American Capital Ltd. (ACAS) reported fourth-quarter 2013 operating income of 14 cents per share, lagging the Zacks Consensus Estimate by 11 cents. Moreover, results compared unfavorably with the prior-year quarter earnings of 26 cents per share.
Lower-than-expected results were attributable to a reduced top line and elevated expenses. Further, the low interest environment during the quarter was a negative. However, new investments and a fall in non-accrual loans acted as the positives.
Net operating income for the quarter came in at $38 million, substantially down from $83 million reported in the prior-year quarter. Net loss was reported at $182 million or 66 cents per share, against net income of $123 million or 38 cents per share in the prior-year quarter.
For full-year 2013, net operating income was $156 million or 51 cents per share, down from $397 million or $1.20 per share reported in the prior year. The results were also below the Zacks Consensus Estimate of 83 cents per share. Net income was reported at $184 million or 61 cents per share, against $1.1 billion or $3.44 per share in the prior year.
Performance in Detail
For full-year 2013, total operating revenue came in at $487 million, down 25% year over year. Moreover, operating revenue was below the Zacks Consensus Estimate of $548 million.
Total operating revenue was $118 million in the final quarter, down 34% from $180 million in the prior-year quarter, due to lower interest and dividend income, partially offset by elevated fee income. Additionally, operating revenue lagged the Zacks Consensus Estimate of $132 million.
In the quarter under review, total interest and dividend income was $92 million, down 41% year over year. The weighted average effective interest rate on the company's debt investments as of Dec 31, 2013, was 10.0%, decreasing 140 basis points from the end of the prior-year quarter. However, fee income increased 13% year over year to $26 million.
Operating expenses increased 2% year over year to $66 million. The rise in interest expenses was primarily due to elevated salaries, benefits and stock-based compensation.
As of Dec 31, 2013, non-accrual loans were $154 million, representing 9.7% of total loans at fair value, down from $177 million of non-accrual loans, indicating 9.0% of total loans at fair value, as of Dec 31, 2012. Net asset value (NAV) per share came in at $18.97, up 6.0% or $1.13 per share from $17. 84 as of Dec 31, 2012.
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 a positive. Management not only anticipates an improvement in the portfolio along with an economic recovery but also expects to post a better book value.
American Capital’s asset coverage ratio declined to 627% in 2013 from 801% in the prior year. The company made new investments of $1.1 billion in the year while strengthening its balance sheet. Moreover, the company recorded $1.2 billion of cash proceeds from the realization of portfolio investments during 2013.
Share Repurchase Update
During 2013, American Capital repurchased 40.4 million shares for $561 million at an average price of $13.90 per share. Notably, during fourth-quarter 2013, the company bought back 8.9 million shares worth $132 million, at an average price of $14.88 per share.
Since the beginning of the new repurchase program, adopted in Sep 2011, the company repurchased 92.7 million shares of common stock for $1.1 billion at an average price of $11.39 per share.
Our Viewpoint
American Capital’s successful restructuring of debt empowered it with sufficient operating flexibility. Moreover, the capital deployment by the company is expected to renew 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.
Currently, American Capital carries a Zacks Rank #3 (Hold). Some better-ranked companies in the same sector worth considering include Apollo Investment Corporation (AINV), Gladstone Investment Corporatio (GAIN) and OFS Capital Corporation (OFS). All the 3 companies carry a Zacks Rank #2 (Buy).
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