Altisource Portfolio Solutions S.A. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. Altisource provides mortgage, real estate, consumer-debt and technology services, primarily in the United States, through Mortgage Services, Financial Services and Technology Services.
Financial results and liquidity
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $1,051.5 million | $1,078.9 million | Down 3% |
| Service revenue | $940.9 million | $938.7 million | Up slightly |
| Gross profit | $364.1 million | $371.7 million | Down 2% |
| Gross profit / service revenue | 39% | 40% | Down 1 percentage point |
| Operating income | $79.1 million | $170.5 million | Down 54% |
| Operating income / service revenue | 8% | 18% | Down 10 percentage points |
| Net income attributable to Altisource | $41.6 million | $134.5 million | Down 69% |
| Diluted EPS | $2.02 | $5.69 | Down 64% |
| Adjusted diluted EPS, non-GAAP | $6.96 | $7.16 | Down 3% |
| Operating cash flow | $195.4 million | $197.5 million | Down 1% |
Cash and cash equivalents were $179.3 million at year-end, up from $161.4 million. Net long-term debt, including current maturities, was $534.4 million, versus $588.6 million. The secured term loan carried a 4.50% rate and matures in 2020; it is secured by substantially all applicable borrower and guarantor assets. Total assets were $728.0 million and total liabilities were $675.7 million. Management stated that operating cash flows should fund capital expenditures and required debt and interest payments for the next 12 months.
Investing cash outflow was $66.0 million, including $36.2 million in capital expenditures and $28.7 million, net of acquired cash, for acquisitions. Financing cash outflow was $111.4 million, including $58.9 million of share repurchases and $50.4 million of debt repurchases and repayments. Altisource repurchased $49.0 million par value of term loans at a 10.3% average discount, recording a $3.8 million gain.
Business trends and material changes
- Mortgage Services service revenue rose 4% to $676.2 million, led by asset management and Hubzu activity; insurance and valuation services declined.
- Financial Services service revenue fell 10% to $88.3 million, mainly from lower mortgage charge-off collection referrals. Its gross margin declined to 31% from 35%.
- Technology Services revenue fell 5% to $215.5 million, reflecting lower IT infrastructure services and reduced investment aligned with revenue expectations. The segment recorded a $66.4 million operating loss, compared with $2.9 million of operating income in 2014.
- Ocwen accounted for 60% of consolidated revenue in both 2015 and 2014; revenue directly attributed to Ocwen was $631.6 million in 2015. A further 21% of 2015 revenue related to Ocwen-serviced portfolios where another party selected Altisource. Ocwen receivables were $38.2 million at year-end.
- Altisource acquired CastleLine for approximately $33.4 million and the RentRange and Investability businesses for approximately $24.8 million, to expand mortgage insurance and real estate investor offerings. It was selected by two top-ten banks to provide portfolio services.
Outlook, risks and unusual items
- Impairments: Fourth-quarter non-cash impairment charges totaled $71.8 million in Technology Services: $55.7 million of goodwill, $11.9 million of intangible assets and $4.1 million of software and equipment. The filing attributes these charges principally to lower projected Technology Services revenue from Ocwen and investments in Ocwen-related technology.
- Other earnings items: 2015 included a $7.6 million gain from extinguishing the Equator earn-out liability and a $1.9 million net loss on HLSS securities. Adjusted EPS is non-GAAP and excludes specified amortization, impairment and earn-out effects.
- Customer and servicing exposure: Ocwen’s regulatory, financial and servicing challenges could reduce referrals, pricing or service volumes, or lead to servicing transfers. The filing notes that Ocwen’s ratings were below certain minimums and that related parties could have rights to transfer servicing beginning in 2017. Management said any effects could unfold over an extended period, but acknowledged that its diversification plans may not succeed.
- Controls: Management reported a material weakness in controls over impairment reviews, and concluded internal control over financial reporting and disclosure controls were ineffective at year-end. The auditor issued an adverse opinion on internal control over financial reporting, while issuing an unqualified opinion on the financial statements. Management had not set a remediation timetable.
- Legal and regulatory matters: The company is responding to government inquiries concerning aspects of its business; it said outcomes and potential financial impacts could not yet be estimated. Securities and derivative lawsuits remained pending, with potential losses not reasonably estimable. A fourth-quarter accrual was recorded for an anticipated payment to Ocwen related to its settlement of a case; the final amount was under negotiation.
- Other risks: Debt covenants limit borrowing, dividends and repurchases; the term loan has a variable rate. A one-percentage-point rate increase would add approximately $2.3 million in annual interest expense. The Luxembourg tax ruling expires in 2019 unless renewed, and changes to tax treatment could increase the effective tax rate. No cash dividend was anticipated in the foreseeable future.
Most important facts for investors to verify
- How Ocwen’s servicing volumes, regulatory status and any servicing transfers affect Altisource revenue, technology assets and customer diversification.
- Whether the impairment-related material weakness is remediated and whether future estimates trigger additional asset impairments.
- Term-loan covenant headroom, cash-flow requirements, refinancing exposure and the effect of variable interest rates.
- Developments in government inquiries, pending litigation and the accrued Ocwen-related payment.
- Whether acquisitions and growth initiatives generate sustainable revenue and returns, given the gap between GAAP EPS and adjusted EPS.