American Capital Ltd. (ACAS - Analyst Report) reported fourth-quarter 2012 operating income of 26 cents per share, beating the Zacks Consensus Estimate by a penny. However, the results compared unfavorably with the prior-year quarter’s earnings of 67 cents per share.
Better-than-expected results were attributable to top-line growth, followed by decreased operating expenses reflecting prudent expense management. Moreover, new investments and reduction of debt acted as positives. Yet, the low interest environment during the quarter was a negative.
Net operating income for the quarter came in at $83 million, down from $229 million reported in the prior-year quarter. Net earnings were reported at $123 million, or 38 cents per share, against $594 million or $1.73 per share in the prior-year quarter.
For full year 2012, net operating income was $397 million or $1.20 per share, down from $448 million or $1.26 per share reported in the prior-year. However, the reported earnings outpaced the Zacks Consensus Estimate by 15 cents.
Performance in Detail
Total operating income was $180 million in the quarter, up 13% from $160 million in the prior-year quarter, due to higher interest and dividend income and elevated fee income. Additionally, operating income significantly surpassed the Zacks Consensus Estimate of $148 million.
For full year 2012, total operating income was $646 million in the quarter, up 9% year over year. Additionally, operating income beat the Zacks Consensus Estimate of $561 million.
In the quarter under review, total interest and dividend income was $157 million, up 5% from $149 million in the prior-year quarter. The weighted average effective interest rate on the company's debt investments as of Dec 31, 2012, was 11.4%, increasing 70 basis points from the end of the prior-year quarter. Moreover, fee income more than doubled on a year-over-year basis to $23 million.
Operating expenses declined 14% year over year to $65 million. The fall in expenses was a result of significant decline in interest expenses and lower general and administrative expenses, partially offset by elevated salaries, benefits and stock-based compensation.
As of Dec 31, 2012, non-accrual loans were $177 million, representing 9% of total loans at fair value, down from $252 million of non-accrual loans, indicating 12.5% of total loans at fair value, as of Sep 30, 2012.
Net asset value (NAV) per share came in at $17.84 in the quarter, up 2.6% or 45 cents per share sequentially. In spite of the volatile capital markets affecting valuations of the investment portfolio in the quarter, the overall underlying performance of American Capital’s portfolio companies continue to remain positive. Management not only anticipates an improvement in the portfolio along with an economic recovery, but expects to post an enhanced book value.
American Capital’s asset coverage ratio improved substantially to 801% from 465% in the prior year. The company repaid securitized debt of $487 million in the year 2012 and increased investments by $719 million while strengthening its balance sheet. Moreover, the company recorded $1.5 billion of cash proceeds from realizations of portfolio investments during the year.
Share Repurchase Update
During the fourth quarter of 2012, American Capital repurchased 8.8 million shares worth $103 million, at an average price of $11.72 per share. Since the beginning of the new repurchase program, adopted in Sep 2011, the company repurchased 52.4 million shares of common stock for $495 million at an average price of $9.46 per share.
American Capital’s successful restructuring of debt in 2012 empowered it with sufficient operating flexibility. Moreover, the capital deployment by the company raises our hopes for an enhancement of investors’ confidence.
The company is also capable of providing flexible financing solutions ranging from a variety of senior debt and uni-tranche to mezzanine and equity co-investments. Further, American Capital provides multi-currency funding with underwriting platform globally, thereby boosting growth of its portfolio companies. Such benefits provided by the company compel private equity clients to consider it as an investment partner, which in turn, helps it diversify.
Though the improved portfolio performance is expected to continue with the economic recovery, we believe the low interest rate environment and global cues might act as headwinds in the upcoming quarters.
Shares of American Capital currently carry a Zacks Rank #2 (Buy). Among peers, companies in the same industry with a Zacks Rank #1 (Strong Buy) include Medallion Financial Corp. and ICG Group Inc. , while KCAP Financial Inc. (KCAP - Snapshot Report) carries a Zacks Rank #2 (Buy).