|
|
741
|
|
|
148
|
|
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
96,967
|
|
|
50
|
|
$
|
64,566
|
|
|
68
|
|
|
$
|
38,541
|
|
N/M — not meaningful.
Cost of revenue for the
year ended
December 31, 2017
of
$97.0 million
increased by
50%
compared to the
year ended
December 31, 2016
. The increase in cost of revenue was primarily due to growth in the buy-renovate-lease-sell business in the Real Estate Investor Solutions business. Compensation and benefits increased in the Consumer Real Estate Solutions business to support growth of this business, partially offset by lower compensation and benefits in the Real Estate Investor Solutions business as this business transitions from supporting non-performing loans and REO to supporting real estate investors through our buy-renovate-lease-sell business and other rental and renovation services.
Cost of revenue for the
year ended
December 31, 2016
of
$64.6 million
increased by
68%
compared to the
year ended
December 31, 2015
, primarily due to increases in compensation and benefits and outside fees and services. Compensation and benefits increased from our investments to support service revenue growth, as discussed above, and certain of our growth initiatives. Higher outside fees and services were driven by increased volumes of higher value RESI property preservation referrals.
Gross profit decreased to a loss of
$7.2 million
, representing
(8)%
of service revenue, for the
year ended
December 31, 2017
compared to gross profit of
$22.0 million
, representing
26%
of service revenue, for the
year ended
December 31, 2016
. Gross profit increased to
$22.0 million
, representing
26%
of service revenue, for the year ended
December 31, 2016
compared to
$15.7 million
, representing
33%
of service revenue, for the year ended
December 31, 2015
. The declines in 2017 were primarily the result of revenue mix from growth of the lower margin buy-renovate-lease-sell program and lower brokerage commissions from fewer higher margin REO sales. Gross profit as a percentage of service revenue declined in
2016
, primarily due to increased volumes of lower margin property preservation services and higher compensation and benefits, partially offset by increased volumes of higher margin RESI homes sold through auction on Hubzu. Our margins can vary substantially depending upon service revenue mix.
Selling, General and Administrative Expenses
SG&A expenses consisted of the following for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
% Increase (decrease)
|
|
2016
|
|
% Increase (decrease)
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
3,387
|
|
|
79
|
|
|
$
|
1,890
|
|
|
112
|
|
|
$
|
891
|
|
Professional services
|
|
1,073
|
|
|
(37
|
)
|
|
1,694
|
|
|
161
|
|
|
648
|
|
Occupancy related costs
|
|
3,043
|
|
|
34
|
|
|
2,278
|
|
|
83
|
|
|
1,246
|
|
Amortization of intangible assets
|
|
843
|
|
|
(14
|
)
|
|
976
|
|
|
N/M
|
|
|
147
|
|
Depreciation and amortization
|
|
727
|
|
|
59
|
|
|
456
|
|
|
168
|
|
|
170
|
|
Marketing costs
|
|
7,020
|
|
|
(57
|
)
|
|
16,424
|
|
|
N/M
|
|
|
3,423
|
|
Other
|
|
2,625
|
|
|
N/M
|
|
|
(427
|
)
|
|
(143
|
)
|
|
989
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
18,718
|
|
|
(20
|
)
|
|
$
|
23,291
|
|
|
210
|
|
|
$
|
7,514
|
|
N/M — not meaningful.
SG&A for the
year ended
December 31, 2017
of
$18.7 million
decreased by
20%
compared to the
year ended
December 31, 2016
. The decrease in SG&A was primarily the result of lower marketing costs as a result of initial non-recurring Owners.com market launch costs incurred in
2016
and the reduction in Owners.com recurring marketing spend as the business unit focuses on improving the lead to closing conversion rate. This decrease was partially offset by an increase in other SG&A, primarily due to a prior year favorable expense adjustment related to the Owners earn out.
SG&A for the
year ended
December 31, 2016
of
$23.3 million
increased by
210%
compared to the
year ended
December 31, 2015
, primarily due to higher marketing costs, related primarily to Owners.com, as we launched our buy side brokerage marketing campaign in 2016, partially offset by the Owners earn out adjustment in 2016 discussed above.
Income (Loss) from Operations
Income from operations decreased to a loss from operations of
$25.9 million
, representing
(30)%
of service revenue, for the
year ended
December 31, 2017
compared to a loss from operations of
$1.3 million
, representing
(1)%
of service revenue, for the
year ended
December 31, 2016
and income from operations of
$8.1 million
, representing
17%
of service revenue, for the
year ended
December 31, 2015
. Operating income (loss) as a percentage of service revenue declined in
2017
compared to
2016
, primarily as a result of lower gross margins, partially offset by lower SG&A, as discussed above. Operating income (loss) as a percentage of service revenue declined in
2016
compared to
2015
, primarily due to lower gross margins and higher SG&A, as discussed above.
Other Businesses, Corporate and Eliminations
Revenue
Revenue by business unit was as follows for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
% Increase (decrease)
|
|
2016
|
|
% Increase (decrease)
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationship management
|
|
$
|
28,469
|
|
|
(23
|
)
|
|
$
|
36,977
|
|
|
(26
|
)
|
|
$
|
50,294
|
|
Asset recovery management
|
|
23,782
|
|
|
(1
|
)
|
|
24,114
|
|
|
23
|
|
|
19,585
|
|
IT infrastructure services
|
|
6,431
|
|
|
(71
|
)
|
|
22,189
|
|
|
(47
|
)
|
|
42,094
|
|
Total service revenue
|
|
58,682
|
|
|
(30
|
)
|
|
83,280
|
|
|
(26
|
)
|
|
111,973
|
|
|
|
|
|
|
|
|
|
|
|
|
Reimbursable expenses:
|
|
|
|
|
|
|
|
|
|
|
Asset recovery management
|
|
60
|
|
|
(45
|
)
|
|
109
|
|
|
(9
|
)
|
|
120
|
|
Total reimbursable expenses
|
|
60
|
|
|
(45
|
)
|
|
109
|
|
|
(9
|
)
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
58,742
|
|
|
(30
|
)
|
|
$
|
83,389
|
|
|
(26
|
)
|
|
$
|
112,093
|
|
We recognized service revenue of
$58.7 million
for the
year ended
December 31, 2017
, a
30%
decrease compared to the
year ended
December 31, 2016
. The decrease in service revenue was primarily due to a decline in IT infrastructure services, which are typically billed on a cost plus basis, as beginning in the fourth quarter of 2015 and continuing through 2017, we transitioned resources supporting Ocwen’s technology infrastructure from Altisource to Ocwen. The decrease in the customer relationship management service revenue was primarily due to severed client relationships with certain non-profitable clients and a reduction in volume from the transition of services from one customer to another.
We recognized service revenue of
$83.3 million
for the
year ended
December 31, 2016
, a
26%
decrease compared to the
year ended
December 31, 2015
. The decrease in service revenue was primarily due to lower customer relationship management service revenue and the decline in IT infrastructure services for the same reasons as described above.
Certain of our other businesses are impacted by seasonality. Revenue in the asset recovery management business tends to be higher in the first quarter, as borrowers may utilize tax refunds and bonuses to pay debts, and generally declines throughout the remainder of the year.
Cost of Revenue and Gross Profit
Cost of revenue consisted of the following for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
% Increase (decrease)
|
|
2016
|
|
% Increase (decrease)
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
41,475
|
|
|
(28
|
)
|
|
$
|
57,698
|
|
|
(21
|
)
|
|
$
|
73,414
|
|
Outside fees and services
|
|
3,284
|
|
|
16
|
|
|
2,825
|
|
|
11
|
|
|
2,537
|
|
Reimbursable expenses
|
|
60
|
|
|
(45
|
)
|
|
109
|
|
|
(9
|
)
|
|
120
|
|
Technology and telecommunications
|
|
6,061
|
|
|
(33
|
)
|
|
9,070
|
|
|
(6
|
)
|
|
9,694
|
|
Depreciation and amortization
|
|
6,511
|
|
|
(30
|
)
|
|
9,237
|
|
|
(11
|
)
|
|
10,345
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
57,391
|
|
|
(27
|
)
|
|
$
|
78,939
|
|
|
(18
|
)
|
|
$
|
96,110
|
|
Cost of revenue for the
year ended
December 31, 2017
of
$57.4 million
decreased by
27%
compared to the
year ended
December 31, 2016
. In addition, cost of revenue for the
year ended
December 31, 2016
of
$78.9 million
decreased by
18%
compared to the
year ended
December 31, 2015
. The decreases in cost of revenue were primarily due to a decrease in compensation and benefits associated with the transition of resources supporting Ocwen’s technology infrastructure to Ocwen and lower headcount levels in our customer relationship management business consistent with the decline in revenue, as discussed in the revenue section above.
Gross profit was
$1.4 million
, representing
2%
of service revenue, for the
year ended
December 31, 2017
compared to
$4.5 million
, representing
5%
of service revenue, for the
year ended
December 31, 2016
and
$16.0 million
, representing
14%
of service revenue, for the
year ended
December 31, 2015
. Gross profit as a percentage of service revenue decreased in
2017
and
2016
, primarily
due to the decreases in IT infrastructure and customer relationship management revenue, largely offset by a reduction in compensation and benefits. However, we were not able to reduce costs at the same rate as revenue declined.
Selling, General and Administrative Expenses
SG&A in Other Businesses, Corporate and Eliminations include SG&A expenses of the customer relationship management, asset recovery management and IT infrastructure services businesses. It also includes costs related to corporate support functions not allocated to the Mortgage Market and Real Estate Market segments.
Other Businesses, Corporate and Eliminations also include eliminations of transactions between the reportable segments.
SG&A expenses consisted of the following for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
% Increase (decrease)
|
|
2016
|
|
% Increase (decrease)
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
31,681
|
|
|
—
|
|
|
$
|
31,600
|
|
|
(20
|
)
|
|
$
|
39,495
|
|
Professional services
|
|
4,247
|
|
|
(57
|
)
|
|
9,819
|
|
|
12
|
|
|
8,774
|
|
Occupancy related costs
|
|
10,053
|
|
|
(30
|
)
|
|
14,355
|
|
|
(17
|
)
|
|
17,355
|
|
Amortization of intangible assets
|
|
1,809
|
|
|
(10
|
)
|
|
2,003
|
|
|
(15
|
)
|
|
2,364
|
|
Depreciation and amortization
|
|
4,637
|
|
|
(16
|
)
|
|
5,515
|
|
|
(12
|
)
|
|
6,283
|
|
Marketing costs
|
|
226
|
|
|
(49
|
)
|
|
443
|
|
|
(82
|
)
|
|
2,531
|
|
Other
|
|
7,056
|
|
|
26
|
|
|
5,621
|
|
|
33
|
|
|
4,218
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
59,709
|
|
|
(14
|
)
|
|
$
|
69,356
|
|
|
(14
|
)
|
|
$
|
81,020
|
|
SG&A for the
year ended
December 31, 2017
of
$59.7 million
decreased by
14%
compared to the
year ended
December 31, 2016
. The decrease in SG&A was primarily due to lower legal costs in professional services in connection with the resolution of, and reduction in activities related to, several legal and regulatory matters and lower occupancy costs driven by subleasing certain office facilities, partially offset by unfavorable loss accrual adjustments of $2.7 million related to facility closures and litigation related costs in other SG&A in the first half of 2017.
SG&A for the
year ended
December 31, 2016
of
$69.4 million
decreased by
14%
compared to the
year ended
December 31, 2015
, primarily due to lower compensation and benefits driven by the implementation of cost savings initiatives in 2015 and lower occupancy related costs, primarily due to office facility relocations and consolidations in 2015 and 2016.
Other Operating Expenses
Other operating expenses include the litigation settlement loss, net of insurance recovery, of
$28.0 million
for the year ended
December 31, 2016
and impairment losses of
$7.6 million
for the year ended
December 31, 2015
(no comparative amounts in 2017).
For the year ended
December 31, 2016
, other operating expenses included a litigation settlement loss, which consists of a legal settlement accrual of $28.0 million, net of a $4.0 million insurance recovery. The litigation settlement loss related to the agreed settlement of the putative class action litigation designated
In re: Altisource Portfolio Solutions, S.A. Securities Litigation
in the United States District Court for the Southern District of Florida. Altisource Portfolio Solutions S.A. and the officer and director defendants denied all claims of wrongdoing or liability. The settlement loss was recorded in 2016 and paid in 2017. For the year ended
December 31, 2015
, other operating expenses included non-cash impairment losses of
$7.6 million
, primarily driven by the Company’s projected technology revenue from Ocwen and investment in technologies provided to Ocwen.
Loss from Operations
Loss from operations decreased to
$58.4 million
for the
year ended
December 31, 2017
compared to loss from operations of
$92.9 million
for the
year ended
December 31, 2016
and
$72.7 million
for the
year ended
December 31, 2015
. The loss from operations decreased in
2017
compared to
2016
, primarily as a result of the 2016 litigation settlement loss, net of $28.0 million and lower SG&A, as discussed above. The loss from operations increased in
2016
compared to
2015
, primarily due to the 2016 litigation settlement loss, net of $28.0 million and lower gross profit in 2016, partially offset by lower SG&A in 2016, as discussed above.
Other Expenses, Net
Other income (expense), net principally includes interest expense and other non-operating gains and losses. Other income (expense), net was
$(14.4) million
,
$(20.9) million
and
$(26.6) million
for the years ended
December 31, 2017
, 2016 and 2015, respectively.
The decrease in other income (expense), net in 2017 was primarily due to lower interest expense and higher other income. Interest expense was
$(22.3) million
in 2017 compared to
$(24.4) million
in 2016, driven by the repurchase of portions of our senior secured term loan, partially offset by an increase in the senior secured term loan interest rate from 4.50% as of December 31, 2016 to 5.07% as of
December 31, 2017
. During 2017, we repurchased portions of our senior secured term loan with an aggregate par value of $60.1 million at a weighted average discount of 10.7%, recognizing a net gain of $5.6 million on the early extinguishment of debt in other income. During 2016, we repurchased portions of our senior secured term loan with an aggregate par value of $51.0 million at a weighted average discount of 13.2%, recognizing a net gain of $5.5 million on the early extinguishment of debt in other income. Also, during 2017 and 2016, we earned dividends of $2.5 million and $2.3 million, respectively, related to our investment in RESI and in 2016 we incurred expenses of $(3.4) million related to this investment (no comparative amount in 2017).
The decrease in other income (expense), net in 2016 was primarily due to lower interest expense and higher other income. Interest expense was
$(24.4) million
in 2016 compared to
$(28.2) million
in 2015, driven by the repurchase of portions of our senior secured term loan. During 2016, we repurchased portions of our senior secured term loan with an aggregate par value of $51.0 million at a weighted average discount of 13.2%, recognizing a net gain of $5.5 million on the early extinguishment of debt in other income. During 2015, we repurchased portions of our senior secured term loan with an aggregate par value of $49.0 million at a weighted average discount of 10.3%, recognizing a net gain of $3.8 million on the early extinguishment of debt in other income. Also, during 2016, we earned dividends of $2.3 million and incurred expenses of $(3.4) million related to our investment in RESI (no comparative amounts in 2015). During March 2015, we purchased 1.6 million shares of HLSS common stock in the open market for $30.0 million. During 2015, we received liquidating dividends and other dividends from HLSS totaling $20.4 million and sold all of our 1.6 million shares of HLSS common stock in the open market for $7.7 million. As a result of these transactions, we recognized a net loss of $1.9 million for the year ended December 31, 2015 in connection with our investment in HLSS (no comparative amount in 2016).
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our primary source of liquidity is cash flow from operations. We seek to deploy cash generated in a disciplined manner. Principally, we intend to use cash to develop and grow complementary services and businesses that we believe will generate attractive margins in line with our core capabilities and strategy. We use cash for scheduled repayments of our senior secured term loan and seek to use cash from time to time to repurchase shares of our common stock and repurchase portions of our senior secured term loan. In addition, we consider and evaluate business acquisitions that may arise from time to time that are aligned with our strategy.
For the year ended
December 31, 2017
, we used
$59.8 million
to repay and repurchase portions of the senior secured term loan and
$39.0 million
to repurchase shares of our common stock. In 2016, we used
$50.7 million
to repay and repurchase portions of the senior secured term loan,
$48.2 million
to purchase available for sale securities and
$37.7 million
to repurchase shares of our common stock. In 2015, we used
$50.4 million
to repay and repurchase portions of the senior secured term loan and
$58.9 million
to repurchase shares of our common stock.
Senior Secured Term Loan
On November 27, 2012, Altisource Solutions S.à r.l., a wholly-owned subsidiary of Altisource Portfolio Solutions S.A., entered into a senior secured term loan agreement with Bank of America, N.A., as administrative agent, and certain lenders. Altisource Portfolio Solutions S.A. and certain subsidiaries are guarantors of the term loan. We subsequently entered into four amendments to the senior secured term loan agreement to, among other changes, increase the principal amount of the senior secured term loan, re-establish the
$200.0 million
incremental term loan facility accordion, lower the interest rate, extend the maturity date by approximately one year, increase the maximum amount of Restricted Junior Payments (as defined in the senior secured term loan agreement; other capitalized terms, unless defined herein, are defined in the senior secured term loan agreement) and certain other changes primarily to facilitate an internal restructuring of the Company’s subsidiaries, as described below. The lenders of the senior secured term loan, as amended, have no obligation to provide any such additional debt under the accordion provision. As of
December 31, 2017
,
$413.6 million
was outstanding under the senior secured term loan agreement, as amended, compared to
$479.7 million
as of
December 31, 2016
.
On December 1, 2017, Altisource Solutions S.à r.l and Altisource Holdings S.à r.l. entered into the fourth amendment to the senior secured term loan (the “Fourth Amendment”) that modifies the senior secured term loan agreement to add Altisource Holdings S.à r.l. (then a guarantor under the senior secured term loan) as a borrower in anticipation of an internal restructuring of Altisource, whereby Altisource Solutions S.à r.l. would merge with and into Altisource Holdings S.à r.l. and Altisource Holdings S.à r.l. would be automatically substituted in all of the rights and obligations of Altisource Solutions S.à r.l. This merger occurred effective December 27, 2017 and Altisource Holdings S.à r.l. (renamed Altisource S.à r.l.) became the sole borrower. The merger is part of
a larger subsidiary restructuring plan designed to simplify the Company’s corporate structure, allow it to operate more efficiently and reduce administrative costs. The merger did not result in any changes to the collateral securing the senior secured term loan. The Fourth Amendment also, among other changes, broadens the mechanisms by which Altisource can purchase or otherwise acquire portions of the senior secured term loan by permitting Altisource to purchase portions of its senior secured term loan on a non-pro-rata basis at par or at a discount to par through open market purchases (including through a broker acting on behalf of Altisource) in addition to its existing right to purchase portions of its senior secured term loan through a Dutch auction open to all senior secured term lenders.
The term loan must be repaid in equal consecutive quarterly principal installments of
$1.5 million
, with the balance due at maturity. All amounts outstanding under the senior secured term loan agreement will become due on the earlier of (i) December 9, 2020, and (ii) the date on which the loans are declared to be due and owing by the administrative agent at the request (or with the consent) of the Required Lenders or as otherwise provided in the senior secured term loan agreement upon the occurrence of any event of default under the senior secured term loan agreement. However, if the leverage ratio exceeds 3.00 to 1.00, as calculated in accordance with the provisions of the senior secured term loan agreement, a percentage of cash flows must be used to repay principal (the percentage increases if the leverage ratio exceeds 3.50 to 1.00). No mandatory prepayments were required during the year ended December 31, 2017. The interest rate as of
December 31, 2017
was
5.07%
.
During 2017, we repurchased portions of our senior secured term loan with an aggregate par value of
$60.1 million
at a weighted average discount of
10.7%
, recognizing a net gain of
$5.6 million
on the early extinguishment of debt. During 2016, we repurchased portions of our senior secured term loan with an aggregate par value of
$51.0 million
at a weighted average discount of
13.2%
, recognizing a net gain of
$5.5 million
on the early extinguishment of debt. During 2015, we repurchased portions of our senior secured term loan with an aggregate par value of
$49.0 million
at a weighted average discount of
10.3%
, recognizing a net gain of
$3.8 million
on the early extinguishment of debt.
The debt covenants in the senior secured term loan agreement limit, among other things, our ability to incur additional debt, pay dividends and repurchase shares of our common stock. In the event we require additional liquidity, our ability to obtain it may be limited by the senior secured term loan.
Cash Flows
The following table presents our cash flows for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
% Increase (decrease)
|
|
2016
|
|
% Increase (decrease)
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Net income adjusted for non-cash items
|
|
$
|
93,769
|
|
|
(19
|
)
|
|
$
|
115,470
|
|
|
(41
|
)
|
|
$
|
195,922
|
|
Changes in operating assets and liabilities
|
|
(27,687
|
)
|
|
(344
|
)
|
|
11,348
|
|
|
N/M
|
|
|
(570
|
)
|
Cash flows from operating activities
|
|
66,082
|
|
|
(48
|
)
|
|
126,818
|
|
|
(35
|
)
|
|
195,352
|
|
Cash flows from investing activities
|
|
(10,036
|
)
|
|
87
|
|
|
(80,223
|
)
|
|
(22
|
)
|
|
(65,995
|
)
|
Cash flows from financing activities
|
|
(100,334
|
)
|
|
(31
|
)
|
|
(76,628
|
)
|
|
31
|
|
|
(111,391
|
)
|
Net (decrease) increase in cash and cash
equivalents
|
|
(44,288
|
)
|
|
(47
|
)
|
|
(30,033
|
)
|
|
(267
|
)
|
|
17,966
|
|
Cash and cash equivalents at the beginning of the period
|
|
149,294
|
|
|
(17
|
)
|
|
179,327
|
|
|
11
|
|
|
161,361
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period
|
|
$
|
105,006
|
|
|
(30
|
)
|
|
$
|
149,294
|
|
|
(17
|
)
|
|
$
|
179,327
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measures
(1)
|
|
|
|
|
|
|
|
|
|
|
Adjusted cash flows from operating activities
|
|
$
|
110,462
|
|
|
(21
|
)
|
|
$
|
139,843
|
|
|
(28
|
)
|
|
$
|
195,352
|
|
Adjusted cash flows from operating activities less additions to premises and equipment
|
|
99,948
|
|
|
(14
|
)
|
|
116,574
|
|
|
(27
|
)
|
|
159,164
|
|
N/M — not meaningful.
_________________________
|
|
(1)
|
These are non-GAAP measures that are defined and reconciled to the corresponding GAAP measures on pages
29
to
31
.
|
Cash Flows from Operating Activities
Cash flows from operating activities generally consist of the cash effects of transactions and events that enter into the determination of net income. For the year ended
December 31, 2017
, we generated cash flows from operating activities of
$66.1 million
, or approximately
$0.07
for every dollar of service revenue, compared to cash flows from operating activities of
$126.8 million
, or approximately
$0.13
for every dollar of service revenue, for the year ended
December 31, 2016
and
$195.4 million
of cash flows from operating activities, or approximately
$0.21
per dollar of service revenue, for the year ended
December 31, 2015
. Cash flows
from operating activities during
2017
were impacted by the $28.0 million net payment for the previously accrued litigation settlement and a
$16.4 million
increase in short-term investments in real estate in connection with our buy-renovate-lease-sell program. Adjusting 2017 cash flows from operating activities for the net litigation settlement payment and the increase in short-term investments in real estate, cash flows from operating activities would have been
$110.5 million
(see non-GAAP measures defined and reconciled on pages
29
to
31
), or approximately $0.12 for every dollar of service revenue. Adjusting 2016 cash flows from operating activities for the increase in short-term investments in real estate, cash flows from operating activities would have been $139.8 million (see non-GAAP measures defined and reconciled on pages
29
to
31
), or approximately $0.15 for every dollar of service revenue.
The decrease in cash flows from operating activities during 2017 compared to 2016 was driven by lower net income, the $28.0 million net payment for the litigation settlement, increased short-term investments in real estate and the timing of payments of current liabilities, partially offset by higher collections of accounts receivable, primarily from timing of collections. The decrease in cash flows from operating activities during 2016 compared to 2015 was principally driven by the decrease in net income, partially offset by an improvement in working capital changes in 2016. Changes in working capital were principally driven by higher collections of accounts receivable and the timing of payments of accounts payable and other accrued expenses, partially offset by increased prepaid expenses and other current assets driven by purchases of short-term investments in real estate assets in connection with our buy-renovate-lease-sell program.
Operating cash flows can be negatively impacted because of the nature of some of our services and the mix of services provided. Certain services are performed immediately following or shortly after the referral, but the collection of the receivable does not occur until a specific event occurs (e.g., the foreclosure is complete, the REO asset is sold, etc.). Furthermore, lower margin services generate lower income and cash flows from operations. Consequently, our cash flows from operations may be negatively impacted when comparing one period to another.
Cash Flows from Investing Activities
Cash flows from investing activities primarily include additions to premises and equipment, acquisitions of businesses and purchases and sales of available for sale securities. Cash flows from investing activities were
$(10.0) million
,
$(80.2) million
and
$(66.0) million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
We used
$10.5 million
,
$23.3 million
and
$36.2 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively, for additions to premises and equipment primarily related to investments in the development of certain software applications, IT infrastructure and facility build-outs. The decreases in additions to premises and equipment in 2017 and 2016 primarily related to the completion of several software development projects and facility build-outs and relocations in 2016 and 2015.
During the year ended
December 31, 2016
, we purchased
4.1 million
shares of RESI common stock for
$48.2 million
including brokers’ commissions. During
2015
, we purchased
1.6 million
shares of HLSS common stock in the open market for
$30.0 million
. Also during
2015
, we received liquidating dividends and other dividends from HLSS totaling
$20.4 million
and we sold all of our
1.6 million
shares of HLSS common stock in the open market for
$7.7 million
. There were no comparative amounts in 2017.
On July 29, 2016, we acquired Granite for $9.5 million. On October 9, 2015, we acquired RentRange and Investability for
$24.8 million
. The purchase price was composed of
$17.5 million
in cash and
$7.3 million
of restricted common stock of the Company. On July 17, 2015, we acquired CastleLine for
$33.4 million
. This was composed of
$11.2 million
of cash at closing, excluding cash balances acquired of
$1.1 million
. Additionally, the acquisition included
$10.5 million
of cash that is payable over four years from the acquisition date and
$14.4 million
of restricted common stock of the Company. Of the cash payable following acquisition,
$3.8 million
is contingent on certain future employment conditions of certain of the sellers, and therefore excluded from the purchase price. There were no comparative amounts in
2017
.
Cash Flows from Financing Activities
Cash flows from financing activities primarily include activities associated with repayments and repurchases of long-term debt, proceeds from stock option exercises, the excess tax benefit on the exercise of stock options, the purchase of treasury shares, distributions to non-controlling interests and payments to satisfy employee tax withholding obligations on the issuance of restricted shares. Cash flows from financing activities were
$(100.3) million
,
$(76.6) million
and
$(111.4) million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
We used
$59.8 million
,
$50.7 million
and
$50.4 million
to repurchase portions of our senior secured term loan and make scheduled repayments of our senior secured term loan for the years ended
December 31, 2017
,
2016
and
2015
, respectively. We received proceeds from stock option exercises of
$2.4 million
,
$9.6 million
and
$1.4 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. During 2016, we recognized an excess tax benefit on the exercise of stock options of $4.8 million (no comparative amounts in 2017 and 2015). We also used
$39.0 million
,
$37.7 million
and
$58.9 million
to repurchase shares of our
common stock for the years ended
December 31, 2017
,
2016
and
2015
, respectively. Also, we distributed
$2.8 million
,
$2.6 million
and
$3.0 million
to non-controlling interests for the years ended
December 31, 2017
,
2016
and
2015
, respectively. In addition, during 2017, we made payments of $1.2 million to satisfy employee tax withholding obligations on the issuance of restricted shares (no comparative amounts in 2016 and 2015). These payments were made to tax authorities, at the employees’ direction, to satisfy the employees’ tax obligations rather than issuing a portion of vested restricted shares to employees.
Liquidity Requirements after
December 31, 2017
Our primary future liquidity obligations pertain to payments related to prior acquisitions, distributions to Lenders One members and senior secured term loan repayments and interest expense.
On July 17, 2015, we acquired CastleLine. A portion of the purchase consideration totaling
$10.5 million
is payable to the sellers over
four years
from the acquisition date, including
$3.8 million
to be paid to certain of the sellers that is contingent on future employment. As of
December 31, 2017
, we have paid
$8.9 million
of the
$10.5 million
that is payable over
four years
from the acquisition date and
$2.1 million
of the
$3.8 million
purchase consideration that is contingent on future employment.
During the next 12 months, we expect to distribute approximately
$3.0 million
to the Lenders One members representing non-controlling interests, make mandatory repayments of
$5.9 million
of the senior secured term loan and pay
$19.9 million
of interest expense under the senior secured term loan agreement.
We believe that our existing cash and cash equivalents balances and our anticipated cash flows from operations will be sufficient to meet our liquidity needs, including to fund additions to premises and equipment and required debt and interest payments, for the next 12 months.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RECENT ACCOUNTING PRONOUNCEMENTS
We prepare our consolidated financial statements in accordance with GAAP. In applying many of these accounting principles, we need to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses in our 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 judgments, however, are often subjective. Actual results may be negatively affected 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.
We have identified the critical accounting policies and estimates addressed below. We also have other key accounting policies, which involve the use of assumptions, estimates and judgments that are significant to understanding our results. For additional information, see
Note 2
to the consolidated financial statements. Although we believe that our assumptions, estimates and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.
Revenue Recognition
We recognize revenue from the services we provide in accordance with ASC Topic 605,
Revenue Recognition
(“ASC Topic 605”). ASC Topic 605 sets forth guidance as to when revenue is realized or realizable and earned, which is generally when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been performed; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. Generally, the contract terms for these services are relatively short in duration, and we recognize revenue as the services are performed either on a per unit or a fixed price basis. Specific policies for each of our reportable segments are as follows:
Mortgage Market segment
: We recognize revenue for the majority of the services we provide when the services have been performed. For certain default management services, we recognize revenue over the period during which we perform the related services, with full recognition upon recording the related foreclosure deed. A significant area of judgment includes the period over which we recognize certain default management services revenue. For disbursement processing services, we recognize revenue over the period during which we perform the processing services with full recognition upon completion of the disbursements. We record revenue associated with fees earned on real estate sales, other than our sales of short-term investments in real estate (see Real Estate Market segment below), on a net basis as we perform services as an agent without assuming the risks and rewards of ownership of the asset and the commission earned on the sale is a fixed percentage. We generally earn our fees for collections on charged-off mortgages on behalf of our clients and recognize revenue following collection from the debtors. We also earn fees for packaging and selling charged-off mortgages and recognize revenue after the sale of the notes and once the risks and rewards of the mortgage notes are transferred to the purchasers. For certain of our servicer technologies software services other than Equator and Mortgage Builder software applications (see below), we charge fees based on the number of loans on the system or on a per-transaction basis. We record transactional revenue when the
service is provided and other revenue monthly based on the number of loans processed or services provided. In addition, we charge fees for professional services engagements, which consist primarily of time and materials agreements with customers that are generally billed and recognized as the hours are worked. Reimbursable expenses revenue is included in revenue with an equal amount recorded in cost of revenue primarily related to our property preservation and inspection services, real estate sales and our default management services. These amounts are recognized on a gross basis, principally because generally we have complete control over selection of vendors and the vendor relationship is with us, rather than with our customers.
For Equator software applications, we recognize revenue from arrangements with multiple deliverables in accordance with ASC Subtopic 605-25,
Revenue Recognition: Multiple-Element Arrangements
(“ASC 605-25”), and SEC Staff Accounting Bulletin Topic 13,
Revenue Recognition
(“SAB Topic 13”). ASC 605-25 and SAB Topic 13 require each deliverable within a multiple-deliverable revenue arrangement to be accounted for as a separate unit if both of the following criteria are met: (1) the delivered item or items have value to the customer on a standalone basis and (2) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the seller’s control. Deliverables not meeting the criteria for accounting treatment as a separate unit are combined with a deliverable that meets that criterion. We derive revenue from platform services fees, professional services fees and other services. We do not begin to recognize revenue for platform services fees until these fees become billable, as the services fees are not fixed and determinable until such time. Platform services fees are recognized ratably over the shorter of the term of the contract with the customer or the minimum cancellation period. Professional services fees consist primarily of configuration services related to customizing the platform for individual customers and are generally billed as the hours are worked. Due to the essential and specialized nature of the configuration and development services, these services do not qualify as separate units of accounting separate from the platform services as the delivered services do not have value to the customer on a standalone basis. Therefore, the related fees are recorded as deferred revenue until the project configuration is complete and then recognized ratably over the longer of the term of the agreement or the estimated expected customer life. Other services consist primarily of training, including agent certification, and consulting services. These services are generally sold separately and are recognized as revenue as the services are performed and earned.
For Mortgage Builder software applications, we recognize subscription revenues ratably over the contract term, beginning on the commencement date of each contract. Revenues for usage-based transactions are generally recognized as the usage occurs, as that is the point when the fee becomes fixed or determinable. We generally invoice customers on a monthly basis.
Real Estate Market segment
: We recognize revenue for the majority of the services we provide when the services have been performed. We record revenue associated with fees earned on real estate sales, other than our sales of short-term investments in real estate, on a net basis as we perform services as an agent without assuming the risks and rewards of ownership of the asset and the commission earned on the sale is a fixed percentage. For sales of short-term investments in real estate, we record revenue in the amount of the selling price of the property upon the sale of the property. Reimbursable expenses revenue is included in revenue with an equal offsetting expense included in cost of revenue primarily related to our real estate sales. These amounts are recognized on a gross basis, principally because we have complete control over selection of vendors and the vendor relationship is with us, rather than with our customers.
Other Businesses, Corporate and Eliminations segment
: We generally earn our fees for asset recovery management services as a percentage of the amount we collect on delinquent consumer receivables and recognize revenue following collection from the debtors. In addition, we provide customer relationship management services for which we typically earn and recognize revenue on a per-person, per-call or per-minute basis as the related services are performed. For the IT infrastructure services we provide to Ocwen, RESI and AAMC, we charge for these services primarily based on the number of employees that are using the applicable systems, fixed fees and the number and type of licensed platforms used by Ocwen, RESI and AAMC. We record revenue associated with implementation services upon completion and maintenance ratably over the related service period.
Goodwill and Identifiable Intangible Assets
Goodwill
We evaluate goodwill for impairment annually during the fourth quarter or more frequently when an event occurs or circumstances change in a manner that indicates the carrying value may not be recoverable. We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether we need to perform the quantitative two-step goodwill impairment test. Only if we determine, based on a qualitative assessment, that it is more likely than not that a reporting unit’s fair value is less than its carrying value will we calculate the fair value of the reporting unit. We would then test goodwill for impairment by first comparing the book value of net assets to the fair value of the reporting units. If the fair value is determined to be less than the book value, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. We estimate the
fair value of the reporting units using discounted cash flows and market comparisons. The discounted cash flow method is based on the present value of projected cash flows. Forecasts of future cash flows are based on our estimate of future sales and operating expenses, based primarily on estimated pricing, sales volumes, market segment share, cost trends and general economic conditions. Certain estimates of discounted cash flows involve businesses with limited financial history and developing revenue models. The estimated cash flows are discounted using a rate that represents our weighted average cost of capital. Market comparisons include an analysis of revenue and earnings multiples of guideline public companies compared to the Company.
During our fourth quarter 2015 annual goodwill assessment, we elected to bypass the initial analysis of qualitative factors and perform a quantitative two-step goodwill impairment test of all of our reporting units as a result of the goodwill impairment recorded in 2014. We calculated the fair value of each of our reporting units by using a discounted cash flow analysis and concluded that the technology businesses in the Mortgage Market segment were less than their carrying values. Accordingly, we performed step two of the impairment test for the technology businesses in the Mortgage Market segment (see Item 1 of Part I, “
Reportable Segments
,” for additional information regarding our changes in reportable segments effective January 1, 2017) and determined that the remaining
$55.7 million
of goodwill of the technology business was impaired. As a result, we recorded a
$55.7 million
impairment loss in the fourth quarter of 2015. This goodwill impairment was primarily driven by the Company’s projected technology revenue from Ocwen and investment in technologies provided to Ocwen. There were no additional goodwill impairments as of December 31, 2015. Based on our
fourth
quarter
2017
and
2016
goodwill assessments, we concluded that there were no impairments of goodwill as of
December 31, 2017
and
2016
.
Identifiable Intangible Assets
Identified intangible assets consist primarily of customer related intangible assets, operating agreements, trade names and trademarks and other intangible assets. We perform tests for impairment if conditions exist that indicate the carrying value may not be recoverable. When facts and circumstances indicate that the carrying value of intangible assets determined to have definite lives may not be recoverable, management assesses the recoverability of the carrying value by preparing estimates of cash flows of discrete intangible assets generally consistent with models utilized for internal planning purposes. If the sum of the undiscounted expected future cash flows is less than the carrying value, we would recognize an impairment to the extent the carrying amount exceeds fair value. In the fourth quarter of 2015, we recorded a non-cash impairment loss of
$11.9 million
in our Mortgage Market segment and Other Businesses, Corporate and Eliminations (see Item 1 of Part I, “
Reportable Segments
,” for additional information regarding our changes in reportable segments effective January 1, 2017), related to customer relationship intangible assets from the 2013 Homeward and ResCap fee-based business acquisitions. These impairments of intangible assets were primarily driven by the Company’s projected former technology revenue from Ocwen and investment in technologies provided to Ocwen. There were no impairments of intangible assets for the years ended
December 31, 2017
and
2016
.
Acquisitions
For those acquisitions that meet the definition of a business combination, we allocate the purchase price, including any contingent consideration, to the assets acquired and the liabilities assumed at their estimated fair values as of the date of the acquisition with any excess of the purchase price paid over the estimated fair value of net assets acquired recorded as goodwill. The fair value of the assets acquired and liabilities assumed is typically determined by using either estimates of replacement costs or discounted cash flow valuation methods. When determining the fair value of tangible assets acquired, we estimate the cost to replace the asset with a new asset taking into consideration such factors as age, condition and the economic useful life of the asset. When determining the fair value of intangible assets acquired, we estimate the applicable discount rate and the timing and amount of future cash flows, including rate and terms of renewal and attrition. The determination of the final purchase price and the fair values on the acquisition date of the identifiable assets acquired and liabilities assumed may extend over more than one period and result in adjustments to the preliminary estimate recognized.
Accounting for Income Taxes
We record our income taxes in accordance with ASC Topic 740,
Income Taxes
. We are subject to income taxes principally in Luxembourg, the United States and India. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and estimates, including projected income by taxing jurisdiction, for which the ultimate tax determination may vary from year to year. For example, our effective tax rates could be adversely affected by lower than anticipated earnings in countries where we have lower effective tax rates and higher than anticipated earnings in countries where we have higher effective tax rates, by changes in currency exchange rates or by changes in the relevant tax rate, accounting and other laws, regulations, principles and interpretations. We are subject to audits in various taxing jurisdictions, and such jurisdictions may assess additional income tax during an examination. Although we believe our recorded tax liabilities are sufficient to support our future tax liabilities, the final determination of tax audits and any related litigation could differ from the balances we have accrued.
Recently Adopted and Future Adoption of New Accounting Pronouncements
See
Note 2
to the consolidated financial statements for a discussion of the recent adoption of a new accounting pronouncements and the future adoption of new accounting pronouncements.
OTHER MATTERS
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist of escrow and trust arrangements and operating leases.
We hold customers’ assets in escrow and trust accounts at various financial institutions pending completion of certain real estate activities. We also hold cash in trust accounts at various financial institutions where contractual obligations mandate maintaining dedicated bank accounts for our collections business. These amounts are held in escrow and trust accounts for limited periods of time and are not included in the accompanying consolidated balance sheets. Amounts held in escrow and trust accounts were
$35.1 million
and
$64.1 million
at
December 31, 2017
and
2016
, respectively.
Contractual Obligations, Commitments and Contingencies
Our long-term contractual obligations generally include our long-term debt and operating lease payments on certain of our premises and equipment. The following table sets forth information relating to our contractual obligations as of
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
(in thousands)
|
|
Total
|
|
Less than 1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than 5 years
|
|
|
|
|
|
|
|
|
|
|
|
Non-cancelable operating lease obligations
|
|
$
|
53,790
|
|
|
$
|
19,833
|
|
|
$
|
24,234
|
|
|
$
|
9,493
|
|
|
$
|
230
|
|
Long-term debt
|
|
413,581
|
|
|
5,945
|
|
|
407,636
|
|
|
—
|
|
|
—
|
|
Contractual interest payments
(1)
|
|
57,824
|
|
|
19,937
|
|
|
37,887
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
525,195
|
|
|
$
|
45,715
|
|
|
$
|
469,757
|
|
|
$
|
9,493
|
|
|
$
|
230
|
|
______________________________________
|
|
(1)
|
Represents estimated future interest payments on our senior secured term loan based on applicable interest rates as of
December 31, 2017
.
|
For further information, see Notes
13
and
23
to the consolidated financial statements.
Customer Concentration
Revenue from Ocwen primarily consists of revenue earned from the loans serviced by Ocwen when Ocwen designates us as the service provider and revenue earned directly from Ocwen. We record revenue we earn from Ocwen under the Ocwen Service Agreements. For the years ended
December 31, 2017
,
2016
and
2015
, we generated revenue from Ocwen of
$542.0 million
,
$561.9 million
and
$631.6 million
, respectively. Revenue from Ocwen as a percentage of segment and consolidated revenue was as follows for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Mortgage Market
|
|
67%
|
|
65%
|
|
66%
|
Real Estate Market
|
|
1%
|
|
—%
|
|
9%
|
Other Businesses, Corporate and Eliminations
|
|
11%
|
|
27%
|
|
37%
|
Consolidated revenue
|
|
58%
|
|
56%
|
|
60%
|
We earn additional revenue related to the portfolios serviced by Ocwen when a party other than Ocwen or the MSR owner selects Altisource as the service provider. For the years ended
December 31, 2017
,
2016
and
2015
, we recognized revenue of
$148.5 million
,
$188.0 million
and
$216.9 million
, respectively, related to the portfolios serviced by Ocwen when a party other than Ocwen or the MSR owner selected Altisource as the service provider. These amounts are not included in deriving revenue from Ocwen as a percentage of revenue in the table above.
As of June 30, 2017, we estimate that NRZ owned certain economic rights in, but not legal title to, approximately 78% of the Subject MSRs. In July 2017, Ocwen and NRZ entered into agreements to convert NRZ’s economic rights to the Subject MSRs into fully-owned MSRs in exchange for payments from NRZ to Ocwen when such MSRs were transferred. The transfers are
subject to certain third party consents. Ocwen disclosed that under these agreements, Ocwen would subservice the transferred Subject MSRs for an initial term of five years, and the agreements provided for the conversion of the existing arrangements into a more traditional subservicing arrangement.
In January 2018, Ocwen disclosed that it and NRZ entered into new agreements to accelerate the implementation of certain parts of their July 2017 arrangement in order to achieve the intent of the July 2017 agreements sooner while Ocwen continues the process of obtaining the third party consents necessary to transfer the Subject MSRs to NRZ.
On August 28, 2017, Altisource, through its licensed subsidiaries, entered into the Brokerage Agreement with NRZ which extends through August 2025. Under this agreement and related amendments, Altisource remains the exclusive provider of brokerage services for REO associated with the Subject MSRs when Ocwen transfers such MSRs to NRZ or when NRZ acquires both an additional economic interest in such MSRs and the right to designate the broker for REO properties in such portfolios. The Brokerage Agreement provides that Altisource is the exclusive provider of brokerage services for REO associated with the Subject MSRs, irrespective of the sub-servicer. NRZ’s brokerage subsidiary will receive a cooperative brokerage commission on the sale of certain REO properties from these portfolios subject to certain exceptions.
On August 28, 2017, Altisource and NRZ also entered into the Services LOI to enter into a Services Agreement, setting forth the terms pursuant to which Altisource would remain the exclusive service provider of fee-based services for the Subject MSRs through August 2025. The Services LOI was amended to continue through February 28, 2018 (with a further automatic extension through March 31, 2018 provided that the parties continue to negotiate the Services Agreement in good faith).
The Brokerage Agreement can be terminated by Altisource if the Services Agreement is not signed between Altisource and NRZ during the term of the Services LOI. The Brokerage Agreement may otherwise only be terminated upon the occurrence of certain specified events. Termination events include, but are not limited to, a breach of the terms of the Brokerage Agreement (including, without limitation, the failure to meet performance standards and non-compliance with law in a material respect), the failure to maintain licenses which failure materially prevents performance of the contract, regulatory allegations of non-compliance resulting in an adversarial proceeding against NRZ, voluntary or involuntary bankruptcy, appointment of a receiver, disclosure in a Form 10-K or Form 10-Q that there is significant uncertainty about Altisource’s ability to continue as a going concern, failure to maintain a specified level of cash and an unapproved change of control.
Following the execution of the Services Agreement, we anticipate that revenue from NRZ would increase and revenue from Ocwen would decrease. As Subject MSRs continue to transfer from Ocwen to NRZ, we anticipate that NRZ will become our largest customer. Had all of the Subject MSRs been transferred to NRZ and the Brokerage Agreement and the Services Agreement with NRZ were in place as of January 1, 2017, we estimate that approximately 50% of our 2017 revenue would have been related to NRZ. There can be no assurance that the parties will reach an agreement with respect to the terms of the Services Agreement or that a Services Agreement will be entered into on a timely basis or at all.
|
|
ITEM 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of Altisource Portfolio Solutions S.A.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Altisource Portfolio Solutions S.A. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of operations and comprehensive income, equity, and cash flows for the years ended December 31, 2017 and 2016, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years ended December 31, 2017 and 2016, in conformity with accounting principles generally accepted in the United States of America.
We also audited the adjustments to the 2015 consolidated financial statements to retrospectively apply the changes in the composition of reportable segments, as described in Note 24 to the consolidated financial statements. In our opinion, such adjustments are appropriate and have been properly applied.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2018 expressed an unqualified opinion.
Change in Application of Accounting Principles
As discussed in Note 24 to the consolidated financial statements, the Company changed its application of accounting for the composition of reportable segments in 2017. The change in the composition of reportable segments is accounted for by retrospective application to the consolidated financial statements of all prior periods presented.
Emphasis of Concentration of Revenue and Uncertainties
As discussed in Note 3 to the consolidated financial statements, Ocwen Financial Corporation (“Ocwen”) is the Company’s largest customer. In July 2017, Ocwen and New Residential Investment Corp. (individually, together with one or more of its subsidiaries, or one or more of its subsidiaries individually, “NRZ”) entered agreements to convert NRZ’s economic rights in Ocwen’s non-government-sponsored enterprise mortgage servicing rights (the “Subject MSRs”) into fully-owned mortgage servicing rights of NRZ in exchange for payments from NRZ to Ocwen when such mortgage servicing rights (“MSRs”) were transferred. In January 2018, Ocwen disclosed that it and NRZ entered into new agreements to accelerate the implementation of certain parts of their July 2017 arrangement in order to achieve the intent of the July 2017 agreements sooner while Ocwen continues the process of obtaining the third party consents necessary to transfer the Subject MSRs to NRZ. On August 28, 2017, the Company, through its licenses subsidiaries, entered into a Cooperative Brokerage Agreement, as amended, and related letter agreement (collectively, the “Brokerage Agreement”) and a Letter of Intent (subsequently amended) to enter into a Services Agreement (the “Services LOI”) with NRZ. The Services LOI sets forth the terms pursuant to which the Company would remain the exclusive service provider of fee-based services for the Subject MSRs through August 2025. Note 23 also discusses the potential implications of these uncertainties to the Company including the loss of Ocwen as a customer or the inability to reach an agreement with NRZ in respect to the terms of the Services Agreement with the Company.
Opinion on the Supplemental Information
The schedule listed in the index at Item 15 of the Form 10-K has been subjected to audit procedures performed in conjunction with the audit of the Company’s consolidated financial statements. The schedule listed in the index at Item 15 of the Form 10-K is the responsibility of the Company’s management. Our audit procedures included determining whether the schedule listed in the index at Item 15 of the Form 10-K reconciles to the consolidated financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the schedule listed in the index at Item 15 of the Form 10-K. In forming our opinion on the schedule listed in the index at Item 15 of the Form 10-K, we evaluated whether the schedule listed in the index at Item 15 of the Form 10-K, including its form and content, is presented in conformity with accounting principles generally accepted in the United States of America. In our opinion, the schedule listed in the index at Item 15 of the Form 10-K is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/
Mayer Hoffman McCann P.C.
We have served as the Company’s auditor since 2016.
February 22, 2018
Clearwater, Florida
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of Altisource Portfolio Solutions S.A.:
Opinion on Internal Control Over Financial Reporting
We have audited Altisource Portfolio Solutions S.A. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2017, based on criteria established in 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in 2013 Internal Control - Integrated Framework issued by the COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets and related consolidated statements of operations and comprehensive income, consolidated statement of equity, cash flows and financial statement schedule as of December 31, 2017 and 2016 and for the years ended December 31, 2017 and 2016 of the Company, and our report dated February 22, 2018, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the change in application of accounting principles, and an emphasis of matter paragraph regarding concentration of revenue with Ocwen Financial Corporation (“Ocwen”) and uncertainties faced by Ocwen and the Company’s related negotiations of certain mortgage servicing rights and subservicing with New Residential Investment Corp.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/
Mayer Hoffman McCann P.C.
February 22, 2018
Clearwater, Florida
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Altisource Portfolio Solutions S.A.:
We have audited, before the effects of the retrospective adjustments to the disclosures for a change in the composition of reportable segments discussed in Note 24 to the consolidated financial statements, the consolidated statements of operations, equity and cash flows of Altisource Portfolio Solutions S.A. and subsidiaries (the “Company”) for the year ended December 31, 2015 (the 2015 consolidated financial statements before the effects of the adjustments discussed in Note 24 of the consolidated financial statements are not presented herein). Our audit of the financial statements referred to above also included the 2015 information contained in the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above, before the effects of the retrospective adjustments to the disclosures for a change in the composition of reportable segments discussed in
Note 24
to the consolidated financial statements, present fairly, in all material respects, the results of operations and cash flows of Altisource Portfolio Solutions S.A. and subsidiaries for the year ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 23 to the consolidated financial statements, Ocwen Financial Corporation (“Ocwen”), the Company’s largest customer, has been and is subject to a number of federal and state regulatory matters and is subject to other challenges and uncertainties that could have significant adverse effects on Ocwen’s business. Note 23 also discusses the potential implications of these uncertainties to the Company including the loss of Ocwen as a customer or a reduction in the number and/volume of services Ocwen purchases from the Company.
We were not engaged to audit, review, or apply any procedures to the retrospective adjustments to the disclosures for a change in the composition of reportable segments, discussed in Note 24 to the consolidated financial statements and, accordingly, we do not express an opinion or any other form of assurance about whether such retrospective adjustments are appropriate and have been properly applied. Those retrospective adjustments were audited by other auditors.
/s/
Deloitte & Touche LLP
Atlanta, Georgia
March 15, 2016
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Consolidated Balance Sheets
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
ASSETS
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
105,006
|
|
|
$
|
149,294
|
|
Available for sale securities
|
|
49,153
|
|
|
45,754
|
|
Accounts receivable, net
|
|
52,740
|
|
|
87,821
|
|
Prepaid expenses and other current assets
|
|
64,742
|
|
|
42,608
|
|
Total current assets
|
|
271,641
|
|
|
325,477
|
|
|
|
|
|
|
Premises and equipment, net
|
|
73,273
|
|
|
103,473
|
|
Goodwill
|
|
86,283
|
|
|
86,283
|
|
Intangible assets, net
|
|
120,065
|
|
|
155,432
|
|
Deferred tax assets, net (Note 21)
|
|
303,707
|
|
|
7,292
|
|
Other assets
|
|
10,195
|
|
|
11,255
|
|
|
|
|
|
|
Total assets
|
|
$
|
865,164
|
|
|
$
|
689,212
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current liabilities:
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
84,400
|
|
|
$
|
83,135
|
|
Accrued litigation settlement (Note 19)
|
|
—
|
|
|
32,000
|
|
Current portion of long-term debt
|
|
5,945
|
|
|
5,945
|
|
Deferred revenue
|
|
9,802
|
|
|
8,797
|
|
Other current liabilities
|
|
9,414
|
|
|
19,061
|
|
Total current liabilities
|
|
109,561
|
|
|
148,938
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
403,336
|
|
|
467,600
|
|
Other non-current liabilities
|
|
12,282
|
|
|
10,480
|
|
|
|
|
|
|
Commitments, contingencies and regulatory matters (Note 23)
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
Common stock ($1.00 par value; 100,000 shares authorized, 25,413 issued and 17,418 outstanding as of December 31, 2017; 25,413 shares authorized and issued and 18,774 outstanding as of December 31, 2016)
|
|
25,413
|
|
|
25,413
|
|
Additional paid-in capital
|
|
112,475
|
|
|
107,288
|
|
Retained earnings
|
|
626,600
|
|
|
333,786
|
|
Accumulated other comprehensive income (loss)
|
|
733
|
|
|
(1,745
|
)
|
Treasury stock, at cost (7,995 shares as of December 31, 2017 and 6,639 shares as of December 31, 2016)
|
|
(426,609
|
)
|
|
(403,953
|
)
|
Altisource equity
|
|
338,612
|
|
|
60,789
|
|
|
|
|
|
|
Non-controlling interests
|
|
1,373
|
|
|
1,405
|
|
Total equity
|
|
339,985
|
|
|
62,194
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
865,164
|
|
|
$
|
689,212
|
|
See accompanying notes to consolidated financial statements
.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Consolidated Statements of Operations and Comprehensive Income
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
942,213
|
|
|
$
|
997,303
|
|
|
$
|
1,051,466
|
|
Cost of revenue
|
|
699,865
|
|
|
690,045
|
|
|
687,327
|
|
|
|
|
|
|
|
|
Gross profit
|
|
242,348
|
|
|
307,258
|
|
|
364,139
|
|
Selling, general and administrative expenses
|
|
192,642
|
|
|
214,155
|
|
|
220,868
|
|
Litigation settlement loss, net of $4,000 insurance recovery (
Note 19
)
|
|
—
|
|
|
28,000
|
|
|
—
|
|
Impairment losses
(Notes 9 and 10)
|
|
—
|
|
|
—
|
|
|
71,785
|
|
Change in the fair value of Equator Earn Out
(Note 19)
|
|
—
|
|
|
—
|
|
|
(7,591
|
)
|
Income from operations
|
|
49,706
|
|
|
65,103
|
|
|
79,077
|
|
Other income (expense), net:
|
|
|
|
|
|
|
Interest expense
|
|
(22,253
|
)
|
|
(24,412
|
)
|
|
(28,208
|
)
|
Other income (expense), net
|
|
7,922
|
|
|
3,630
|
|
|
2,191
|
|
Total other income (expense), net
|
|
(14,331
|
)
|
|
(20,782
|
)
|
|
(26,017
|
)
|
|
|
|
|
|
|
|
Income before income taxes and non-controlling interests
|
|
35,375
|
|
|
44,321
|
|
|
53,060
|
|
Income tax benefit (provision)
(Note 21)
|
|
276,256
|
|
|
(12,935
|
)
|
|
(8,260
|
)
|
|
|
|
|
|
|
|
Net income
|
|
311,631
|
|
|
31,386
|
|
|
44,800
|
|
Net income attributable to non-controlling interests
|
|
(2,740
|
)
|
|
(2,693
|
)
|
|
(3,202
|
)
|
|
|
|
|
|
|
|
Net income attributable to Altisource
|
|
$
|
308,891
|
|
|
$
|
28,693
|
|
|
$
|
41,598
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
Basic
|
|
$
|
16.99
|
|
|
$
|
1.53
|
|
|
$
|
2.13
|
|
Diluted
|
|
$
|
16.53
|
|
|
$
|
1.46
|
|
|
$
|
2.02
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
Basic
|
|
18,183
|
|
|
18,696
|
|
|
19,504
|
|
Diluted
|
|
18,692
|
|
|
19,612
|
|
|
20,619
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
Net income
|
|
$
|
311,631
|
|
|
$
|
31,386
|
|
|
$
|
44,800
|
|
Other comprehensive
income (loss)
, net of tax:
|
|
|
|
|
|
|
Unrealized gain (loss) on securities, net of income tax benefit
(provision) of $(921), $720, $0
|
|
2,478
|
|
|
(1,745
|
)
|
|
—
|
|
|
|
|
|
|
|
|
Comprehensive income, net of tax
|
|
314,109
|
|
|
29,641
|
|
|
44,800
|
|
Comprehensive income attributable to non-controlling interests
|
|
(2,740
|
)
|
|
(2,693
|
)
|
|
(3,202
|
)
|
|
|
|
|
|
|
|
Comprehensive income attributable to Altisource
|
|
$
|
311,369
|
|
|
$
|
26,948
|
|
|
$
|
41,598
|
|
See accompanying notes to consolidated financial statements
.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Consolidated Statements of Equity
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Altisource Equity
|
|
|
|
|
|
Common stock
|
|
Additional paid-in capital
|
|
Retained earnings
|
|
Accumulated other comprehensive income (loss)
|
|
Treasury stock, at cost
|
|
Non-controlling interests
|
|
Total
|
|
Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2015
|
25,413
|
|
|
$
|
25,413
|
|
|
$
|
91,509
|
|
|
$
|
367,967
|
|
|
$
|
—
|
|
|
$
|
(444,495
|
)
|
|
$
|
1,049
|
|
|
$
|
41,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
41,598
|
|
|
—
|
|
|
—
|
|
|
3,202
|
|
|
44,800
|
|
Distributions to non-controlling interest holders
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,959
|
)
|
|
(2,959
|
)
|
Share-based compensation expense
|
—
|
|
|
—
|
|
|
4,812
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,812
|
|
Exercise of stock option
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,292
|
)
|
|
—
|
|
|
9,682
|
|
|
—
|
|
|
1,390
|
|
Issuance of restricted shares for acquisitions
|
—
|
|
|
—
|
|
|
—
|
|
|
(32,003
|
)
|
|
—
|
|
|
53,736
|
|
|
—
|
|
|
21,733
|
|
Repurchase of shares
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(58,949
|
)
|
|
—
|
|
|
(58,949
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
25,413
|
|
|
25,413
|
|
|
96,321
|
|
|
369,270
|
|
|
—
|
|
|
(440,026
|
)
|
|
1,292
|
|
|
52,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
28,693
|
|
|
—
|
|
|
—
|
|
|
2,693
|
|
|
31,386
|
|
Other comprehensive loss, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,745
|
)
|
|
—
|
|
|
—
|
|
|
(1,745
|
)
|
Distributions to non-controlling interest holders
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,580
|
)
|
|
(2,580
|
)
|
Share-based compensation expense
|
—
|
|
|
—
|
|
|
6,188
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,188
|
|
Excess tax benefit on stock-based compensation
|
—
|
|
|
—
|
|
|
4,779
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,779
|
|
Exercise of stock options and issuance of restricted shares
|
—
|
|
|
—
|
|
|
—
|
|
|
(64,177
|
)
|
|
—
|
|
|
73,735
|
|
|
—
|
|
|
9,558
|
|
Repurchase of shares
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(37,662
|
)
|
|
—
|
|
|
(37,662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
25,413
|
|
|
25,413
|
|
|
107,288
|
|
|
333,786
|
|
|
(1,745
|
)
|
|
(403,953
|
)
|
|
1,405
|
|
|
62,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
308,891
|
|
|
—
|
|
|
—
|
|
|
2,740
|
|
|
311,631
|
|
Other comprehensive income, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,478
|
|
|
—
|
|
|
—
|
|
|
2,478
|
|
Distributions to non-controlling interest holders
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,772
|
)
|
|
(2,772
|
)
|
Share-based compensation expense
|
—
|
|
|
—
|
|
|
4,255
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,255
|
|
Cumulative effect of an accounting change (
Note 2
)
|
—
|
|
|
—
|
|
|
932
|
|
|
(932
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercise of stock options and issuance of restricted shares
|
—
|
|
|
—
|
|
|
—
|
|
|
(13,491
|
)
|
|
—
|
|
|
15,865
|
|
|
—
|
|
|
2,374
|
|
Treasury shares withheld for the payment of tax on restricted share issuances
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,654
|
)
|
|
—
|
|
|
490
|
|
|
—
|
|
|
(1,164
|
)
|
Repurchase of shares
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(39,011
|
)
|
|
—
|
|
|
(39,011
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
25,413
|
|
|
$
|
25,413
|
|
|
$
|
112,475
|
|
|
$
|
626,600
|
|
|
$
|
733
|
|
|
$
|
(426,609
|
)
|
|
$
|
1,373
|
|
|
$
|
339,985
|
|
See accompanying notes to consolidated financial statements
.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
Net income
|
$
|
311,631
|
|
|
$
|
31,386
|
|
|
$
|
44,800
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
36,447
|
|
|
36,788
|
|
|
36,470
|
|
Amortization of intangible assets
|
35,367
|
|
|
47,576
|
|
|
41,135
|
|
Loss on HLSS equity securities and dividends received, net
|
—
|
|
|
—
|
|
|
1,854
|
|
Change in the fair value of acquisition related contingent consideration
|
24
|
|
|
(3,555
|
)
|
|
(7,184
|
)
|
Impairment losses
|
—
|
|
|
—
|
|
|
71,785
|
|
Share-based compensation expense
|
4,255
|
|
|
6,188
|
|
|
4,812
|
|
Bad debt expense
|
5,116
|
|
|
1,829
|
|
|
5,514
|
|
Gain on early extinguishment of debt
|
(5,637
|
)
|
|
(5,464
|
)
|
|
(3,836
|
)
|
Amortization of debt discount
|
301
|
|
|
413
|
|
|
498
|
|
Amortization of debt issuance costs
|
833
|
|
|
1,141
|
|
|
1,374
|
|
Deferred income taxes
|
(297,336
|
)
|
|
(2,597
|
)
|
|
(1,326
|
)
|
Loss on disposal of fixed assets
|
2,768
|
|
|
1,765
|
|
|
26
|
|
Changes in operating assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
Accounts receivable
|
29,965
|
|
|
15,980
|
|
|
2,401
|
|
Prepaid expenses and other current assets
|
(22,134
|
)
|
|
(20,881
|
)
|
|
1,883
|
|
Other assets
|
770
|
|
|
1,053
|
|
|
2,993
|
|
Accounts payable and accrued expenses
|
2,576
|
|
|
(9,113
|
)
|
|
(14,483
|
)
|
Other current and non-current liabilities
|
(38,864
|
)
|
|
24,309
|
|
|
6,636
|
|
Net cash provided by operating activities
|
66,082
|
|
|
126,818
|
|
|
195,352
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
Additions to premises and equipment
|
(10,514
|
)
|
|
(23,269
|
)
|
|
(36,188
|
)
|
Acquisition of businesses, net of cash acquired
|
—
|
|
|
(9,409
|
)
|
|
(28,675
|
)
|
Purchase of available for sale securities
|
—
|
|
|
(48,219
|
)
|
|
(29,966
|
)
|
Proceeds received from sale of and dividends from HLSS equity securities
|
—
|
|
|
—
|
|
|
28,112
|
|
Change in restricted cash
|
290
|
|
|
674
|
|
|
722
|
|
Other investing activities
|
188
|
|
|
—
|
|
|
—
|
|
Net cash used in investing activities
|
(10,036
|
)
|
|
(80,223
|
)
|
|
(65,995
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
Repayments and repurchases of long-term debt
|
(59,761
|
)
|
|
(50,723
|
)
|
|
(50,373
|
)
|
Proceeds from stock option exercises
|
2,374
|
|
|
9,558
|
|
|
1,390
|
|
Excess tax benefit on stock-based compensation
|
—
|
|
|
4,779
|
|
|
—
|
|
Purchase of treasury shares
|
(39,011
|
)
|
|
(37,662
|
)
|
|
(58,949
|
)
|
Distributions to non-controlling interests
|
(2,772
|
)
|
|
(2,580
|
)
|
|
(2,959
|
)
|
Payment of tax withholding on issuance of restricted shares
|
(1,164
|
)
|
|
—
|
|
|
—
|
|
Other financing activities
|
—
|
|
|
—
|
|
|
(500
|
)
|
Net cash used in financing activities
|
(100,334
|
)
|
|
(76,628
|
)
|
|
(111,391
|
)
|
|
|
|
|
|
|
Net
(decrease) increase
in cash and cash equivalents
|
(44,288
|
)
|
|
(30,033
|
)
|
|
17,966
|
|
Cash and cash equivalents at the beginning of the period
|
149,294
|
|
|
179,327
|
|
|
161,361
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period
|
$
|
105,006
|
|
|
$
|
149,294
|
|
|
$
|
179,327
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
Interest paid
|
$
|
21,210
|
|
|
$
|
22,717
|
|
|
$
|
26,274
|
|
Income taxes paid, net
|
18,332
|
|
|
18,327
|
|
|
9,725
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
Acquisition of businesses with restricted shares
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21,733
|
|
(Decrease) increase in payables for purchases of premises and equipment
|
(1,311
|
)
|
|
404
|
|
|
(6,679
|
)
|
See accompanying notes to consolidated financial statements.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements
NOTE 1
—
ORGANIZATION
Description of Business
Altisource Portfolio Solutions S.A., together with its subsidiaries (which may be referred to as “Altisource,” the “Company,” “we,” “us” or “our”), is an integrated service provider and marketplace for the real estate and mortgage industries. Combining operational excellence with a suite of innovative services and technologies, Altisource helps solve the demands of the ever-changing markets we serve.
Effective January 1, 2017, our reportable segments changed as a result of a change in the way our Chief Executive Officer (our chief operating decision maker) manages our businesses, allocates resources and evaluates performance, and the related changes in our internal organization. We now report our operations through
two
new reportable segments: Mortgage Market and Real Estate Market. In addition, we report Other Businesses, Corporate and Eliminations separately. Prior to the January 1, 2017 change in reportable segments, our reportable segments were Mortgage Services, Financial Services and Technology Services. Prior year comparable period segment disclosures have been restated to conform to the current year presentation. See
Note 24
for a description of our business segments.
NOTE 2
—
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting and Presentation
- The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Intercompany transactions and accounts have been eliminated in consolidation.
Principles of Consolidation
- The financial statements include the accounts of the Company, its wholly-owned subsidiaries and those entities in which we have a variable interest and are the primary beneficiary.
Altisource consolidates Best Partners Mortgage Cooperative, Inc., which is managed by The Mortgage Partnership of America, L.L.C. (“MPA”), a wholly-owned subsidiary of Altisource. Best Partners Mortgage Cooperative, Inc. is a mortgage cooperative doing business as Lenders One
®
(“Lenders One”). MPA provides services to Lenders One under a management agreement that ends on December 31, 2025 (with renewals for three successive five-year periods at MPA’s option).
The management agreement between MPA and Lenders One, pursuant to which MPA is the management company, represents a variable interest in a variable interest entity. MPA is the primary beneficiary of Lenders One as it has the power to direct the activities that most significantly impact the cooperative’s economic performance and the right to receive benefits from the cooperative. As a result, Lenders One is presented in the accompanying consolidated financial statements on a consolidated basis and the interests of the members are reflected as non-controlling interests. As of
December 31, 2017
, Lenders One had total assets of
$4.6 million
and total liabilities of
$3.1 million
. As of
December 31, 2016
, Lenders One had total assets of
$3.8 million
and total liabilities of
$1.5 million
.
Use of Estimates
- The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, determining share-based compensation, income taxes, collectability of receivables, valuation of acquired intangibles and goodwill, depreciable lives and valuation of fixed assets and contingencies. Actual results could differ materially from those estimates.
Cash and Cash Equivalents
- We classify all highly liquid instruments with an original maturity of three months or less at the time of purchase as cash equivalents.
Accounts Receivable, Net
- Accounts receivable are presented net of an allowance for doubtful accounts that represents an amount that we estimate to be uncollectible. We have estimated the allowance for doubtful accounts based on our historical write-offs, our analysis of past due accounts based on the contractual terms of the receivables and our assessment of the economic status of our customers, if known. The carrying value of accounts receivable, net, approximates fair value.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
Premises and Equipment, Net
- We report premises and equipment, net at cost or estimated fair value at acquisition for premises and equipment recorded in connection with a business combination and depreciate these assets over their estimated useful lives using the straight-line method as follows:
|
|
|
Furniture and fixtures
|
5 years
|
Office equipment
|
5 years
|
Computer hardware
|
5 years
|
Computer software
|
3-7 years
|
Leasehold improvements
|
Shorter of useful life, 10 years or the term of the lease
|
Maintenance and repair costs are expensed as incurred. We capitalize expenditures for significant improvements and new equipment and depreciate the assets over the shorter of the capitalized asset’s life or the life of the lease.
We review premises and equipment for impairment following events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. We measure recoverability of assets to be held and used by comparing the carrying amount of an asset or asset group to estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset or asset group exceeds its estimated future cash flows, we recognize an impairment charge for the amount that the carrying value of the asset or asset group exceeds the fair value of the asset or asset group. There were
no
impairments of premises and equipment for the years ended
December 31, 2017
and
2016
. For the year ended
December 31, 2015
, we recognized a
$4.1 million
premises and equipment impairment loss. See
Note 9
for additional information.
Computer software includes the fair value of software acquired in business combinations, capitalized software development costs and purchased software. Capitalized software development and purchased software are recorded at cost and amortized using the straight-line method over their estimated useful lives. Software acquired in business combinations is recorded at fair value and amortized using the straight-line method over its estimated useful life.
Business Combinations
-
We account for acquisitions using the purchase method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805,
Business Combinations
. The purchase price of an acquisition is allocated to the assets acquired and liabilities assumed using their fair value as of the acquisition date.
Goodwill -
Goodwill represents the excess cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. We evaluate goodwill for impairment annually during the fourth quarter or more frequently when an event occurs or circumstances change in a manner that indicates the carrying value may not be recoverable. We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether we need to perform the quantitative two-step goodwill impairment test. Only if we determine, based on qualitative assessment, that it is more likely than not that a reporting unit’s fair value is less than its carrying value will we calculate the fair value of the reporting unit. We would then test goodwill for impairment by first comparing the book value of net assets to the fair value of the reporting units. If the fair value is determined to be less than the book value, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. We estimate the fair value of the reporting units using discounted cash flows and market comparisons. The discounted cash flow method is based on the present value of projected cash flows. Forecasts of future cash flows are based on our estimate of future sales and operating expenses, based primarily on estimated pricing, sales volumes, market segment share, cost trends and general economic conditions. Certain estimates of discounted cash flows involve businesses with limited financial history and developing revenue models. The estimated cash flows are discounted using a rate that represents our weighted average cost of capital. The market comparisons include an analysis of revenue and earnings multiples of guideline public companies compared to the Company. There were
no
impairments of goodwill for the years ended
December 31, 2017
and
2016
. For the year ended
December 31, 2015
, we recognized a goodwill impairment loss of
$55.7 million
. See
Note 10
for additional information.
Intangible Assets, Net -
Identified intangible assets consist primarily of customer related intangible assets, operating agreements, trademarks and trade names and other intangible assets. Identifiable intangible assets acquired in business combinations are recorded based on their fair values at the date of acquisition. We determine the useful lives of our identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors we consider when determining useful lives include the contractual term of any arrangements, the history of the asset, our long-term strategy for use of the asset and other economic factors. We amortize intangible assets that we deem to have definite lives in proportion to actual and expected customer revenues or on a straight-line basis over their useful lives, generally ranging from
4
to
20
years.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
We perform tests for impairment if conditions exist that indicate the carrying value may not be recoverable. When facts and circumstances indicate that the carrying value of intangible assets determined to have definite lives may not be recoverable, management assesses the recoverability of the carrying value by preparing estimates of cash flows of discrete intangible assets generally consistent with models utilized for internal planning purposes. If the sum of the undiscounted expected future cash flows is less than the carrying value, we would recognize an impairment to the extent the carrying amount exceeds fair value. There were
no
impairments of intangible assets for the years ended
December 31, 2017
and
2016
. For the year ended
December 31, 2015
, we recognized impairments of intangible assets of
$11.9 million
. See
Note 10
for additional information on impairments.
Long-Term Debt
-
Long-term debt is reported net of applicable discount or premium and net of debt issuance costs. The debt discount or premium and debt issuance costs are amortized to interest expense through maturity of the related debt using the effective interest method.
Fair Value Measurements
- Fair value is defined as an exit price, representing the amount that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the methodologies of measuring fair value for assets and liabilities, is as follows:
Level 1
—
Quoted prices in active markets for identical assets and liabilities
Level 2
—
Observable inputs other than quoted prices included in Level 1
Level 3
—
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.
Financial assets and financial liabilities are classified based on the lowest level of input that is significant to the fair value measurements. Our assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.
Functional Currency
- The currency of the primary economic environment in which our operations are conducted is the United States dollar. Therefore, the United States dollar has been determined to be our functional and reporting currency. Non-United States dollar transactions and balances have been measured in United States dollars in accordance with ASC Topic 830,
Foreign Currency Matters
. All transaction gains and losses from the measurement of monetary balance sheet items denominated in non-United States dollar currencies are reflected in the consolidated statements of operations and comprehensive income as income or expenses, as appropriate.
Defined Contribution 401(k) Plan
- Some of our employees currently participate in a defined contribution 401(k) plan under which we may make matching contributions equal to a discretionary percentage determined by us. We recorded expenses of
$1.2 million
,
$1.2 million
and
$1.0 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively, related to our discretionary contributions.
Share-Based Compensation -
Share-based compensation is accounted for under the provisions of ASC Topic 718,
Compensation - Stock Compensation
(“ASC Topic 718”). Under ASC Topic 718, the cost of services received in exchange for an award of equity instruments is generally measured based on the grant date fair value of the award. Share-based awards that do not require future service are expensed immediately. Share-based awards that require future service are recognized over the relevant service period. In 2017, the Company adopted FASB Accounting Standards Update (“ASU”) No. 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”). In connection with adopting ASU 2016-09 (see Recently Adopted Accounting Pronouncements below), the Company made an accounting policy election to account for forfeitures in compensation expense as they occur. Prior to adopting ASU No. 2016-09, the Company estimated forfeitures for share-based awards in compensation expense that were not expected to vest.
Earnings Per Share
- We compute earnings per share (“EPS”) in accordance with ASC Topic 260,
Earnings Per Share
. Basic net income per share is computed by dividing net income attributable to Altisource by the weighted average number of shares of common stock outstanding for the period. Diluted net income per share reflects the assumed conversion of all dilutive securities using the treasury stock method.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
Revenue Recognition
-
We recognize revenue from the services we provide in accordance with ASC Topic 605,
Revenue Recognition
(“ASC Topic 605”). ASC Topic 605 sets forth guidance as to when revenue is realized or realizable and earned, which is generally when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been performed; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. Generally, the contract terms for these services are relatively short in duration, and we recognize revenue as the services are performed either on a per unit or a fixed price basis. Specific policies for each of our reportable segments are as follows:
Mortgage Market segment
: We recognize revenue for the majority of the services we provide when the services have been performed. For certain default management services, we recognize revenue over the period during which we perform the related services, with full recognition upon recording the related foreclosure deed. A significant area of judgment includes the period over which we recognize certain default management services revenue. For disbursement processing services, we recognize revenue over the period during which we perform the processing services with full recognition upon completion of the disbursements. We record revenue associated with fees earned on real estate sales, other than our sales of short-term investments in real estate (see Real Estate Market segment below), on a net basis as we perform services as an agent without assuming the risks and rewards of ownership of the asset and the commission earned on the sale is a fixed percentage. We generally earn our fees for collections on charged-off mortgages on behalf of our clients and recognize revenue following collection from the debtors. We also earn fees for packaging and selling charged-off mortgages and recognize revenue after the sale of the notes and once the risks and rewards of the mortgage notes are transferred to the purchasers. For certain of our servicer technologies software services other than Equator and Mortgage Builder software applications (see below), we charge fees based on the number of loans on the system or on a per-transaction basis. We record transactional revenue when the service is provided and other revenue monthly based on the number of loans processed or services provided. In addition, we charge fees for professional services engagements, which consist primarily of time and materials agreements with customers that are generally billed and recognized as the hours are worked. Reimbursable expenses revenue is included in revenue with an equal amount recorded in cost of revenue primarily related to our property preservation and inspection services, real estate sales and our default management services. These amounts are recognized on a gross basis, principally because generally we have complete control over selection of vendors and the vendor relationship is with us, rather than with our customers.
For Equator software applications, we recognize revenue from arrangements with multiple deliverables in accordance with ASC Subtopic 605-25,
Revenue Recognition: Multiple-Element Arrangements
(“ASC 605-25”), and Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin Topic 13,
Revenue Recognition
(“SAB Topic 13”). ASC 605-25 and SAB Topic 13 require each deliverable within a multiple-deliverable revenue arrangement to be accounted for as a separate unit if both of the following criteria are met: (1) the delivered item or items have value to the customer on a standalone basis and (2) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the seller’s control. Deliverables not meeting the criteria for accounting treatment as a separate unit are combined with a deliverable that meets that criterion. We derive revenue from platform services fees, professional services fees and other services. We do not begin to recognize revenue for platform services fees until these fees become billable, as the services fees are not fixed and determinable until such time. Platform services fees are recognized ratably over the shorter of the term of the contract with the customer or the minimum cancellation period. Professional services fees consist primarily of configuration and development services related to customizing the platform for individual customers and are generally billed as the hours are worked. Due to the essential and specialized nature of the configuration services, these services do not qualify as separate units of accounting separate from the platform services as the delivered services do not have value to the customer on a standalone basis. Therefore, the related fees are recorded as deferred revenue until the project configuration is complete and then recognized ratably over the longer of the term of the agreement or the estimated expected customer life. Other services consist primarily of training, including agent certification, and consulting services. These services are generally sold separately and are recognized as revenue as the services are performed and earned.
For Mortgage Builder software applications, we recognize subscription revenues ratably over the contract term, beginning on the commencement date of each contract. Revenues for usage-based transactions are generally recognized as the usage occurs, as that is the point when the fee becomes fixed or determinable. We generally invoice customers on a monthly basis.
Real Estate Market segment
: We recognize revenue for the majority of the services we provide when the services have been performed. We record revenue associated with fees earned on real estate sales, other than our sales of short-term investments in real estate, on a net basis as we perform services as an agent without assuming the risks and rewards of ownership of the asset and the commission earned on the sale is a fixed percentage. For sales of short-term investments in real estate, we record revenue in the amount of the selling price of the property upon the sale of the property. Reimbursable expenses revenue is included in revenue with an equal offsetting expense included in cost of revenue primarily related to our real estate sales. These amounts are recognized on a gross basis, principally because we have complete control over selection of vendors and the vendor relationship is with us, rather than with our customers.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
Other Businesses, Corporate and Eliminations segment
: We generally earn our fees for asset recovery management services as a percentage of the amount we collect on delinquent consumer receivables and recognize revenue following collection from the debtors. In addition, we provide customer relationship management services for which we typically earn and recognize revenue on a per-person, per-call or per-minute basis as the related services are performed. For the information technology (“IT”) infrastructure services we provide to Ocwen Financial Corporation (“Ocwen”), Front Yard Residential Corporation (formerly Altisource Residential Corporation) (“RESI”) and Altisource Asset Management Corporation (“AAMC”), we charge for these services primarily based on the number of employees that are using the applicable systems, fixed fees and the number and type of licensed platforms used by Ocwen, RESI and AAMC. We record revenue associated with implementation services upon completion and maintenance ratably over the related service period.
Income Taxes
- We record income taxes in accordance with ASC Topic 740,
Income Taxes
(“ASC Topic 740”). We account for certain income and expense items differently for financial reporting purposes and income tax purposes. We recognize deferred income tax assets and liabilities for these differences between the financial reporting basis and the tax basis of our assets and liabilities as well as expected benefits of utilizing net operating loss and credit carryforwards. The most significant temporary differences relate to accrued compensation, amortization, loss carryforwards and valuation allowances. We measure deferred income tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we anticipate recovery or settlement of those temporary differences. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining tax expense and in evaluating tax positions including evaluating uncertainties under ASC Topic 740. We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on our results of operations.
Recently Adopted Accounting Pronouncements
On January 1, 2017, ASU No. 2016-09 became effective. This standard simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The standard requires companies to recognize all award-related excess tax benefits and tax deficiencies in the income statement, classify any excess tax benefits as an operating activity in the statement of cash flows, limit tax withholding up to the maximum statutory tax rates in order to continue to apply equity accounting rules and classify cash paid by employers when directly withholding shares for tax withholding purposes as a financing activity in the statement of cash flows. The standard also provides companies with the option of estimating forfeitures or recognizing forfeitures as they occur. In connection with the adoption of this standard, the Company made an accounting policy election to account for forfeitures in compensation expense as they occur, rather than continuing to apply the Company’s previous policy of estimating forfeitures. This policy election resulted in a cumulative effect adjustment of
$0.9 million
to retained earnings and additional paid-in capital as of January 1, 2017 using the modified retrospective transition method. There were no other significant impacts of the adoption of this standard on the Company’s results of operations and financial position.
Effective December 22, 2017, the SEC issued Staff Accounting Bulletin Topic 5 EE,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
(“SAB Topic 5 EE”). This staff accounting bulletin expresses the views of the SEC staff regarding application of ASC Topic 740 in the reporting period that includes December 22, 2017, the date on which the Tax Cuts and Jobs Act (the “Jobs Act”) was signed into law. The SEC recognizes that an entity may not have the necessary information available, prepared, or analyzed (including computations) for certain income tax effects of the Jobs Act in order to determine a reasonable estimate to be included as provisional amounts. In circumstances in which provisional amounts cannot be prepared, the SEC stated an entity should continue to apply ASC Topic 740 (e.g., when recognizing and measuring current and deferred taxes) based on the provisions of the tax laws that were in effect immediately prior to the Jobs Act being enacted until a reasonable estimate can be determined.
Future Adoption of New Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
. This standard establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. This new standard requires that an entity recognize revenue for the transfer of promised goods or services to a customer in an amount that reflects the consideration that the entity expects to receive and consistent with the delivery of the performance obligation described in the underlying contract with the customer. This standard will be effective
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
for annual periods beginning after December 15, 2017, including interim periods within that reporting period. The Company plans to adopt ASU No. 2014-09 retrospectively with the cumulative effect of initially applying the new standard recognized on the date of the initial application. The new standard was effective for the Company on January 1, 2018. Based on the Company’s analysis of all sources of revenue from customers for the year ended
December 31, 2017
and prior periods, the Company has determined that approximately
$10 million
of revenue reported during 2017 and prior years, primarily related to software development professional services, will be deferred and recognized over future periods under the new standard.
In January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
. This standard will require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The standard also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. It also amends certain financial statement presentation and disclosure requirements associated with the fair value of financial instruments. This standard will be effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period and was effective for the Company on January 1, 2018. Based on the Company’s analysis of this guidance, upon adoption of ASU No. 2016-01 the Company will reflect changes in the fair value of its available for sale securities in income. These changes in fair value are currently reflected in other comprehensive income. The Company will adopt ASU No. 2016-01 with a cumulative effect adjustment to the balance sheet as of the beginning of 2018. The Company currently has one investment that will be impacted by this standard
—
its investment in RESI (see
Note 6
). As of
December 31, 2017
and
2016
, the unrealized gain (loss) in accumulated other comprehensive income (loss) related to the RESI investment was
$0.7 million
and
$(1.7) million
, respectively.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. This standard introduces a new lessee model that brings substantially all leases on the balance sheet. The standard will require companies to recognize lease assets and lease liabilities on their balance sheets and disclose key information about leasing arrangements in their financial statements. This standard will be effective for annual periods beginning after December 15, 2018, including interim periods within that reporting period. Early application of this standard is permitted. The Company is currently evaluating the impact of this guidance on its results of operations and financial position. Based on the Company’s preliminary analysis of its lease arrangements where the Company is a lessee, approximately
$25 million
, primarily related to office leases, would be recorded as right-of-use assets and lease liabilities on the Company’s balance sheet as of
December 31, 2017
under the new standard. The Company will continue to analyze the impact of this guidance and refine the estimated impact on its results of operations and financial position.
In March 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
. This standard clarifies guidance on principal versus agent considerations in connection with revenue recognition. When another party is involved in providing goods or services to a customer, an entity is required to determine whether the nature of its promise is to provide the specified good or service itself (that is, the entity is a principal) or to arrange for that good or service to be provided by the other party (that is, the entity is an agent). An entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customer. This standard will be effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period and was effective for the Company on January 1, 2018. The Company has evaluated the impact of this guidance on its results of operations and financial position in connection with its adoption of ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606),
described above.
In April 2016, the FASB issued ASU No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
. This standard provides guidance on identifying performance obligations in a contract with a customer and clarifying several licensing considerations, including whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time) and guidance on sales-based and usage-based royalties. This standard will be effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period and was effective for the Company on January 1, 2018. The Company has evaluated the impact of this guidance on its results of operations and financial position in connection with its adoption of ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, described above.
In May 2016, the FASB issued ASU No. 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
. This standard addresses collectability, sales taxes and other similar taxes collected from customers, non-cash consideration, contract modifications at transition and completed contracts at transition. This standard will be effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period and was effective for the Company on January 1, 2018. The Company has evaluated the impact of this guidance on its results of operations
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
and financial position in connection with its adoption of ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, described above.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
. This standard addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This standard will be effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period and was effective for the Company on January 1, 2018. The Company does not expect the adoption of this guidance to have a material effect on its statement of cash flows.
In October 2016, the FASB issued ASU No. 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.
This standard will require that companies recognize the income tax consequences of an intra-entity transfer of an asset (other than inventory) when the transfer occurs. Current guidance prohibits companies from recognizing current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. This standard will be effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period and was effective for the Company on January 1, 2018. The Company does not expect the adoption of this standard to have a material impact on its results of operations or financial position.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
. This standard will require that companies include restricted cash and restricted cash equivalents in their cash and cash equivalent balances in the statement of cash flows. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This standard will be effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period and was effective for the Company on January 1, 2018. The Company does not expect the adoption of this guidance to have a material effect on its statement of cash flows. As of
December 31, 2017
and
2016
, restricted cash was
$3.8 million
and
$4.1 million
, respectively.
In December 2016, the FASB issued ASU No. 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
. The FASB issued 13 technical corrections and improvements to ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, including providing optional exemptions from the disclosure requirement for remaining performance obligations for specific situations in which an entity need not estimate variable consideration to recognize revenue. The amendments in this standard also expand the information that is required to be disclosed when an entity applies one of the optional exemptions. This standard will be effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period and was effective for the Company on January 1, 2018. The Company has evaluated the impact of this guidance on its results of operations and financial position in connection with its adoption of ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, described above.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business.
This standard clarifies the definition of a business and provides a screen to determine if a set of inputs, processes and outputs is a business. The screen requires that when substantially all of the fair value of gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the assets acquired would not be a business. Under the new guidance, in order to be considered a business, an acquisition must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. In addition, the standard narrows the definition of the term “output” so that it is consistent with how it is described in ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606).
This standard will be effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period and was effective for the Company on January 1, 2018. The Company does not expect the adoption of this guidance to have a material effect on its results of operations and financial position.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.
This standard will simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Current guidance requires that companies compute the implied fair value of goodwill under Step 2 by performing procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. This standard will require companies to perform annual or interim goodwill impairment tests by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This standard will be effective for annual periods beginning after December 15, 2019, including interim periods within that reporting period, and will be applied prospectively. Early adoption of this standard is permitted. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
In February 2017, the FASB issued ASU No. 2017-05,
Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
. This standard was issued to clarify the scope of Subtopic 610-20,
Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets
, and to add guidance for partial sales of nonfinancial assets. Subtopic 610-20 provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. This standard will be effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period and was effective for the Company on January 1, 2018. The Company does not expect the adoption of this guidance to have a material effect on its results of operations and financial position.
In May 2017, the FASB issued ASU No. 2017-09, C
ompensation—Stock Compensation (Topic 718): Scope of Modification Accounting
. This standard provides guidance about which changes to the terms or conditions of a share-based payment award require the application of modification accounting. This standard will require companies to continue to apply modification accounting, unless the fair value, vesting conditions and classification of an award all do not change as a result of the modification. This standard will be effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period and was effective for the Company on January 1, 2018. The Company does not expect the adoption of this guidance to have a material effect on its results of operations and financial position.
In August 2017, the FASB issued ASU No. 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
. The amendments in this standard better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedging results. This standard will be effective for annual periods beginning after December 15, 2018, including interim periods within that reporting period. Early application is permitted. The Company currently does not expect the adoption of this guidance to have a material effect on its results of operations and financial position.
NOTE 3
—
CUSTOMER CONCENTRATION
During the year ended
December 31, 2017
, Ocwen was our largest customer, accounting for
58%
of our total revenue. Ocwen is a residential mortgage loan servicer for mortgage servicing rights (“MSRs”) it owns, including those MSRs in which others have an economic interest, which includes New Residential Investment Corp. (individually, together with one or more of its subsidiaries or one or more of its subsidiaries individually, “NRZ”), and purchases certain mortgage services and technology services from us under the terms of master services agreements and amendments thereto (collectively, the “Ocwen Services Agreements”) with terms extending through August 2025. Certain of the Ocwen Service Agreements, among other things, contain a “most favored nation” provision and also grant the parties the right to renegotiate pricing. Certain of the Ocwen Service Agreements also prohibit Ocwen from establishing fee-based businesses that would directly or indirectly compete with Altisource’s services with respect to the Homeward Residential, Inc. (“Homeward”) and Residential Capital, LLC (“ResCap”) servicing portfolios acquired by Ocwen in December 2012 and February 2013, respectively. Ocwen also purchases certain origination services from Altisource under an agreement that continues until January 2019, but which is subject to a 90 day termination right by Ocwen.
Revenue from Ocwen primarily consists of revenue earned from the loans serviced by Ocwen when Ocwen designates us as the service provider and revenue earned directly from Ocwen. For the years ended
December 31, 2017
,
2016
and
2015
, we generated revenue from Ocwen of
$542.0 million
,
$561.9 million
and
$631.6 million
, respectively. Revenue from Ocwen as a percentage of segment and consolidated revenue was as follows for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Mortgage Market
|
|
67%
|
|
65%
|
|
66%
|
Real Estate Market
|
|
1%
|
|
—%
|
|
9%
|
Other Businesses, Corporate and Eliminations
|
|
11%
|
|
27%
|
|
37%
|
Consolidated revenue
|
|
58%
|
|
56%
|
|
60%
|
We earn additional revenue related to the portfolios serviced by Ocwen when a party other than Ocwen or the MSR owner selects Altisource as the service provider. For the years ended
December 31, 2017
,
2016
and
2015
, we recognized revenue of
$148.5 million
,
$188.0 million
and
$216.9 million
, respectively, related to the portfolios serviced by Ocwen when a party other than Ocwen or the MSR owner selected Altisource as the service provider. These amounts are not included in deriving revenue from Ocwen as a percentage of revenue in the table above.
As of
December 31, 2017
, accounts receivable from Ocwen totaled
$18.9 million
,
$13.6 million
of which was billed and
$5.3 million
of which was unbilled.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
As of June 30, 2017, we estimate that NRZ owned certain economic rights in, but not legal title to, approximately
78%
of Ocwen’s non-government-sponsored enterprise (“non-GSE”) MSRs (the “Subject MSRs”). In July 2017, Ocwen and NRZ entered into agreements to convert NRZ’s economic rights to the Subject MSRs into fully-owned MSRs in exchange for payments from NRZ to Ocwen when such MSRs were transferred. The transfers are subject to certain third party consents. Ocwen disclosed that under these agreements, Ocwen would subservice the transferred Subject MSRs for an initial term of five years, and the agreements provided for the conversion of the existing arrangements into a more traditional subservicing arrangement.
In January 2018, Ocwen disclosed that it and NRZ entered into new agreements to accelerate the implementation of certain parts of their July 2017 arrangement in order to achieve the intent of the July 2017 agreements sooner while Ocwen continues the process of obtaining the third party consents necessary to transfer the Subject MSRs to NRZ.
On August 28, 2017, Altisource, through its licensed subsidiaries, entered into a Cooperative Brokerage Agreement, as amended, and related letter agreement (collectively, the “Brokerage Agreement”) with NRZ which extends through August 2025. Under this agreement and related amendments, Altisource remains the exclusive provider of brokerage services for real estate owned (“REO”) associated with the Subject MSRs when Ocwen transfers such MSRs to NRZ or when NRZ acquires both an additional economic interest in such MSRs and the right to designate the broker for REO properties in such portfolios. The Brokerage Agreement provides that Altisource is the exclusive provider of brokerage services for REO associated with the Subject MSRs, irrespective of the sub-servicer. NRZ’s brokerage subsidiary will receive a cooperative brokerage commission on the sale of certain REO properties from these portfolios subject to certain exceptions.
On August 28, 2017, Altisource and NRZ also entered into a non-binding Letter of Intent (subsequently amended) to enter into a Services Agreement (the “Services LOI”), setting forth the terms pursuant to which Altisource would remain the exclusive service provider of fee-based services for the Subject MSRs through August 2025. The Services LOI was amended to continue through February 28, 2018 (with a further automatic extension through March 31, 2018 provided that the parties continue to negotiate the Services Agreement in good faith).
The Brokerage Agreement can be terminated by Altisource if the Services Agreement is not signed between Altisource and NRZ during the term of the Services LOI. The Brokerage Agreement may otherwise only be terminated upon the occurrence of certain specified events. Termination events include, but are not limited to, a breach of the terms of the Brokerage Agreement (including, without limitation, the failure to meet performance standards and non-compliance with law in a material respect), the failure to maintain licenses which failure materially prevents performance of the contract, regulatory allegations of non-compliance resulting in an adversarial proceeding against NRZ, voluntary or involuntary bankruptcy, appointment of a receiver, disclosure in a Form 10-K or Form 10-Q that there is significant uncertainty about Altisource’s ability to continue as a going concern, failure to maintain a specified level of cash and an unapproved change of control.
Following the execution of the Services Agreement, we anticipate that revenue from NRZ would increase and revenue from Ocwen would decrease. As Subject MSRs continue to transfer from Ocwen to NRZ, we anticipate that NRZ will become our largest customer. Had all of the Subject MSRs been transferred to NRZ and the Brokerage Agreement and the Services Agreement with NRZ were in place as of January 1, 2017, we estimate that approximately
50%
of our 2017 revenue would have been related to NRZ. There can be no assurance that the parties will reach an agreement with respect to the terms of the Services Agreement or that a Services Agreement will be entered into on a timely basis or at all.
For the year ended
December 31, 2017
, we earned revenue from NRZ of
$2.4 million
following the transfer of certain of the Subject MSRs from Ocwen to NRZ (the “Transferred MSRs”) (
no
comparative amounts in 2016 or 2015). For the year ended
December 31, 2017
, we earned additional revenue of
$3.9 million
relating to the Transferred MSRs when a party other than NRZ selects Altisource as the service provider (
no
comparative amounts in 2016 or 2015).
NOTE 4
—
TRANSACTIONS WITH RELATED PARTIES
Through January 16, 2015, William C. Erbey served as our Chairman as well as the Executive Chairman of Ocwen and Chairman of each of Home Loan Servicing Solutions, Ltd. (“HLSS”), RESI and AAMC. Effective January 16, 2015, Mr. Erbey stepped down as the Executive Chairman of Ocwen and Chairman of each of Altisource, HLSS, RESI and AAMC and is no longer a member of the Board of Directors of any of these companies. Consequently, as of January 16, 2015, these companies are no longer related parties of Altisource, as defined by FASB ASC Topic 850,
Related Party Disclosures
. The disclosures in this note are limited to the periods that each of Ocwen, HLSS, RESI and AAMC were related parties of Altisource and are not reflective of current activities with these former related parties.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
Ocwen
For the period from January 1, 2015 through January 16, 2015, we estimated that we generated revenue from Ocwen of
$22.9 million
. Services provided to Ocwen during such periods included real estate asset management and sales, residential property valuation, trustee management services, property inspection and preservation services, insurance services, mortgage charge-off collections, IT infrastructure management and software applications.
We record revenue we earn from Ocwen under the terms of master services agreements and amendments thereto at rates we believe to be comparable market rates as we believe they are consistent with the fees we charge to other customers and/or fees charged by our competitors for comparable services.
At times, we have used Ocwen’s contractors and/or employees to support Altisource related services. Ocwen generally billed us for these contractors and/or employees based on their fully-allocated cost. Additionally, through March 31, 2015, we purchased certain data relating to Ocwen’s servicing portfolio in connection with a Data Access and Services Agreement. Based upon our previously provided notice, the Data Access and Services Agreement was terminated effective March 31, 2015. For the period from January 1, 2015 through January 16, 2015, we estimated that we incurred
$1.9 million
of expenses related to these items. These amounts are reflected as a component of cost of revenue in the consolidated statements of operations and comprehensive income.
We provided certain other services to Ocwen and Ocwen provided certain other services to us in connection with support services agreements. These services primarily included vendor management, corporate services and facilities related services. Billings for these services were generally based on the fully-allocated cost of providing the service based on an estimate of the time and expense of providing the service or estimates thereof. For the period from January 1, 2015 through January 16, 2015, billings to Ocwen were estimated to be
$0.1 million
and billings from Ocwen were estimated to be
$0.3 million
and are reflected as a component of selling, general and administrative expenses in the consolidated statements of operations and comprehensive income.
HLSS, RESI and AAMC
For the period from January 1, 2015 through January 16, 2015, our billings to HLSS were immaterial. RESI acquires, owns and manages single-family-rental properties throughout the United States. AAMC is an asset management company that provides portfolio management and corporate governance services to investment vehicles that own real estate related assets. Its initial client is RESI. We have agreements and amendments thereto, which extend through 2027, to provide RESI with renovation management, lease management, property management, REO asset management, title insurance, settlement and valuation services. In addition, we have agreements with RESI and AAMC pursuant to which we may provide services such as finance, human resources, facilities, technology and insurance risk management. Further, we have separate agreements for certain services related to income tax matters, trademark licenses and technology products and services. For the period from January 1, 2015 through January 16, 2015, we estimated that we generated revenue from RESI of
$1.0 million
under these services agreements. These amounts are reflected in revenue in the consolidated statements of operations and comprehensive income. This excludes revenue from services we provided to RESI’s loans serviced by Ocwen or other loan servicers where we were retained by Ocwen or RESI’s other loan servicers. Other revenue and expenses related to AAMC and RESI for the period from January 1, 2015 through January 16, 2015 were immaterial.
NOTE 5
—
ACQUISITIONS
Granite Acquisition
On July 29, 2016, we acquired certain assets and assumed certain liabilities of Granite Loan Management of Delaware, LLC (“Granite”) for
$9.5 million
in cash. Granite provides residential and commercial loan disbursement processing, risk mitigation and construction inspection services to lenders. The Granite acquisition is not material in relation to the Company’s results of operations or financial position.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
The final allocation of the purchase price is as follows:
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
1,024
|
|
Prepaid expenses
|
|
22
|
|
Other assets
|
|
25
|
|
Premises and equipment, net
|
|
299
|
|
Non-compete agreements
|
|
100
|
|
Trademarks and trade names
|
|
100
|
|
Customer relationships
|
|
3,400
|
|
Goodwill
|
|
4,827
|
|
|
|
9,797
|
|
Accounts payable and accrued expenses
|
|
(57
|
)
|
Other current liabilities
|
|
(192
|
)
|
|
|
|
Purchase price
|
|
$
|
9,548
|
|
RentRange, Investability and Onit Solutions Acquisitions
On October 9, 2015, we acquired GoldenGator, LLC (doing business as RentRange) (“RentRange”), REIsmart, LLC (doing business as Investability) (“Investability”) and Onit Solutions, LLC, a support company for RentRange and Investability (collectively “RentRange and Investability”) for
$24.8 million
. RentRange is a leading provider of rental home data and information to the financial services and real estate industries, delivering a wide assortment of address and geography level data, analytics and rent-based valuation solutions for single and multi-family properties. Investability is an online residential real estate acquisition platform that utilizes data and analytics to allow real estate investors to access the estimated cash flow, capitalization rate, net yield and market value of properties for sale in the United States. The purchase price was composed of
$17.5 million
in cash and
247 thousand
shares of restricted common stock of the Company with a value of
$7.3 million
as of the closing date. Upon issuance, the restricted shares were subject to transfer restrictions and potential forfeiture provisions. These restrictions and forfeiture provisions lapse over a
four
year period, subject to the recipients meeting certain continued employment conditions with the Company and the satisfaction of certain acquisition related escrow release conditions. During 2017, transfer restrictions were removed on
14 thousand
shares. In addition, on June 30, 2017, the Company amended the purchase and sale agreement and purchased
170 thousand
restricted shares. During 2016, transfer restrictions were removed on
55 thousand
shares. Also during 2016, management adjusted the allocation of the purchase price based upon information that subsequently became available relating to acquisition date working capital and the purchase price allocation to intangible assets. The working capital adjustment resulted in an obligation of the sellers to pay the Company
$0.2 million
. RentRange and Investability are not material in relation to the Company’s results of operations or financial position.
The initial and final allocation of the purchase price is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Initial purchase price allocation
|
|
Adjustments
|
|
Final purchase price allocation
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
Accounts receivable, net
|
|
245
|
|
|
(76
|
)
|
|
169
|
|
Premises and equipment, net
|
|
2,471
|
|
|
(1,067
|
)
|
|
1,404
|
|
Other assets
|
|
199
|
|
|
(196
|
)
|
|
3
|
|
Trademarks and trade names
|
|
1,205
|
|
|
—
|
|
|
1,205
|
|
Databases/other
|
|
910
|
|
|
1,035
|
|
|
1,945
|
|
Non-compete agreements
|
|
330
|
|
|
—
|
|
|
330
|
|
Customer relationships
|
|
255
|
|
|
—
|
|
|
255
|
|
Goodwill
|
|
19,565
|
|
|
50
|
|
|
19,615
|
|
|
|
25,183
|
|
|
(254
|
)
|
|
24,929
|
|
Accounts payable and accrued expenses
|
|
(391
|
)
|
|
46
|
|
|
(345
|
)
|
|
|
|
|
|
|
|
Purchase price
|
|
$
|
24,792
|
|
|
$
|
(208
|
)
|
|
$
|
24,584
|
|
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
CastleLine Acquisition
On July 17, 2015, we acquired CastleLine Holdings, LLC and its subsidiaries (“CastleLine”) for
$33.4 million
. CastleLine is a specialty risk management and insurance services firm that provides financial products and services to parties involved in the origination, underwriting, purchase and securitization of residential mortgages. The purchase consideration was composed of
$12.3 million
of cash at closing,
$10.5 million
of cash payable over
four years
from the acquisition date and
495 thousand
shares of restricted common stock of the Company, that were subject to transfer restrictions, with a value of
$14.4 million
as of the closing date. During 2016, the restrictions were removed on the
495 thousand
shares. Of the cash payable following acquisition,
$3.8 million
is contingent on certain future employment conditions of certain of the sellers, and therefore excluded from the purchase price. As of
December 31, 2017
, we have paid
$8.9 million
of the up to
$10.5 million
that is payable over four years from the acquisition date and
$2.1 million
of the
$3.8 million
purchase consideration that is contingent on future employment. During the second quarter of 2016, management adjusted the allocation of the purchase price based upon information that subsequently became available relating to acquisition date working capital and the purchase price allocation to intangible assets. The CastleLine acquisition is not material in relation to the Company’s results of operations or financial position.
The initial and final allocation of the purchase price is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Initial purchase price allocation
|
|
Adjustments
|
|
Final purchase price allocation
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,088
|
|
|
$
|
—
|
|
|
$
|
1,088
|
|
Accounts receivable, net
|
|
510
|
|
|
(410
|
)
|
|
100
|
|
Prepaid expenses
|
|
66
|
|
|
(46
|
)
|
|
20
|
|
Restricted cash
|
|
2,501
|
|
|
—
|
|
|
2,501
|
|
Non-compete agreements
|
|
1,105
|
|
|
25
|
|
|
1,130
|
|
Databases/other
|
|
465
|
|
|
1,335
|
|
|
1,800
|
|
Customer relationships
|
|
395
|
|
|
—
|
|
|
395
|
|
Trademarks and trade names
|
|
150
|
|
|
10
|
|
|
160
|
|
Deferred taxes
|
|
—
|
|
|
356
|
|
|
356
|
|
Goodwill
|
|
28,125
|
|
|
(1,395
|
)
|
|
26,730
|
|
|
|
34,405
|
|
|
(125
|
)
|
|
34,280
|
|
Accounts payable and accrued expenses
|
|
(875
|
)
|
|
38
|
|
|
(837
|
)
|
Deferred revenue
|
|
(87
|
)
|
|
87
|
|
|
—
|
|
|
|
|
|
|
|
|
Purchase price
|
|
$
|
33,443
|
|
|
$
|
—
|
|
|
$
|
33,443
|
|
NOTE 6
—
AVAILABLE FOR SALE SECURITIES
During the year ended
December 31, 2016
, we purchased
4.1 million
shares of RESI common stock for
$48.2 million
. This investment is classified as available for sale and reflected in the consolidated balance sheets at fair value at the respective balance sheet dates (
$49.2 million
and
$45.8 million
as of
December 31, 2017
and
2016
, respectively). Unrealized gains and losses on available for sale securities are reflected in other comprehensive income, unless there is an impairment that is other than temporary. In the event that a decline in market value is other than temporary, we would record a charge to earnings and a new cost basis in the investment would be established. During the years ended
December 31, 2017
and
2016
, we earned dividends of
$2.5 million
and
$2.3 million
, respectively, related to this investment (
no
comparative amount in 2015). In addition, during the year ended
December 31, 2016
, we incurred expenses of
$3.4 million
related to this investment (
no
comparative amounts in 2017 and 2015).
NOTE 7
—
ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consists of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
|
|
|
|
Billed
|
|
$
|
40,787
|
|
|
$
|
58,392
|
|
Unbilled
|
|
22,532
|
|
|
39,853
|
|
|
|
63,319
|
|
|
98,245
|
|
Less: Allowance for doubtful accounts
|
|
(10,579
|
)
|
|
(10,424
|
)
|
|
|
|
|
|
Total
|
|
$
|
52,740
|
|
|
$
|
87,821
|
|
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
Unbilled receivables consist primarily of certain real estate asset management and sales services for which we generally recognize revenue when the service is provided but collect upon closing of the sale, and default management services, for which we generally recognize revenues over the service delivery period but bill following completion of the service. We also include amounts in unbilled receivables that are earned during a month and billed in the following month.
Bad debt expense amounted to
$5.1 million
,
$1.8 million
and
$5.5 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively, and is included in selling, general and administrative expenses in the consolidated statements of operations and comprehensive income.
NOTE 8
—
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following as of
December 31
:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
|
|
|
|
Short-term investments in real estate
|
|
$
|
29,405
|
|
|
$
|
13,025
|
|
Maintenance agreements, current portion
|
|
8,014
|
|
|
6,590
|
|
Income taxes receivable
|
|
9,227
|
|
|
5,186
|
|
Prepaid expenses
|
|
7,898
|
|
|
6,919
|
|
Litigation settlement insurance recovery (Note 19)
|
|
—
|
|
|
4,000
|
|
Other current assets
|
|
10,198
|
|
|
6,888
|
|
|
|
|
|
|
Total
|
|
$
|
64,742
|
|
|
$
|
42,608
|
|
NOTE 9
—
PREMISES AND EQUIPMENT, NET
Premises and equipment, net consists of the following as of
December 31
:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
|
|
|
|
Computer hardware and software
|
|
$
|
179,567
|
|
|
$
|
164,877
|
|
Office equipment and other
|
|
9,388
|
|
|
20,188
|
|
Furniture and fixtures
|
|
14,092
|
|
|
13,997
|
|
Leasehold improvements
|
|
33,417
|
|
|
33,808
|
|
|
|
236,464
|
|
|
232,870
|
|
Less: Accumulated depreciation and amortization
|
|
(163,191
|
)
|
|
(129,397
|
)
|
|
|
|
|
|
Total
|
|
$
|
73,273
|
|
|
$
|
103,473
|
|
Depreciation and amortization expense amounted to
$36.4 million
,
$36.8 million
and
$36.5 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively, and is included in cost of revenue for operating assets and in selling, general and administrative expenses for non-operating assets in the consolidated statements of operations and comprehensive income.
In the fourth quarter of 2015, we recognized a
$4.1 million
premises and equipment impairment loss in our Mortgage Market segment (see
Note 24
for additional information regarding our changes in reportable segments effective January 1, 2017), primarily driven by the Company’s projected technology revenue from Ocwen and investment in technologies provided to Ocwen. There were
no
impairments of premises and equipment for the years ended
December 31, 2017
and
2016
.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
NOTE 10
—
GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
Goodwill was recorded in connection with the 2016 acquisition of Granite, the 2015 acquisitions of CastleLine and RentRange and Investability, the 2014 acquisition of certain assets and assumption of certain liabilities of Owners Advantage, LLC (“Owners”), the 2013 acquisition of the Homeward fee-based business, the 2011 acquisitions of Springhouse, LLC and Tracmail and the 2010 acquisition of MPA.
Note 5
discusses the
2016
and
2015
acquisitions (there were
no
acquisitions in 2017). Changes in goodwill during the years ended
December 31, 2017
and
2016
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Mortgage Market
|
|
Real Estate Market
|
|
Other Businesses, Corporate and Eliminations
|
|
Total
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2016
|
|
$
|
69,827
|
|
|
$
|
10,006
|
|
|
$
|
2,968
|
|
|
$
|
82,801
|
|
CastleLine purchase price allocation adjustment
(1)
|
|
(1,395
|
)
|
|
—
|
|
|
—
|
|
|
(1,395
|
)
|
RentRange and Investability purchase price allocation adjustment
(2)
|
|
—
|
|
|
50
|
|
|
—
|
|
|
50
|
|
Acquisition of Granite
|
|
4,827
|
|
|
—
|
|
|
—
|
|
|
4,827
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016 and 2017
|
|
$
|
73,259
|
|
|
$
|
10,056
|
|
|
$
|
2,968
|
|
|
$
|
86,283
|
|
______________________________________
|
|
(1)
|
During the second quarter of 2016, goodwill was revised to reflect a purchase accounting measurement period adjustment related to the CastleLine acquisition. See
Note 5
.
|
|
|
(2)
|
During the third quarter of 2016, goodwill was revised to reflect a purchase accounting measurement period adjustment related to the RentRange and Investability acquisition. See
Note 5
.
|
During our fourth quarter 2015 annual goodwill assessment, we elected to bypass the initial analysis of qualitative factors and perform a quantitative two-step goodwill impairment test of all of our reporting units as a result of the goodwill impairment recorded in 2014. We calculated the fair value of each of our reporting units by using a discounted cash flow analysis and concluded that the technology businesses in the Mortgage Market segment (see
Note 24
for additional information regarding our changes in reportable segments effective January 1, 2017) were less than their carrying values. Accordingly, we performed step two of the impairment test for the technology businesses in the Mortgage Market segment and determined that the remaining
$55.7 million
of goodwill of the technology businesses was impaired. As a result, we recorded a
$55.7 million
impairment loss in the fourth quarter of 2015. This goodwill impairment was primarily driven by the Company’s projected technology revenue from Ocwen and investment in technologies provided to Ocwen. There were no additional goodwill impairments as of December 31, 2015. Based on our fourth quarter 2017 and 2016 goodwill assessments, we concluded that there were
no
impairments of goodwill as of
December 31, 2017
and
2016
.
Intangible Assets, Net
Intangible assets, net consist of the following as of
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average estimated useful life
(in years)
|
|
Gross carrying amount
|
|
Accumulated amortization
|
|
Net book value
|
(in thousands)
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names
|
|
13
|
|
$
|
15,354
|
|
|
$
|
15,354
|
|
|
$
|
(8,881
|
)
|
|
$
|
(7,724
|
)
|
|
$
|
6,473
|
|
|
$
|
7,630
|
|
Customer related intangible assets
|
|
10
|
|
277,828
|
|
|
277,828
|
|
|
(188,258
|
)
|
|
(156,980
|
)
|
|
89,570
|
|
|
120,848
|
|
Operating agreement
|
|
20
|
|
35,000
|
|
|
35,000
|
|
|
(13,865
|
)
|
|
(12,104
|
)
|
|
21,135
|
|
|
22,896
|
|
Non-compete agreements
|
|
4
|
|
1,560
|
|
|
1,560
|
|
|
(897
|
)
|
|
(507
|
)
|
|
663
|
|
|
1,053
|
|
Intellectual property
|
|
10
|
|
300
|
|
|
300
|
|
|
(115
|
)
|
|
(85
|
)
|
|
185
|
|
|
215
|
|
Other intangible assets
|
|
5
|
|
3,745
|
|
|
3,745
|
|
|
(1,706
|
)
|
|
(955
|
)
|
|
2,039
|
|
|
2,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
333,787
|
|
|
$
|
333,787
|
|
|
$
|
(213,722
|
)
|
|
$
|
(178,355
|
)
|
|
$
|
120,065
|
|
|
$
|
155,432
|
|
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
Amortization expense for definite lived intangible assets was
$35.4 million
,
$47.6 million
and
$41.1 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively
.
Expected annual definite lived intangible asset amortization expense for
2018
through
2022
is
$26.2 million
,
$21.8 million
,
$18.2 million
,
$11.5 million
and
$7.3 million
, respectively.
In the fourth quarter of 2015, we recorded an impairment loss of
$11.9 million
in our Mortgage Market segment and Other Businesses, Corporate and Eliminations (see
Note 24
for additional information regarding our changes in reportable segments effective January 1, 2017), related to customer relationship intangible assets from the 2013 Homeward and ResCap fee-based business acquisitions. These impairments of intangible assets were primarily driven by the Company’s projected technology revenue from Ocwen and investment in technologies provided to Ocwen. There were
no
impairments of intangible assets for the years ended
December 31, 2017
and
2016
.
NOTE 11
—
OTHER ASSETS
Other assets consist of the following as of
December 31
:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
|
|
|
|
Security deposits
|
|
$
|
5,304
|
|
|
$
|
5,508
|
|
Maintenance agreements, non-current portion
|
|
362
|
|
|
853
|
|
Restricted cash
|
|
3,837
|
|
|
4,127
|
|
Other
|
|
692
|
|
|
767
|
|
|
|
|
|
|
Total
|
|
$
|
10,195
|
|
|
$
|
11,255
|
|
NOTE 12
—
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts payable and accrued expenses consist of the following as of
December 31
:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
|
|
|
|
Accounts payable
|
|
$
|
15,682
|
|
|
$
|
8,787
|
|
Accrued salaries and benefits
|
|
41,363
|
|
|
47,614
|
|
Accrued expenses - general
|
|
27,268
|
|
|
26,426
|
|
Income taxes payable
|
|
87
|
|
|
308
|
|
|
|
|
|
|
Total
|
|
$
|
84,400
|
|
|
$
|
83,135
|
|
Other current liabilities consist of the following as of
December 31
:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
|
|
|
|
Unfunded cash account balances
|
|
$
|
5,900
|
|
|
$
|
7,137
|
|
Other
|
|
3,514
|
|
|
11,924
|
|
|
|
|
|
|
Total
|
|
$
|
9,414
|
|
|
$
|
19,061
|
|
NOTE 13
—
LONG-TERM DEBT
Long-term debt consists of the following as of
December 31
:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
|
|
|
|
Senior secured term loan
|
|
$
|
413,581
|
|
|
$
|
479,653
|
|
Less: Debt issuance costs, net
|
|
(3,158
|
)
|
|
(4,486
|
)
|
Less: Unamortized discount, net
|
|
(1,142
|
)
|
|
(1,622
|
)
|
Net long-term debt
|
|
409,281
|
|
|
473,545
|
|
Less: Current portion
|
|
(5,945
|
)
|
|
(5,945
|
)
|
|
|
|
|
|
Long-term debt, less current portion
|
|
$
|
403,336
|
|
|
$
|
467,600
|
|
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
On November 27, 2012, Altisource Solutions S.à r.l., a wholly-owned subsidiary of Altisource Portfolio Solutions S.A., entered into a senior secured term loan agreement with Bank of America, N.A., as administrative agent, and certain lenders. Altisource Portfolio Solutions S.A. and certain subsidiaries are guarantors of the term loan (collectively, the “Guarantors”). We subsequently entered into four amendments to the senior secured term loan agreement to, among other changes, increase the principal amount of the senior secured term loan, re-establish the
$200.0 million
incremental term loan facility accordion, lower the interest rate, extend the maturity date by approximately
one year
, increase the maximum amount of Restricted Junior Payments (as defined in the senior secured term loan agreement; other capitalized terms, unless defined herein, are defined in the senior secured term loan agreement) and certain other changes to facilitate an internal restructuring of the Company’s subsidiaries.
On December 1, 2017, Altisource Solutions S.à r.l. and Altisource Holdings S.à r.l. entered into the fourth amendment to the senior secured term loan (the “Fourth Amendment”) that modifies the senior secured term loan agreement to add Altisource Holdings S.à r.l. (then a guarantor under the senior secured term loan) as a borrower in anticipation of an internal restructuring of Altisource, whereby Altisource Solutions S.à r.l. would merge with and into Altisource Holdings S.à r.l. and Altisource Holdings S.à r.l. would be automatically substituted in all of the rights and obligations of Altisource Solutions S.à r.l. This merger occurred effective December 27, 2017 and Altisource Holdings S.à r.l. (renamed Altisource S.à r.l.) became the sole borrower. The merger is part of a larger subsidiary restructuring plan designed to simplify the Company’s corporate structure, allow it to operate more efficiently and reduce administrative costs. The merger did not result in any changes to the collateral securing the senior secured term loan. The Fourth Amendment also, among other changes, broadens the mechanisms by which Altisource can purchase or otherwise acquire portions of the senior secured term loan by permitting Altisource to purchase portions of its senior secured term loan on a non-pro-rata basis at par or at a discount to par through open market purchases (including through a broker acting on behalf of Altisource) in addition to its existing right to purchase portions of its senior secured term loan through a Dutch auction open to all senior secured term lenders.
The term loan must be repaid in equal consecutive quarterly principal installments of
$1.5 million
, with the balance due at maturity. All amounts outstanding under the senior secured term loan agreement will become due on the earlier of (i) December 9, 2020, and (ii) the date on which the loans are declared to be due and owing by the administrative agent at the request (or with the consent) of the Required Lenders or as otherwise provided in the senior secured term loan agreement upon the occurrence of any event of default under the senior secured term loan agreement.
In addition to the scheduled principal payments, subject to certain exceptions, the term loan is subject to mandatory prepayment upon issuances of debt, casualty and condemnation events and sales of assets, as well as from a percentage of Consolidated Excess Cash Flow if the leverage ratio is greater than
3.00
to
1.00
, as calculated in accordance with the provisions of the senior secured term loan (the percentage increases if the leverage ratio exceeds
3.50
to
1.00
).
No
mandatory prepayments were owed for the year ended
December 31, 2017
.
During
2017
, we repurchased portions of our senior secured term loan with an aggregate par value of
$60.1 million
at a weighted average discount of
10.7%
, recognizing a net gain of
$5.6 million
on the early extinguishment of debt. During
2016
, we repurchased portions of our senior secured term loan with an aggregate par value of
$51.0 million
at a weighted average discount of
13.2%
, recognizing a net gain of
$5.5 million
on the early extinguishment of debt. During
2015
, we repurchased portions of our senior secured term loan with an aggregate par value of
$49.0 million
at a weighted average discount of
10.3%
, recognizing a net gain of
$3.8 million
on the early extinguishment of debt. These net gains are included in other income (expense), net in the consolidated statements of operations and comprehensive income (see
Note 20
).
The term loan bears interest at rates based upon, at our option, the
Adjusted Eurodollar Rate
or the
Base Rate
.
Adjusted Eurodollar Rate
loans bear interest at a rate per annum equal to the sum of (i) the greater of (x) the
Adjusted Eurodollar Rate
for the applicable interest period and (y)
1.00%
plus (ii) a
3.50%
margin.
Base Rate
loans bear interest at a rate per annum equal to the sum of (i) the greater of (x) the
Base Rate
and (y)
2.00%
plus (ii) a
2.50%
margin. The interest rate at
December 31, 2017
was
5.07%
.
Term loan payments are guaranteed by the Guarantors and are secured by a pledge of all equity interests of certain subsidiaries as well as a lien on substantially all of the assets of Altisource S.à r.l. and the Guarantors, subject to certain exceptions.
The senior secured term loan agreement includes covenants that restrict or limit, among other things, our ability to create liens and encumbrances; incur additional indebtedness; sell, transfer or dispose of assets; make Restricted Junior Payments including share repurchases, dividends and repayment of junior indebtedness; change lines of business; amend material debt agreements or other material contracts; engage in certain transactions with affiliates; enter into sale/leaseback transactions; grant negative pledges or agree to such other restrictions relating to subsidiary dividends and distributions; make changes to our fiscal year; and engage in mergers and consolidations.
The senior secured term loan agreement contains certain events of default including (i) failure to pay principal when due or interest or any other amount owing on any other obligation under the senior secured term loan agreement within
five days
of becoming
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
due, (ii) material incorrectness of representations and warranties when made, (iii) breach of covenants, (iv) failure to pay principal or interest on any other debt that equals or exceeds
$40.0 million
when due, (v) default on any other debt that equals or exceeds
$40.0 million
that causes, or gives the holder or holders of such debt the ability to cause, an acceleration of such debt, (vi) occurrence of a Change of Control, (vii) bankruptcy and insolvency events, (viii) entry by a court of one or more judgments against us in an amount in excess of
$40.0 million
that remain unbonded, undischarged or unstayed for a certain number of days after the entry thereof, (ix) the occurrence of certain ERISA events and (x) the failure of certain Loan Documents to be in full force and effect. If any event of default occurs and is not cured within applicable grace periods set forth in the senior secured term loan agreement or waived, all loans and other obligations could become due and immediately payable and the facility could be terminated.
At
December 31, 2017
, debt issuance costs were
$3.2 million
, net of
$7.1 million
of accumulated amortization. At
December 31, 2016
, debt issuance costs were
$4.5 million
, net of
$5.8 million
of accumulated amortization.
Interest expense on the senior secured term loan, including amortization of debt issuance costs and the net debt discount, totaled
$22.3 million
,
$24.4 million
and
$28.2 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Maturities of our long-term debt (excluding debt issuance costs, net, and unamortized discount, net) are as follows:
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
2018
|
|
$
|
5,945
|
|
2019
|
|
5,945
|
|
2020
|
|
401,691
|
|
|
|
|
|
|
$
|
413,581
|
|
NOTE 14
—
OTHER NON-CURRENT LIABILITIES
Other non-current liabilities consist of the following as of
December 31
:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
|
|
|
|
Income tax liabilities (Note 21)
|
|
$
|
5,955
|
|
|
$
|
—
|
|
Deferred revenue
|
|
2,101
|
|
|
5,680
|
|
Other non-current liabilities
|
|
4,226
|
|
|
4,800
|
|
|
|
|
|
|
Total
|
|
$
|
12,282
|
|
|
$
|
10,480
|
|
NOTE 15
—
FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
The following table presents the carrying amount and estimated fair value of financial instruments and certain liabilities measured at fair value as of
December 31, 2017
and
2016
. The following fair values are estimated using market information and what the Company believes to be appropriate valuation methodologies under GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
(in thousands)
|
|
Carrying amount
|
|
Fair value
|
|
Carrying amount
|
|
Fair value
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
105,006
|
|
|
$
|
105,006
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
149,294
|
|
|
$
|
149,294
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted cash
|
|
3,837
|
|
|
3,837
|
|
|
—
|
|
|
—
|
|
|
4,127
|
|
|
4,127
|
|
|
—
|
|
|
—
|
|
Available for sale securities
|
|
49,153
|
|
|
49,153
|
|
|
—
|
|
|
—
|
|
|
45,754
|
|
|
45,754
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition contingent consideration
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
376
|
|
|
—
|
|
|
—
|
|
|
376
|
|
Long-term debt
|
|
413,581
|
|
|
—
|
|
|
407,377
|
|
|
—
|
|
|
479,653
|
|
|
—
|
|
|
474,856
|
|
|
—
|
|
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
Fair Value Measurements on a Recurring Basis
Cash and cash equivalents and restricted cash are carried at amounts that approximate their fair values due to the highly liquid nature of these instruments and were measured using Level 1 inputs.
Available for sale securities are carried at fair value and consist of
4.1 million
shares of RESI common stock. Available for sale securities are measured using Level 1 inputs as these securities have quoted prices in active markets.
The fair value of our long-term debt is based on quoted market prices. Based on the frequency of trading, we do not believe that there is an active market for our debt. Therefore, the quoted prices are considered Level 2 inputs.
In accordance with ASC Topic 805,
Business Combinations
, liabilities for contingent consideration are reflected at fair value and adjusted each reporting period with the change in fair value recognized in earnings. Liabilities for acquisition related contingent consideration were recorded in connection with acquisitions in prior years. We measure the liabilities for acquisition related contingent consideration using Level 3 inputs as they are determined based on the present value of future estimated payments, which include sensitivities pertaining to discount rates and financial projections.
During 2017, the Company reduced the fair value of the acquisition contingent consideration related to the acquisition of certain assets and assumption of certain liabilities of Mortgage Builder Software, Inc. (“Mortgage Builder”) to
$0
as a result of the completion of the final earn-out period in 2017. During
2016
, the Company reduced the fair value of the acquisition contingent consideration related to the Mortgage Builder and Owners acquisitions by
$1.4 million
and
$2.2 million
, respectively, as a result of changes in the fair value of expected payments.
There were no transfers between different levels during the periods presented.
Concentrations of Credit Risk
Financial instruments that subject us to concentrations of credit risk primarily consist of cash and cash equivalents and accounts receivable. Our policy is to deposit our cash and cash equivalents with larger, highly rated financial institutions. The Company derives the largest portion of its revenues from Ocwen (see
Note 3
for additional information on Ocwen revenues and accounts receivable balance). The Company mitigates its concentrations of credit risk with respect to accounts receivable by actively monitoring past due accounts and the economic status of larger customers, if known.
NOTE 16
—
SHAREHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION
Common Stock
At
December 31, 2017
, we had
100 million
shares authorized,
25.4 million
shares issued and
17.4 million
shares of common stock outstanding. At
December 31, 2016
, we had
25.4 million
shares authorized and issued, and
18.8 million
shares of common stock outstanding. The holders of shares of Altisource common stock generally are entitled to
one
vote for each share on all matters voted on by shareholders, and the holders of such shares generally will possess all voting power.
On October 9, 2015, we acquired RentRange and Investability for
$24.8 million
, which included a cash component and the issuance of
247 thousand
shares of restricted common stock of the Company with a value of
$7.3 million
as of the closing date. Upon issuance, the restricted shares were subject to transfer restrictions and potential forfeiture provisions. These restrictions and forfeiture provisions lapse over a
four
year period, subject to the recipients meeting certain continued employment conditions with the Company and the satisfaction of certain acquisition related escrow release conditions. During 2017, transfer restrictions were removed on
14 thousand
shares. In addition, on June 30, 2017, the Company amended the purchase and sale agreement and purchased
170 thousand
restricted shares. During 2016, transfer restrictions were removed on
55 thousand
shares. On July 17, 2015, we acquired CastleLine for
$33.4 million
, which included a cash component and the issuance of
495 thousand
shares of restricted common stock of the Company with a value of
$14.4 million
as of the closing date. The restrictions were removed on these
495 thousand
shares during 2016. See
Note 5
for additional information about these acquisitions.
Equity Incentive Plan
Our 2009 Equity Incentive Plan (the “Plan”) provides for various types of equity awards, including stock options, stock appreciation rights, stock purchase rights, restricted shares and other awards, or a combination of any of the above. Under the Plan, we may grant up to
6.7 million
Altisource share-based awards to officers, directors, employees and to employees of our affiliates. As of
December 31, 2017
,
1.5 million
share-based awards were available for future grant under the Plan. Expired and forfeited awards are available for reissuance.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
Share Repurchase Program
On May 17, 2017, our shareholders approved the renewal of the share repurchase program previously approved by the shareholders on May 18, 2016, which replaced the previous share repurchase program. We are authorized to purchase up to
4.6 million
shares of our common stock, based on a limit of
25%
of the outstanding shares of common stock on the date of approval, at a minimum price of
$1.00
per share and a maximum price of
$500.00
per share, for a period of
five
years from the date of approval. As of
December 31, 2017
, approximately
3.4 million
shares of common stock remain available for repurchase under the program. We purchased
1.6 million
shares of common stock at an average price of
$23.84
per share during the year ended
December 31, 2017
,
1.4 million
shares at an average price of
$26.81
per share during the year ended
December 31, 2016
and
2.1 million
shares at an average price of
$27.60
per share during the year ended
December 31, 2015
. Luxembourg law limits share repurchases to the balance of Altisource Portfolio Solutions S.A. (unconsolidated parent company) retained earnings, less the value of shares repurchased. As of December 31, 2017, we can repurchase up to approximately
$178 million
of our common stock under Luxembourg law. Our senior secured term loan limits the amount we can spend on share repurchases, which was approximately
$446 million
as of
December 31, 2017
, and may prevent repurchases in certain circumstances.
Share-Based Compensation
We issue share-based awards in the form of stock options and restricted shares for certain employees, officers and directors. We recorded share-based compensation expense of
$4.3 million
,
$6.2 million
and
$4.8 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. As of
December 31, 2017
, estimated unrecognized compensation costs related to share-based awards amounted to
$9.0 million
, which we expect to recognize over a weighted average remaining requisite service period of approximately
2.18 years
.
In connection with the January 1, 2017 adoption of ASU No. 2016-09 (see
Note 2
), the Company made an accounting policy election to account for forfeitures in compensation expense as they occur, rather than continuing to apply the Company’s previous policy of estimating forfeitures. Prior to this accounting change, share-based compensation expense for stock options and restricted shares was recorded net of estimated forfeiture rates ranging from
0%
to
40%
.
Stock Options
Stock option grants are composed of a combination of service-based, market-based and performance-based options.
Service-Based Options.
These options generally vest over
three
or
four years
with equal annual vesting and expire on the earlier of
ten years
after the date of grant or following termination of service. A total of
684 thousand
service-based awards were outstanding as of
December 31, 2017
.
Market-Based Options
. These option grants generally have
two
components, each of which vests only upon the achievement of certain criteria. The first component, which we refer to as “ordinary performance” grants, generally consists of
two-thirds
of the market-based grant and begins to vest if the stock price is at least
double
the exercise price, as long as the stock price realizes a compounded annual gain of at least
20%
over the exercise price. The remaining
third
of the market-based options, which we refer to as “extraordinary performance” grants, generally begins to vest if the stock price is at least
triple
the exercise price, as long as the stock price realizes a compounded annual gain of at least
25%
over the exercise price. Market-based awards vest in
three
or
four
year installments with the first installment vesting upon the achievement of the criteria and the remaining installments vesting thereafter in equal annual installments. Market-based options generally expire on the earlier of
ten
years after the date of grant or following termination of service, unless the performance criteria is met prior to termination of service or in the final
three
years of the option term, in which case vesting will generally continue in accordance with the provisions of the award agreement. A total of
936 thousand
market-based awards were outstanding as of
December 31, 2017
.
Performance-Based Options.
These option grants generally begin to vest upon the achievement of certain specific financial measures. Generally, the awards begin vesting if the performance criteria are achieved;
one-third
vest on each anniversary of the grant date. For certain other financial measures, awards cliff-vest upon the achievement of the specific performance during the period from 2017 through 2021. The award of performance-based options is adjusted based on the level of achievement specified in the award agreements. If the performance criteria achieved is above threshold performance levels, participants have the opportunity to vest in
70%
to
150%
of the option grants, depending upon performance achieved. If the performance criteria achieved is below a certain threshold, the award is canceled. The options expire on the earlier of
ten years
after the date of grant or following termination of service. There were
126 thousand
performance-based awards outstanding as of
December 31, 2017
.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
The Company granted
244 thousand
stock options (at a weighted average exercise price of
$33.28
per share),
145 thousand
stock options (at a weighted average exercise price of
$29.17
per share) and
854 thousand
stock options (at a weighted average exercise price of
$24.21
per share) during the years ended
December 31, 2017
,
2016
and
2015
, respectively.
The fair values of the service-based options and performance-based options were determined using the Black-Scholes option pricing model and the fair values of the market-based options were determined using a lattice (binomial) model. The following assumptions were used to determine the fair values as of the grant date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
Black-Scholes
|
|
Binomial
|
|
Black-Scholes
|
|
Binomial
|
|
Black-Scholes
|
|
Binomial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate (%)
|
|
1.89 – 2.29
|
|
|
0.77 – 2.38
|
|
|
1.25 – 1.89
|
|
|
0.23 – 2.23
|
|
|
1.50 – 1.91
|
|
|
0.02 – 2.34
|
|
Expected stock price volatility (%)
|
|
61.49 – 71.52
|
|
|
66.68 – 71.52
|
|
|
59.75 – 62.14
|
|
|
59.76 – 62.14
|
|
|
55.06 – 59.73
|
|
|
55.06 – 59.73
|
|
Expected dividend yield
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Expected option life (in years)
|
|
6.00 – 7.50
|
|
|
2.55 – 4.82
|
|
|
6.00 – 6.25
|
|
|
4.06 – 4.88
|
|
|
6.00 – 6.25
|
|
|
4.08 – 4.92
|
|
Fair value
|
|
$13.57 – $24.80
|
|
|
$11.94 – $24.30
|
|
|
$11.15 – $18.60
|
|
|
$11.06 – $19.27
|
|
|
$10.01 – $17.66
|
|
|
$9.91 – $18.05
|
|
We determined the expected option life of all service-based stock option grants using the simplified method. We use the simplified method because we believe that our historical data does not provide a reasonable basis upon which to estimate expected option life.
The following table summarizes the weighted average grant date fair value of stock options granted per share, the total intrinsic value of stock options exercised and the grant date fair value of stock options that vested during the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Weighted average grant date fair value of stock options granted per share
|
|
$
|
20.44
|
|
|
$
|
16.82
|
|
|
$
|
13.20
|
|
Intrinsic value of stock options exercised
|
|
3,028
|
|
|
18,209
|
|
|
1,998
|
|
Grant date fair value of stock options that vested
|
|
2,279
|
|
|
2,698
|
|
|
1,616
|
|
The following table summarizes the activity related to our stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of options
|
|
Weighted average exercise price
|
|
Weighted average contractual term (in years)
|
|
Aggregate intrinsic value (in thousands)
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
1,996,509
|
|
|
$
|
25.98
|
|
|
5.32
|
|
$
|
15,942
|
|
Granted
|
243,930
|
|
|
33.28
|
|
|
|
|
|
Exercised
|
(223,060
|
)
|
|
10.64
|
|
|
|
|
|
|
Forfeited
|
(271,473
|
)
|
|
30.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
1,745,906
|
|
|
28.20
|
|
|
4.96
|
|
10,202
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2017
|
1,140,333
|
|
|
23.10
|
|
|
3.30
|
|
9,160
|
|
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
The following table summarizes information about stock options outstanding and exercisable at
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
Options exercisable
|
Exercise price range
(1)
|
|
Number
|
|
Weighted average remaining contractual life (in years)
|
|
Weighted average exercise price
|
|
Number
|
|
Weighted average remaining contractual life (in years)
|
|
Weighted average exercise price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Up to $10.00
|
|
286,252
|
|
|
0.53
|
|
$
|
9.14
|
|
|
286,252
|
|
|
0.53
|
|
$
|
9.14
|
|
$10.01 — $20.00
|
|
246,479
|
|
|
7.27
|
|
18.79
|
|
|
163,424
|
|
|
7.25
|
|
18.79
|
|
$20.01 — $30.00
|
|
813,730
|
|
|
4.86
|
|
25.11
|
|
|
559,576
|
|
|
3.21
|
|
24.11
|
|
$30.01 — $40.00
|
|
224,695
|
|
|
8.03
|
|
36.27
|
|
|
53,924
|
|
|
4.78
|
|
32.67
|
|
$60.01 — $70.00
|
|
71,000
|
|
|
4.19
|
|
60.73
|
|
|
51,375
|
|
|
4.19
|
|
60.74
|
|
$70.01 — $80.00
|
|
25,000
|
|
|
6.86
|
|
72.78
|
|
|
4,688
|
|
|
6.86
|
|
72.78
|
|
$80.01 — $90.00
|
|
30,000
|
|
|
6.35
|
|
86.22
|
|
|
8,438
|
|
|
5.94
|
|
85.43
|
|
$90.01 — $100.00
|
|
46,875
|
|
|
6.15
|
|
95.64
|
|
|
11,250
|
|
|
5.95
|
|
95.38
|
|
$100.01 — $110.00
|
|
1,875
|
|
|
6.37
|
|
105.11
|
|
|
1,406
|
|
|
6.37
|
|
105.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,745,906
|
|
|
|
|
|
|
1,140,333
|
|
|
|
|
|
______________________________________
|
|
(1)
|
These options contain market-based components as described above.
|
The following table summarizes the market prices necessary in order for the market-based options to begin to vest:
|
|
|
|
|
|
|
|
|
|
|
|
Market-based options
|
Vesting price
|
|
Ordinary performance
|
|
Extraordinary performance
|
|
|
|
|
|
$40.01 — $50.00
|
|
9,525
|
|
|
—
|
|
$50.01 — $60.00
|
|
82,600
|
|
|
11,653
|
|
$60.01 — $70.00
|
|
14,148
|
|
|
6,325
|
|
$70.01 — $80.00
|
|
1,250
|
|
|
10,333
|
|
$80.01 — $90.00
|
|
—
|
|
|
30,963
|
|
$90.01 — $100.00
|
|
—
|
|
|
7,075
|
|
$110.01 — $120.00
|
|
—
|
|
|
625
|
|
$140.01 — $150.00
|
|
12,500
|
|
|
—
|
|
$170.01 — $180.00
|
|
12,500
|
|
|
—
|
|
$180.01 — $190.00
|
|
7,500
|
|
|
19,625
|
|
Over $190.00
|
|
15,000
|
|
|
25,000
|
|
|
|
|
|
|
Total
|
|
155,023
|
|
|
111,599
|
|
|
|
|
|
|
Weighted average share price
|
|
$
|
45.99
|
|
|
$
|
45.83
|
|
Other Share-Based Awards
The Company’s other share-based and similar types of awards are composed of restricted shares and, through August 29, 2016, Equity Appreciation Rights (“EAR”). The restricted shares are composed of a combination of service-based awards and performance-based awards.
Service-Based Awards.
These awards generally vest over
one
to
four years
with either annual cliff-vesting, vesting of all of the restricted shares at the end of the vesting period or vesting beginning after
two years
of service. A total of
315 thousand
service-based awards were outstanding as of
December 31, 2017
.
Performance-Based Awards.
These awards generally begin to vest upon the achievement of certain specific financial measures. Generally, the awards begin vesting if the performance criteria are achieved;
one-third
vest on each anniversary of the grant date. The award of performance-based restricted shares is adjusted based on the level of achievement specified in the award agreements. If the performance criteria achieved is above threshold performance levels, participants have the opportunity to vest in
80%
to
150%
of the restricted share award, depending on performance achieved. If the performance criteria achieved
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
is below a certain threshold, the award is canceled. A total of
42 thousand
performance-based awards were outstanding as of
December 31, 2017
.
The Company granted
246 thousand
restricted shares (at a weighted average price of
$29.93
per share) during the year ended
December 31, 2017
.
The following table summarizes the activity related to our restricted shares:
|
|
|
|
|
Number of restricted shares
|
|
|
Outstanding at December 31, 2016
|
231,730
|
|
Granted
|
245,655
|
|
Issued
|
(55,385
|
)
|
Forfeited/canceled
|
(65,491
|
)
|
|
|
Outstanding at December 31, 2017
|
356,509
|
|
Effective August 29, 2016, the EAR plans were terminated.
NOTE 17
—
REVENUE
Revenue includes service revenue, reimbursable expenses and non-controlling interests. Service revenue consists of amounts attributable to our fee-based services and sales of short-term investments in real estate. Reimbursable expenses and non-controlling interests are pass-through items for which we earn no margin. Reimbursable expenses consist of amounts we incur on behalf of our customers in performing our fee-based services that we pass directly on to our customers without a markup. Non-controlling interests represent the earnings of Lenders One, a consolidated entity that is a mortgage cooperative managed, but not owned, by Altisource. Lenders One is included in revenue and reduced from net income to arrive at net income attributable to Altisource (see
Note 2
). The components of revenue were as follows for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Service revenue
|
|
$
|
899,561
|
|
|
$
|
942,599
|
|
|
$
|
940,920
|
|
Reimbursable expenses
|
|
39,912
|
|
|
52,011
|
|
|
107,344
|
|
Non-controlling interests
|
|
2,740
|
|
|
2,693
|
|
|
3,202
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
942,213
|
|
|
$
|
997,303
|
|
|
$
|
1,051,466
|
|
NOTE 18
—
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, cost of real estate sold, reimbursable expenses, technology and telecommunications costs as well as depreciation and amortization of operating assets. The components of cost of revenue were as follows for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
240,487
|
|
|
$
|
264,796
|
|
|
$
|
261,839
|
|
Outside fees and services
|
|
325,459
|
|
|
301,116
|
|
|
248,278
|
|
Cost of real estate sold
|
|
24,398
|
|
|
1,040
|
|
|
—
|
|
Reimbursable expenses
|
|
39,912
|
|
|
52,011
|
|
|
107,344
|
|
Technology and telecommunications
|
|
42,340
|
|
|
44,295
|
|
|
43,177
|
|
Depreciation and amortization
|
|
27,269
|
|
|
26,787
|
|
|
26,689
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
699,865
|
|
|
$
|
690,045
|
|
|
$
|
687,327
|
|
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
NOTE 19
—
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES AND OTHER OPERATING EXPENSES
Selling, general and administrative expenses include payroll and employee benefits associated with personnel employed in executive, finance, law, compliance, human resources, vendor management, facilities, risk management, sales and marketing roles. This category also includes professional fees, occupancy costs, marketing costs, depreciation and amortization of non-operating assets and other expenses. The components of selling, general and administrative expenses were as follows for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
58,157
|
|
|
$
|
55,577
|
|
|
$
|
54,897
|
|
Professional services
|
|
13,421
|
|
|
23,284
|
|
|
23,183
|
|
Occupancy related costs
|
|
36,371
|
|
|
37,370
|
|
|
39,917
|
|
Amortization of intangible assets
|
|
35,367
|
|
|
47,576
|
|
|
41,135
|
|
Depreciation and amortization
|
|
9,178
|
|
|
10,001
|
|
|
9,781
|
|
Marketing costs
|
|
16,171
|
|
|
27,847
|
|
|
27,499
|
|
Other
|
|
23,977
|
|
|
12,500
|
|
|
24,456
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
192,642
|
|
|
$
|
214,155
|
|
|
$
|
220,868
|
|
In addition, on September 8, 2014, the West Palm Beach Firefighters’ Pension Fund filed a putative securities class action suit against Altisource Portfolio Solutions S.A. and certain of its current or former officers and directors in the United States District Court for the Southern District of Florida. On January 19, 2017, the parties notified the Court of their agreement to settle the action to resolve all claims related to this matter for a payment by the Company of
$32.0 million
,
$4.0 million
of which was funded by insurance proceeds. The net expense of
$28.0 million
was recorded as a litigation settlement loss, net in other operating expenses for the year ended December 31, 2017.
In 2015, we paid the former owners of Equator, LLC (“Equator”)
$0.5 million
to extinguish any liability for the Equator acquisition earn-out. In connection with this settlement, we reduced the liability for the Equator earn-out to
$0
and recognized a
$7.6 million
gain in other operating expenses for the year ended December 31, 2015.
NOTE 20
—
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists of the following for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Gain on early extinguishment of debt
|
|
$
|
5,637
|
|
|
$
|
5,464
|
|
|
$
|
3,836
|
|
Expenses related to the purchase of available for sale securities
|
|
—
|
|
|
(3,356
|
)
|
|
—
|
|
Loss on HLSS equity securities and dividends received, net
|
|
—
|
|
|
—
|
|
|
(1,854
|
)
|
Interest income
|
|
270
|
|
|
91
|
|
|
133
|
|
Other, net
|
|
2,015
|
|
|
1,431
|
|
|
76
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,922
|
|
|
$
|
3,630
|
|
|
$
|
2,191
|
|
During March 2015, we purchased
1.6 million
shares of HLSS common stock in the open market for
$30.0 million
. This investment was classified as available for sale. On April 6, 2015, HLSS completed the sale of substantially all of its assets to NRZ and adopted a plan of complete liquidation and dissolution. During April 2015, we received liquidating dividends and other dividends from HLSS totaling
$20.4 million
and we sold all of our
1.6 million
shares of HLSS common stock in the open market for
$7.7 million
. As a result of these transactions, we recognized a net loss of
$1.9 million
for the year ended December 31, 2015 in connection with our investment in HLSS (
no
comparative amounts in
2017
and
2016
).
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
NOTE 21
—
INCOME TAXES
The components of income before income taxes and non-controlling interests consist of the following for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Domestic - Luxembourg
|
|
$
|
9,123
|
|
|
$
|
8,489
|
|
|
$
|
27,884
|
|
Foreign - U.S.
|
|
7,967
|
|
|
16,655
|
|
|
5,944
|
|
Foreign - Non-U.S.
|
|
18,285
|
|
|
19,168
|
|
|
19,232
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,375
|
|
|
$
|
44,321
|
|
|
$
|
53,060
|
|
The income tax provision consists of the following for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
Domestic - Luxembourg
|
|
$
|
737
|
|
|
$
|
160
|
|
|
$
|
1,787
|
|
Foreign - U.S. Federal
|
|
2,405
|
|
|
9,556
|
|
|
539
|
|
Foreign - U.S. State
|
|
364
|
|
|
258
|
|
|
855
|
|
Foreign - Non-U.S.
|
|
17,574
|
|
|
5,558
|
|
|
6,405
|
|
|
|
|
|
|
|
|
|
|
$
|
21,080
|
|
|
$
|
15,532
|
|
|
$
|
9,586
|
|
Deferred:
|
|
|
|
|
|
|
Domestic - Luxembourg
|
|
$
|
(295,318
|
)
|
|
$
|
432
|
|
|
$
|
—
|
|
Foreign - U.S. Federal
|
|
(111
|
)
|
|
(3,065
|
)
|
|
(108
|
)
|
Foreign - U.S. State
|
|
(210
|
)
|
|
(100
|
)
|
|
(526
|
)
|
Foreign - Non-U.S.
|
|
(1,697
|
)
|
|
136
|
|
|
(692
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(297,336
|
)
|
|
$
|
(2,597
|
)
|
|
$
|
(1,326
|
)
|
|
|
|
|
|
|
|
Total
|
|
$
|
(276,256
|
)
|
|
$
|
12,935
|
|
|
$
|
8,260
|
|
In June 2010, the Company received a tax ruling regarding the treatment of certain intangibles that existed for determining the Company’s taxable income, which was scheduled to expire in 2019 unless extended, renewed or terminated by the Company. On December 27, 2017, two of the Company’s wholly-owned subsidiaries, Altisource Solutions S.à r.l. and Altisource Holdings S.à r.l., merged, with Altisource Holdings S.à r.l. as the surviving entity. Altisource Holdings S.à r.l. was subsequently renamed Altisource S.à r.l. The merger is part of a larger subsidiary restructuring plan designed to simplify the Company’s corporate structure, allow it to operate more efficiently and reduce administrative costs. For Luxembourg tax purposes, the merger was recognized at fair value and generated a net operating loss (“NOL”) of
$1.3 billion
and a deferred tax asset of
$342.6 million
as of December 31, 2017, before a valuation allowance (see below). The NOL has a
17
year life. This deferred tax asset was partially offset by the impact of other changes in U.S. and Luxembourg income tax rates of
$6.3 million
and an increase in certain foreign income tax reserves (and related interest) of
$10.5 million
. The Company’s June 2010 tax ruling was terminated in connection with the merger of the Company’s Luxembourg subsidiaries.
Income tax computed by applying the Luxembourg statutory rate differs from income tax computed at the effective tax rate primarily from changes in the mix of taxable income across the jurisdictions in which the Company operates, remeasurement of deferred taxes related to tax rate changes, recognition of net operating losses created by the merger, an increase in unrecognized tax benefits and a valuation allowance against deferred tax assets the Company believes it is more likely than not will not be realized.
We operate under tax holidays in certain geographies in India, the Philippines and Uruguay. The India tax holidays are effective through 2020, and may be extended if certain additional requirements are satisfied. The Philippines tax holiday has been extended
through June 2019. We operate in a Uruguay free trade zone that provides an indefinite future tax benefit. The tax holidays are conditional upon our meeting certain employment and investment thresholds. The impact of these tax holidays decreased foreign taxes by
$0.9 million
(
$0.05
per diluted share),
$0.9 million
(
$0.04
per diluted share) and
$0.8 million
(
$0.04
per diluted share) for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
The Company accounts for certain income and expense items differently for financial reporting purposes and income tax purposes. We recognize deferred income tax assets and liabilities for these differences between the financial reporting basis and the tax basis of our assets and liabilities as well as expected benefits of utilizing net operating loss and credit carryforwards. We measure deferred income tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those temporary differences.
A summary of the tax effects of the temporary differences is as follows for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
|
|
|
|
Non-current deferred tax assets:
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
349,154
|
|
|
$
|
5,891
|
|
U.S. federal and state tax credits
|
|
407
|
|
|
316
|
|
Other non-U.S. deferred tax assets
|
|
5,724
|
|
|
3,674
|
|
Share-based compensation
|
|
1,496
|
|
|
2,486
|
|
Accrued expenses
|
|
6,494
|
|
|
11,527
|
|
Non-current deferred tax liabilities:
|
|
|
|
|
Intangible assets
|
|
(8,015
|
)
|
|
(4,203
|
)
|
Depreciation
|
|
(3,318
|
)
|
|
(6,964
|
)
|
Other non-U.S. deferred tax liability
|
|
(1,692
|
)
|
|
(1,342
|
)
|
Other
|
|
(260
|
)
|
|
(626
|
)
|
|
|
349,990
|
|
|
10,759
|
|
|
|
|
|
|
Valuation allowance
|
|
(46,283
|
)
|
|
(3,467
|
)
|
|
|
|
|
|
Non-current deferred tax assets, net
|
|
$
|
303,707
|
|
|
$
|
7,292
|
|
A valuation allowance is provided when it is deemed more likely than not that some portion or all of a deferred tax asset will not be realized. In determining whether a valuation allowance is needed, the Company considered estimates of future taxable income, future reversals of temporary differences, the tax character of gains and losses and the impact of tax planning strategies that can be implemented, if warranted. The net increase in valuation allowance of
$42.8 million
during
2017
is primarily related to the portion of the Luxembourg NOL that we project will not be utilized prior to expiration.
We have not recognized Luxembourg deferred taxes on cumulative earnings of non-Luxembourg affiliates as we have chosen to indefinitely reinvest these earnings. The earnings reinvested as of
December 31, 2017
were approximately
$74.2 million
, which if distributed would result in additional tax due totaling approximately
$13.5 million
.
The Company had a deferred tax asset of
$349.2 million
as of
December 31, 2017
relating to Luxembourg, U.S. federal, state and foreign net operating losses compared to
$5.9 million
as of
December 31, 2016
. Of this amount, a valuation allowance totaling
$1.7 million
as of
December 31, 2017
related to state net operating losses subject to a valuation allowance compared to
$1.4 million
as of
December 31, 2016
, and
$44.4 million
as of
December 31, 2017
related to Luxembourg net operating losses have been established compared to
$2.2 million
as of
December 31, 2016
. The gross amount of net operating losses available for carryover to future years is approximately
$1,339.6 million
as of
December 31, 2017
compared to approximately
$17.3 million
as of
December 31, 2016
. These losses are scheduled to expire between the years 2023 and 2037. Of this amount,
$8.9 million
as of
December 31, 2017
compared to
$10.1 million
as of
December 31, 2016
relates to Nationwide Credit, Inc. (“NCI”) for periods prior to our acquisition of NCI and is subject to Section 382 of the Internal Revenue Code which limits their use to approximately
$1.3 million
per year.
On December 22, 2017, the Jobs Act was enacted, which reforms corporate tax legislation in the United States and related laws. One of the provisions of the new tax law reduces the U.S. federal corporate tax rate from
35%
to
21%
. The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally
21%
. The provisional amount recorded related to the remeasurement of our deferred tax balance was
$2.9 million
. However, the Company is still analyzing certain aspects of the Jobs Act and refining its calculations, which could potentially affect the measurement of these balances or potentially result in new deferred tax amounts. Any change in the Company’s reasonable estimates of the impact of the Jobs Act will be included in the reporting period in which the change is identified in accordance with SAB Topic 5 EE.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
In addition, the Company had a deferred tax asset of
$0.4 million
and
$0.3 million
as of
December 31, 2017
and
2016
, respectively, relating to the U.S. federal and state tax credits. The U.S. federal credit carryforward is scheduled to expire between 2032 and 2037. The state tax credit carryforwards are scheduled to expire between 2017 and 2027.
The following table reconciles the Luxembourg statutory tax rate to our effective tax rate for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Statutory tax rate
|
|
27.08
|
%
|
|
29.22
|
%
|
|
29.22
|
%
|
Permanent difference related to Luxembourg intangible assets
|
|
(0.63
|
)
|
|
—
|
|
|
(13.56
|
)
|
Change in valuation allowance
|
|
119.20
|
|
|
(0.08
|
)
|
|
0.83
|
|
State tax expense
|
|
0.50
|
|
|
2.30
|
|
|
0.29
|
|
Tax credits
|
|
(2.13
|
)
|
|
(1.81
|
)
|
|
(2.34
|
)
|
Uncertain taxes
|
|
30.16
|
|
|
(3.65
|
)
|
|
1.39
|
|
Unrecognized tax loss
|
|
(1,008.20
|
)
|
|
—
|
|
|
—
|
|
Income tax rate change
|
|
57.36
|
|
|
—
|
|
|
—
|
|
Other
|
|
(4.28
|
)
|
|
3.20
|
|
|
(0.26
|
)
|
|
|
|
|
|
|
|
Effective tax rate
|
|
(780.94
|
)%
|
|
29.18
|
%
|
|
15.57
|
%
|
The Company follows ASC Topic 740 which clarifies the accounting and disclosure for uncertainty in tax positions. We analyzed our tax filing positions in all of the domestic and foreign tax jurisdictions where we are required to file income tax returns as well as for all open tax years and subject to audit in these jurisdictions. The Company has open tax years in the United States (2014 through 2016), India (2011 through 2017) and Luxembourg (2012 through 2015).
The following table summarizes changes in unrecognized tax benefits during the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
|
|
|
|
Amount of unrecognized tax benefits as of the beginning of the year
|
|
$
|
758
|
|
|
$
|
2,005
|
|
Decreases as a result of tax positions taken in a prior period
|
|
(78
|
)
|
|
(1,527
|
)
|
Increases as a result of tax positions taken in a prior period
|
|
53
|
|
|
60
|
|
Increases as a result of tax positions taken in the current period
|
|
8,159
|
|
|
220
|
|
|
|
|
|
|
Amount of unrecognized tax benefits as of the end of the year
|
|
$
|
8,892
|
|
|
$
|
758
|
|
The total amount of unrecognized tax benefits including interest and penalties that, if recognized, would affect the effective tax rate is
$11.5 million
and
$0.6 million
as of
December 31, 2017
and
2016
, respectively. The Company recognizes interest, if any, related to unrecognized tax benefits as a component of income tax expense. As of
December 31, 2017
and
2016
, the Company had recorded accrued interest and penalties related to unrecognized tax benefits of
$2.6 million
and less than
$0.1 million
, respectively.
NOTE 22
—
EARNINGS PER SHARE
Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the assumed conversion of all dilutive securities using the treasury stock method.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
Basic and diluted EPS are calculated as follows for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Net income attributable to Altisource
|
|
$
|
308,891
|
|
|
$
|
28,693
|
|
|
$
|
41,598
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic
|
|
18,183
|
|
|
18,696
|
|
|
19,504
|
|
Dilutive effect of stock options and restricted shares
|
|
509
|
|
|
916
|
|
|
1,115
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, diluted
|
|
18,692
|
|
|
19,612
|
|
|
20,619
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
Basic
|
|
$
|
16.99
|
|
|
$
|
1.53
|
|
|
$
|
2.13
|
|
Diluted
|
|
$
|
16.53
|
|
|
$
|
1.46
|
|
|
$
|
2.02
|
|
For the years ended
December 31, 2017
,
2016
and
2015
,
0.5 million
options,
0.4 million
options and
0.6 million
options, respectively, that were anti-dilutive have been excluded from the computation of diluted EPS. These options were anti-dilutive and excluded from the computation of diluted EPS because their exercise price was greater than the average market price of our common stock. Also excluded from the computation of diluted EPS are
0.4 million
options and restricted shares,
0.4 million
options and
0.3 million
options for the years ended
December 31, 2017
,
2016
and
2015
, respectively, which begin to vest upon the achievement of certain market criteria related to our common stock price, performance criteria and an annualized rate of return to shareholders that have not yet been met.
NOTE 23
—
COMMITMENTS, CONTINGENCIES AND REGULATORY MATTERS
We record a liability for contingencies if an unfavorable outcome is probable and the amount of loss can be reasonably estimated, including expected insurance coverage. For proceedings where the reasonable estimate of loss is a range, we record a best estimate of loss within the range.
Litigation
We are currently involved in legal actions in the course of our business, some of which seek monetary damages. We do not believe that the outcome of these proceedings, both individually and in the aggregate, will have a material impact on our financial condition, results of operations or cash flows.
Regulatory Matters
Periodically, we are subject to audits, examinations and investigations by federal, state and local governmental authorities and receive subpoenas, civil investigative demands or other requests for information from such governmental authorities in connection with their regulatory or investigative authority. We are currently responding to such inquiries from governmental authorities relating to certain aspects of our business. We believe it is premature to predict the potential outcome or to estimate any potential financial impact in connection with these inquiries.
As previously disclosed, Altisource received a Notice and Opportunity to Respond and Advise (“NORA”) letter on November 10, 2016 from the Consumer Financial Protection Bureau (“CFPB”) indicating that the CFPB is considering a potential enforcement action against Altisource relating to an alleged violation of federal law focused on REALServicing and certain other technology services provided to Ocwen, including claims related to the features, functioning and support of such technology. The NORA process provides the recipient an opportunity to present its positions to the CFPB before an enforcement action is recommended or commenced. On December 5, 2016, we provided a written response to the NORA letter setting forth the legal, policy and factual reasons why we believe an enforcement action is not warranted. We are committed to resolving any potential concerns of the CFPB. If the CFPB were to bring an enforcement action against us, the resolution of such action could have a material adverse impact on our business, reputation, financial condition and results of operations. However, we believe it is premature to predict the potential outcome or to estimate any potential financial impact in connection with any potential CFPB enforcement action.
Ocwen Related Matters
As discussed in
Note 3
, during the year ended December 31, 2017, Ocwen was our largest customer, accounting for
58%
of our total revenue. Additionally,
16%
of our revenue for the year ended December 31, 2017 was earned on the portfolios serviced by Ocwen, when a party other than Ocwen or the MSR owner selected Altisource as the service provider.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
As of June 30, 2017, we estimate that NRZ owned certain economic rights in, but not legal title to, approximately
78%
of the Subject MSRs. In July 2017, Ocwen and NRZ entered into agreements to convert NRZ’s economic rights to the Subject MSRs into fully-owned MSRs in exchange for payments from NRZ to Ocwen when such MSRs were transferred. The transfers are subject to certain third party consents. Ocwen disclosed that under these agreements, Ocwen would subservice the transferred Subject MSRs for an initial term of five years, and the agreements provided for the conversion of the existing arrangements into a more traditional subservicing arrangement.
In January 2018, Ocwen disclosed that it and NRZ entered into new agreements to accelerate the implementation of certain parts of their July 2017 arrangement in order to achieve the intent of the July 2017 agreements sooner while Ocwen continues the process of obtaining the third party consents necessary to transfer the Subject MSRs to NRZ.
On August 28, 2017, Altisource, through its licensed subsidiaries, entered into the Brokerage Agreement with NRZ which extends through August 2025. Under this agreement and related amendments, Altisource remains the exclusive provider of brokerage services for REO associated with the Subject MSRs when Ocwen transfers such MSRs to NRZ or when NRZ acquires both an additional economic interest in such MSRs and the right to designate the broker for REO properties in such portfolios. The Brokerage Agreement provides that Altisource is the exclusive provider of brokerage services for REO associated with the Subject MSRs, irrespective of the sub-servicer. NRZ’s brokerage subsidiary will receive a cooperative brokerage commission on the sale of certain REO properties from these portfolios subject to certain exceptions.
On August 28, 2017, Altisource and NRZ also entered into the Services LOI to enter into a Services Agreement, setting forth the terms pursuant to which Altisource would remain the exclusive service provider of fee-based services for the Subject MSRs through August 2025. The Services LOI was amended to continue through February 28, 2018 (with a further automatic extension through March 31, 2018 provided that the parties continue to negotiate the Services Agreement in good faith).
The Brokerage Agreement can be terminated by Altisource if the Services Agreement is not signed between Altisource and NRZ during the term of the Services LOI. The Brokerage Agreement may otherwise only be terminated upon the occurrence of certain specified events. Termination events include, but are not limited to, a breach of the terms of the Brokerage Agreement (including, without limitation, the failure to meet performance standards and non-compliance with law in a material respect), the failure to maintain licenses which failure materially prevents performance of the contract, regulatory allegations of non-compliance resulting in an adversarial proceeding against NRZ, voluntary or involuntary bankruptcy, appointment of a receiver, disclosure in a Form 10-K or Form 10-Q that there is significant uncertainty about Altisource’s ability to continue as a going concern, failure to maintain a specified level of cash and an unapproved change of control.
Following the execution of the Services Agreement, we anticipate that revenue from NRZ would increase and revenue from Ocwen would decrease. As Subject MSRs continue to transfer from Ocwen to NRZ, we anticipate that NRZ will become our largest customer. Had all of the Subject MSRs been transferred to NRZ and the Brokerage Agreement and Services Agreement with NRZ were in place as of January 1, 2017, we estimate that approximately
50%
of our 2017 revenue would have been related to NRZ. There can be no assurance that the parties will reach an agreement with respect to the terms of the Services Agreement or that a Services Agreement will be entered into on a timely basis or at all.
Ocwen has disclosed that it is subject to a number of ongoing federal and state regulatory examinations, cease and desist orders, consent orders, inquiries, subpoenas, civil investigative demand, requests for information and other actions and is subject to pending legal proceedings, some of which include claims against Ocwen for substantial monetary damages. For example, on May 15, 2017, Ocwen disclosed that on April 20, 2017, the CFPB and the State of Florida filed separate complaints in the United States District Court for the Southern District of Florida against Ocwen alleging violations of Federal consumer financial law and, in the case of Florida, Florida statutes. As another example, on May 15, 2017, Ocwen also disclosed that on April 28, 2017, the Commonwealth of Massachusetts filed a lawsuit against Ocwen in the Superior Court for the Commonwealth of Massachusetts alleging violations of state consumer financial laws relating to Ocwen’s servicing business, including lender-placed insurance and property preservation fees. Ocwen disclosed that the complaints seek to obtain permanent injunctive relief, consumer redress, refunds, restitution, disgorgement, damages, civil penalties, costs and fees and other relief. The forgoing or other matters could result in, and in some cases, have resulted in, adverse regulatory or other actions against Ocwen. Previous regulatory actions against Ocwen resulted in subjecting Ocwen to independent oversight of its operations and placing certain restrictions on its ability to acquire servicing rights.
In addition to the above, Ocwen may become subject to future federal and state regulatory investigations, cease and desist orders, consent orders, inquiries, subpoenas, civil investigative demands, requests for information, other matters or legal proceedings, any of which could also result in adverse regulatory or other actions against Ocwen.
The foregoing may have significant adverse effects on Ocwen’s business and/or our continuing relationship with Ocwen. For example, Ocwen may be required to alter the way it conducts business, including the parties it contracts with for services (including
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
IT and software services), it may be required to seek changes to its existing pricing structure with us, it may lose its non-GSE servicing rights or subservicing arrangements or may lose one or more of its state servicing or origination licenses. Additional regulatory actions or adverse financial developments may impose additional restrictions on or require changes in Ocwen’s business that could require it to sell assets or change its business operations. Any or all of these effects could result in our eventual loss of Ocwen as a customer or a reduction in the number and/or volume of services they purchase from us or the loss of other customers.
If any of the following events occurred, Altisource’s revenue could be significantly lower and our results of operations could be materially adversely affected, including from the possible impairment or write-off of goodwill, intangible assets, property and equipment, other assets and accounts receivable:
|
|
•
|
Altisource loses Ocwen as a customer or there is a significant reduction in the volume of services they purchase from us
|
|
|
•
|
Ocwen loses, sells or transfers a significant portion or all of its remaining non-GSE servicing rights or subservicing arrangements and Altisource fails to be retained as a service provider
|
|
|
•
|
Ocwen loses state servicing licenses in states with a significant number of loans in Ocwen’s servicing portfolio
|
|
|
•
|
Altisource fails to be retained as a service provider
|
|
|
•
|
The contractual relationship between Ocwen and Altisource changes significantly or there are significant changes to our pricing to Ocwen for services from which we generate material revenue
|
Additionally, Ocwen has notified us, disclosed in its filings and stated in connection with resolving several state administrative actions discussed above, that it plans to transition from REALServicing to another mortgage servicing software platform. We anticipate that such a transition could be a multi-year project and Altisource would support Ocwen through such a transition. We do not anticipate that a servicing technology transition would impact the other services we provide to Ocwen. For the years ended
December 31, 2017
,
2016
and
2015
, service revenue from REALServicing was
$26.4 million
,
$29.8 million
and
$50.3 million
, respectively. We estimate, with respect to income before income tax, that the REALServicing business currently operates at approximately break-even.
Management cannot predict the outcome of these matters or the amount of any impact they may have on Altisource. However, in the event these matters materially negatively impact Altisource, we believe the variable nature of our cost structure would allow us to realign our cost structure in line with remaining revenue. Furthermore, in the event of a significant reduction in the volume of services purchased or loans serviced by Ocwen (such as a transfer of Ocwen’s remaining servicing rights to a successor servicer), we believe the impact to Altisource could occur over an extended period of time. During this period, we believe that we will continue to generate revenue from all or a portion of Ocwen’s portfolio.
Additionally, our Servicer Solutions, Origination Solutions, Consumer Real Estate Solutions and Real Estate Investor Solutions businesses are focused on diversifying and growing our revenue and customer base and we have a sales and marketing strategy to support these businesses.
Management believes our plans, together with current liquidity and cash flows from operations, would be sufficient to meet our working capital, capital expenditures, debt service and other cash needs. However, there can be no assurance that our plans will be successful or our operations will be profitable.
Leases
We lease certain premises and equipment under various operating lease agreements. Future minimum lease payments at
December 31, 2017
under non-cancelable operating leases with an original term exceeding one year are as follows:
|
|
|
|
|
|
(in thousands)
|
|
Operating lease obligations
|
|
|
|
2018
|
|
$
|
19,833
|
|
2019
|
|
14,012
|
|
2020
|
|
10,222
|
|
2021
|
|
6,817
|
|
2022
|
|
2,676
|
|
Thereafter
|
|
230
|
|
|
|
|
|
|
$
|
53,790
|
|
Total operating lease expense, net of sublease income, was
$19.0 million
,
$17.6 million
and
$20.0 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. Sublease income was
$1.3 million
,
$0.5 million
and less than
$0.1 million
for
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
the years ended
December 31, 2017
,
2016
and
2015
, respectively. The minimum lease payments in the table above have not been reduced by minimum sublease rentals of totaling
$2.9 million
expected to be received under non-cancelable subleases. The operating leases generally relate to office locations and reflect customary lease terms which range from
0
to
9
years in duration.
We have executed
four
standby letters of credit totaling
$1.5 million
, related to four office leases that are secured by restricted cash balances.
Escrow and Trust Balances
We hold customers’ assets in escrow and trust accounts at various financial institutions pending completion of certain real estate activities. We also hold cash in trust accounts at various financial institutions where contractual obligations mandate maintaining dedicated bank accounts for our asset recovery management business’s collections. These amounts are held in escrow and trust accounts for limited periods of time and are not included in the consolidated balance sheets. Amounts held in escrow and trust accounts were
$35.1 million
and
$64.1 million
at
December 31, 2017
and
2016
, respectively.
NOTE 24
—
SEGMENT REPORTING
Our business segments are based upon our organizational structure, which focuses primarily on the services offered, and are consistent with the internal reporting used by our Chief Executive Officer (our chief operating decision maker) to evaluate operating performance and to assess the allocation of our resources.
Effective January 1, 2017, our reportable segments changed as a result of a change in the way our chief operating decision maker manages our businesses, allocates resources and evaluates performance, and the related changes in our internal organization. We now report our operations through
two
new reportable segments:
Mortgage Market
and
Real Estate Market
. In addition, we report
Other Businesses, Corporate and Eliminations
separately. Prior to the January 1, 2017 change in reportable segments, our reportable segments were
Mortgage Services
,
Financial Services
and
Technology Services
. The former
Mortgage Services
segment was separated into the
Mortgage Market
and
Real Estate Market
segments. Furthermore, certain of the software services business units that were formerly in the
Technology Services
segment and the mortgage charge-off collections business that was formerly in the
Financial Services
segment are now included in the
Mortgage Market
.
Other Businesses, Corporate and Eliminations
includes asset recovery management services and customer relationship management services that were formerly in the
Financial Services
segment as well as IT infrastructure management services formerly in the
Technology Services
segment. Prior year comparable period segment disclosures have been restated to conform to the current year presentation.
The
Mortgage Market
segment provides loan servicers and originators with marketplaces, services and technologies that span the mortgage lifecycle. The
Real Estate Market
segment provides real estate consumers and rental property investors with marketplaces and services that span the real estate lifecycle. In addition, the
Other Businesses, Corporate and Eliminations
segment includes businesses that provide post-charge-off consumer debt collection services primarily to debt originators (e.g., credit card, auto lending and retail credit), customer relationship management services primarily to the utility, insurance and hotel industries and IT infrastructure management services.
Other Businesses, Corporate and Eliminations
also includes interest expense and costs related to corporate support functions including executive, finance, law, compliance, human resources, vendor management, facilities, risk management, and sales and marketing costs not allocated to the business units as well as eliminations between the reportable segments.
Financial information for our segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2017
|
(in thousands)
|
|
Mortgage Market
|
|
Real Estate Market
|
|
Other Businesses, Corporate and Eliminations
|
|
Consolidated Altisource
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
793,684
|
|
|
$
|
89,787
|
|
|
$
|
58,742
|
|
|
$
|
942,213
|
|
Cost of revenue
|
|
545,507
|
|
|
96,967
|
|
|
57,391
|
|
|
699,865
|
|
Gross profit (loss)
|
|
248,177
|
|
|
(7,180
|
)
|
|
1,351
|
|
|
242,348
|
|
Selling, general and administrative expenses
|
|
114,215
|
|
|
18,718
|
|
|
59,709
|
|
|
192,642
|
|
Income (loss) from operations
|
|
133,962
|
|
|
(25,898
|
)
|
|
(58,358
|
)
|
|
49,706
|
|
Total other income (expense), net
|
|
72
|
|
|
(4
|
)
|
|
(14,399
|
)
|
|
(14,331
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and non-controlling interests
|
|
$
|
134,034
|
|
|
$
|
(25,902
|
)
|
|
$
|
(72,757
|
)
|
|
$
|
35,375
|
|
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2016
|
(in thousands)
|
|
Mortgage Market
|
|
Real Estate Market
|
|
Other Businesses, Corporate and Eliminations
|
|
Consolidated Altisource
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
827,324
|
|
|
$
|
86,590
|
|
|
$
|
83,389
|
|
|
$
|
997,303
|
|
Cost of revenue
|
|
546,540
|
|
|
64,566
|
|
|
78,939
|
|
|
690,045
|
|
Gross profit
|
|
280,784
|
|
|
22,024
|
|
|
4,450
|
|
|
307,258
|
|
Selling, general and administrative expenses
|
|
121,508
|
|
|
23,291
|
|
|
69,356
|
|
|
214,155
|
|
Litigation settlement loss, net of $4,000 insurance recovery
|
|
—
|
|
|
—
|
|
|
28,000
|
|
|
28,000
|
|
Income (loss) from operations
|
|
159,276
|
|
|
(1,267
|
)
|
|
(92,906
|
)
|
|
65,103
|
|
Total other income (expense), net
|
|
154
|
|
|
(5
|
)
|
|
(20,931
|
)
|
|
(20,782
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and non-controlling interests
|
|
$
|
159,430
|
|
|
$
|
(1,272
|
)
|
|
$
|
(113,837
|
)
|
|
$
|
44,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2015
|
(in thousands)
|
|
Mortgage Market
|
|
Real Estate Market
|
|
Other Businesses, Corporate and Eliminations
|
|
Consolidated Altisource
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
885,174
|
|
|
$
|
54,199
|
|
|
$
|
112,093
|
|
|
$
|
1,051,466
|
|
Cost of revenue
|
|
552,676
|
|
|
38,541
|
|
|
96,110
|
|
|
687,327
|
|
Gross profit
|
|
332,498
|
|
|
15,658
|
|
|
15,983
|
|
|
364,139
|
|
Selling, general and administrative expenses
|
|
132,334
|
|
|
7,514
|
|
|
81,020
|
|
|
220,868
|
|
Impairment losses
|
|
64,146
|
|
|
—
|
|
|
7,639
|
|
|
71,785
|
|
Change in the fair value of Equator Earn Out
|
|
(7,591
|
)
|
|
—
|
|
|
—
|
|
|
(7,591
|
)
|
Income (loss) from operations
|
|
143,609
|
|
|
8,144
|
|
|
(72,676
|
)
|
|
79,077
|
|
Total other income (expense), net
|
|
621
|
|
|
2
|
|
|
(26,640
|
)
|
|
(26,017
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and non-controlling interests
|
|
$
|
144,230
|
|
|
$
|
8,146
|
|
|
$
|
(99,316
|
)
|
|
$
|
53,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Mortgage Market
|
|
Real Estate Market
|
|
Other Businesses, Corporate and Eliminations
|
|
Consolidated Altisource
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
$
|
304,346
|
|
|
$
|
64,624
|
|
|
$
|
496,194
|
|
|
$
|
865,164
|
|
December 31, 2016
|
|
347,067
|
|
|
47,863
|
|
|
294,282
|
|
|
689,212
|
|
Our services are primarily provided to customers located in the United States. Premises and equipment, net consist of the following, by country, as of
December 31
:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
|
|
|
|
United States
|
|
$
|
46,268
|
|
|
$
|
71,418
|
|
India
|
|
8,136
|
|
|
14,006
|
|
Luxembourg
|
|
16,688
|
|
|
14,791
|
|
Philippines
|
|
2,038
|
|
|
3,027
|
|
Uruguay
|
|
143
|
|
|
231
|
|
|
|
|
|
|
Total
|
|
$
|
73,273
|
|
|
$
|
103,473
|
|
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (
Continued
)
NOTE 25
—
QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables contain selected unaudited statement of operations information for each quarter of
2017
and
2016
. The following information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period. Our business is affected by seasonality.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 quarter ended
(1)(2)
|
(in thousands, except per share data)
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
240,483
|
|
|
$
|
250,685
|
|
|
$
|
234,979
|
|
|
$
|
216,066
|
|
Gross profit
|
|
62,530
|
|
|
65,292
|
|
|
60,081
|
|
|
54,445
|
|
Income before income taxes and non-controlling interests
|
|
9,746
|
|
|
12,160
|
|
|
10,357
|
|
|
3,112
|
|
Net income
|
|
7,160
|
|
|
9,722
|
|
|
7,766
|
|
|
286,983
|
|
Net income attributable to Altisource
|
|
6,545
|
|
|
9,035
|
|
|
6,961
|
|
|
286,350
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.35
|
|
|
$
|
0.49
|
|
|
$
|
0.39
|
|
|
$
|
16.16
|
|
Diluted
|
|
$
|
0.34
|
|
|
$
|
0.48
|
|
|
$
|
0.38
|
|
|
$
|
15.72
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
18,662
|
|
|
18,335
|
|
|
18,023
|
|
|
17,724
|
|
Diluted
|
|
19,304
|
|
|
18,836
|
|
|
18,429
|
|
|
18,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 quarter ended
(1)(3)(4)
|
(in thousands, except per share data)
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
250,132
|
|
|
$
|
255,799
|
|
|
$
|
252,745
|
|
|
$
|
238,627
|
|
Gross profit
|
|
81,269
|
|
|
81,428
|
|
|
78,743
|
|
|
65,818
|
|
Income (loss) before income taxes and non-controlling interests
|
|
21,085
|
|
|
23,977
|
|
|
18,796
|
|
|
(19,537
|
)
|
Net income (loss)
|
|
18,892
|
|
|
20,686
|
|
|
11,472
|
|
|
(19,664
|
)
|
Net income (loss) attributable to Altisource
|
|
18,494
|
|
|
19,994
|
|
|
10,589
|
|
|
(20,384
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.98
|
|
|
$
|
1.08
|
|
|
$
|
0.57
|
|
|
$
|
(1.08
|
)
|
Diluted
|
|
$
|
0.92
|
|
|
$
|
1.02
|
|
|
$
|
0.54
|
|
|
$
|
(1.08
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
18,855
|
|
|
18,437
|
|
|
18,715
|
|
|
18,788
|
|
Diluted
|
|
20,040
|
|
|
19,604
|
|
|
19,568
|
|
|
18,788
|
|
______________________________________
|
|
(1)
|
The sum of quarterly amounts, including per share amounts, may not equal amounts reported for year-to-date periods. This is due to the effects of rounding and changes in the number of weighted average shares outstanding for each period.
|
|
|
(2)
|
On December 27, 2017, two of the Company’s wholly-owned subsidiaries, Altisource Solutions S.à r.l. and Altisource Holdings S.à r.l., merged, with Altisource Holdings S.à r.l. as the surviving entity. Altisource Holdings S.à r.l. was subsequently renamed Altisource S.à r.l. The merger is part of a larger subsidiary restructuring plan designed to simplify the Company’s corporate structure, allow it to operate more efficiently and reduce administrative costs. For Luxembourg tax purposes, the merger was recognized at fair value and generated an NOL of
$1.3 billion
and a deferred tax asset, net of valuation allowance, of
$300.9 million
as of December 31, 2017. The NOL has a
17
year life. This deferred tax asset was partially offset by the impact of other changes in U.S. and Luxembourg income tax rates of
$6.3 million
and an increase in certain foreign income tax reserves (and related interest) of
$10.5 million
. See
Note 21
.
|
|
|
(3)
|
We acquired Granite on July 29, 2016. See
Note 5
.
|
|
|
(4)
|
During the fourth quarter of 2016, Altisource recorded a litigation settlement loss of
$32.0 million
in connection with a litigation matter. Also during the fourth quarter of 2016, Altisource recorded an insurance recovery related to this litigation settlement of
$4.0 million
. See
Note 19
.
|