Fidus Investment (NASDAQ:FDUS)
Q4 2012 Earnings Call
March 8, 2013 9:00 am ET
Edward Ross – President, Chief Executive Officer
Cary Schaefer – Chief Financial Officer
[no analyst questions]
Good morning ladies and gentlemen and welcome to the Fidus Investment Corporation’s Fourth Quarter and Year-End 2012 Earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference is being recorded.
I will now turn the call over to your host, Stephanie Prince from LHA. Please go ahead.
Thank you, Stephanie. Good morning everyone. This is Stephanie Prince. Thank you for joining us for Fidus Investment Corporation’s Fourth Quarter and Year-End 2012 Earnings conference call. With me this morning are Ed Ross, Fidus Investment Corp.’s Chairman and Chief Executive Officer; and Cary Schaefer, Chief Financial Officer and Chief Compliance Officer.
Fidus Investment Corporation issued a press release yesterday afternoon with details of the company’s quarterly and year-end financial and operating results. A copy of the press release is available on the Investor Relations page of the company’s website at fdus.com. I’d like to remind everyone that today’s call is being recorded. A replay of today’s call will be available by using the telephone numbers and conference ID provided in the earnings press release. In addition, an archived webcast replay will be available on the Investor Relations page of the company’s website at fdus.com following the conclusion of the conference call.
I’d also like to call your attention to the customary Safe Harbor disclosure regarding forward-looking information included in the earnings release. The conference call today will contain certain forward-looking statements, including statements regarding the goals, strategies, beliefs, future potential operating results and cash flows of Fidus Investment Corporation. Although management believes these statements are reasonable based on estimates, assumptions and projections as of today, March 8, 2013, these statements are not guarantees of future performance. Time sensitive information may no longer be accurate at the time of any telephonic or webcast replay. Actual results may differ materially as a result of risks, uncertainties and other factors, including but not limited to the factors set forth in the company’s filings with the SEC. Fidus undertakes no obligation to update or revise any of these forward-looking statements.
I’d now like to turn the call over to Ed Ross. Ed?
Thank you, Stephanie, and good morning everyone. I want to welcome you to our fourth quarter and year-end 2012 earnings call. I’d like to begin with a brief review of our strategy and we’ll follow with highlights of the fourth quarter and full year before discussing the investment activity and performance of our investment portfolio. I’ll then close with a brief market update before turning the call over to Cary, who will provide more detailed information about our financial results and liquidity position before we open up the call to questions.
For those of you who are new to Fidus, I’ll briefly review our strategy. The primary goal of Fidus Investment Corporation is to deliver stable and growing dividends to our stockholders. Our strategy is to build a well diversified portfolio of debt and to a lesser extent equity investments in high quality, lower middle market companies that are market leaders in their respective niches. In executing this strategy, we strive to maintain an acute focus on capital preservation while generating attractive risk-adjusted returns. We seek to invest in businesses that we believe will perform well over the long term with an emphasis on companies that operate in industries we know well, that generate excess free cash flow for debt service and investment, and have positive outlooks. Also from a debt structuring perspective, we look to maintain significant cushions to a borrower’s enterprise value in support of our capital preservation and income goals.
Some of the industries we know well and focus on include aerospace and defense, consumer products and services, retail and restaurants, business services, industrial products and services, transportation and logistics, healthcare products and services, and niche manufacturing. Notably, our senior investment professionals, most of whom have worked together for over 14 years, have an average of more than 20 years experience investing and advising in these broad sectors of the economy.
Turning to fiscal year 2012, we had a productive year during which we continued to make progress on our growth, diversification, and capital preservation goals. We originated approximately $85 million of investments, adding nine new portfolio companies and making seven add-on investments in existing portfolio companies. As a result, as of December 31, 2012 our investment portfolio was comprised of 30 portfolio companies with a fair value of approximately $274 million, representing an increase of approximately 34% from the prior year. Correspondingly, net investment income for the year increased approximately 36% which enabled us to raise our quarterly dividend three times during the year and provide our shareholders with total annual dividends of $1.46 per share.
Also during 2012, we were successful in raising additional equity capital of $37.9 million in September. Last month, we completed another equity offering resulting in $28.8 million in net proceeds. We were very pleased that both offerings were completed at prices accretive to net asset value.
We ended fiscal 2012 with approximately $52 million of cash and an additional $5.5 million of debt availability from the SBA for additional investments and operations. Taking into account both the January investment activity and the February equity offering, Fidus continues to be well positioned to take advantage of new investment opportunities. In addition, this liquidity position provides us with capital to fund the second SBIC license that we have applied for, and as we’ve said, this second license, if approved, will result in access to an additional $75 million of attractive low-cost long term debt capital.
Some highlights of the fourth quarter include net investment income, or NII or $4.7 million or $0.40 per share compared to NII of $3.4 million or $0.36 per share for last year’s fourth quarter. Net asset value, or NAV increased to $15.32 per share as of December 31, compared to $15.27 at September 30, 2012. For comparison, NAV at the end of 2011 was $14.90 per share.
Our investments during the fourth quarter totaled $27.8 million, including investments in two new portfolio companies. We believe that these new portfolio companies fit well with our strategy of constructing a well diversified portfolio of debt and to a lesser extent equity investments that can withstand the challenges of the current economic environment. The fourth quarter portfolio additions included an inspection and value-added service provider serving all major oil and natural gas producing regions in the contiguous U.S.; and a leading retailer of urban inspired footwear and apparel domiciled in the northeast.
Repayments during the quarter totaled $7.3 million, including the full realization of our subordinated loan investment in Innovative Product Achievement, LLC and small partial repayments in three additional portfolio companies. We anticipate that periodic refinancing activity and realizations will continue to be part of the business going forward.
We also continue to be pleased with the performance and quality of our portfolio. For those of you who have been following us, you know that we track several measures of quality. The first is the fair value to cost ratio of the portfolio, which at quarter end was 105%, relatively consistent with prior periods. Second is the portfolio’s weighted average investment rating based on our internal systems. Under our methodology, 1 is outperform and 5 is an expected loss. As of December 31, the weighted average investment rating for the portfolio was 2, and we continue to have no investments on non-accrual status.
Other performance metrics also remain strong. At December 31, our portfolio of companies had a combined ratio of total net debt through Fidus’ debt investments to total EBITDA of 3.4 times, reflecting a prudent level of risk for our portfolio. In addition, our portfolio companies have a combined ratio of total EBITDA to total cash interest expense of 2.9 times, which we believe provides significant cushion for our portfolio companies to meet their debt service obligations to us.
To wrap up my comments about our performance, I’m pleased to report our Board of Directors has declared a dividend of $0.38 per share for the first quarter of 2013. This is an increase of approximately 12% relative to the dividend in the first quarter of 2012. This dividend will be paid on March 28, 2013 to stockholders of record as of March 14, 2013.
With respect to current market conditions and our target lower middle market, broadly speaking deal flow was busier than normal in the fourth quarter because of the pending tax law changes. As expected, deal flow has slowed down in the first quarter without that sense of urgency and the pull-forward effect the prospective tax law changes had on the fourth quarter. Looking ahead, we do expect 2013 to be a relatively healthy year from a deal flow perspective, assuming status quo in terms of economic conditions and market dynamics.
We continue to find attractive investment opportunities in our target lower middle market where we benefit from the large and fragmented landscape and generally less intense competitive conditions. Our approach remains cautious and deliberate with an intense focus on capital preservation and attractive risk adjusted returns over the long term. As we grow and diversify our portfolio, we continue to maintain our highly selective investment approach, emphasizing quality over quantity. In particular, we look for high quality businesses with strong market positions that performed relatively well during the last downturn and have positive long-term outlooks. We believe this strategy, combined with our broad origination network comprising multiple channels will continue to present us with suitable opportunities to meet our diversification and portfolio growth goals.
I’ll now turn the call over to Cary to provide details on our financial and operating results. Cary?
Thanks, Ed, and good morning everyone. I will now review our fourth quarter and full year 2012 results in a little more detail, and then comment on our liquidity position.
Total investment income was $9.6 million for the fourth quarter of 2012, an increase of $2.3 million or approximately 32% over the $7.3 million recorded during the fourth quarter of 2011. This increase was primarily driven by an increase in average outstanding debt investments in the fourth quarter of 2012 as compared to last year. Also contributing to the fourth quarter 2012 investment income growth was an increase in dividend income, which included a special dividend from a portfolio company of approximately $230,000. These increases were partially offset by a decrease in fee income which will fluctuate from quarter to quarter depending on the level of new investment activity, as well as prepayment activity. Fee income during the fourth quarter of 2012 was approximately $512,000 compared to approximately $927,000 for the fourth quarter of 2011. This was due to a higher level of prepayment activity and growth investments during the fourth quarter of 2011.
Total expenses for the fourth quarter of 2012 were $4.9 million compared to $3.9 million for the fourth quarter of 2011. Management and incentive fees totaled $2.5 million for the fourth quarter 2012, which included an accrual for capital gains incentive fee of approximately $81,000 or almost $0.01 per share, compared to $182,000 for the same period in 2011. This accrual is the result of the unrealized portfolio gains recognized during the quarter; however, it’s important to note that capital gains incentive fees are only payable when net realized capital gains are in excess of gross unrealized depreciation.
Administrative service expenses, professional fees, and other general and administrative expenses totaled approximately $716,000 compared to approximately $574,000 in the fourth quarter of 2011. This increase in expenses was largely due to higher professional fees during the quarter. Interest expense on our SBA debentures was approximately $1.8 million for the fourth quarter compared to $1.4 million for fourth quarter 2011 due to a higher average level of outstanding debentures. As of December 31, 2012, the weighted average fixed interest rate on our SBA debentures was 4.5% before fees.
As a result of our operating activities, net investment income for the three months ended December 31, 2012 was $4.7 million or $0.40 per share compared to $3.4 million or $0.36 per share for the same period in 2011. During the fourth quarter 2012, we recorded net unrealized appreciation on investments of approximately $400,000 or about $0.03 per share. This was comprised of net unrealized appreciation of $900,000 on debt investments partially offset by net unrealized depreciation on equity investments of $500,000. This activity resulted in a net increase in net assets from operations of $5.1 million or $0.43 per share for the fourth quarter 2012. After giving effect to our fourth quarter dividend payment of $0.38 per share, we ended the year with net asset value of $15.32 per share. Our fourth quarter 2012 per-share results are based on weighted average shares outstanding of 11.9 million compared to 9.4 million shares in the fourth quarter of 2011.
For the full year ended December 31, 2012, total investment income was $33.8 million, an increase of $10.5 million or 44.7% over $23.4 million of total investment income for the year ended December 31, 2011. This increase was driven by a higher average level of debt and equity investments, greater dividend income in the fourth quarter as discussed previously, and an increase in fee income for the year of $300,000 to $1.6 million for the full year compared to $1.3 million in 2011.
Total expenses for fiscal year 2012 were $18.2 million compared to $11.8 million for fiscal year 2011. Management and incentive fees totaled $9.1 million for 2012, which included an accrual for capital gains incentive fees of approximately $745,000 or almost $0.07 per share compared to $280,000 for the same period in 2011. Interest expense on our SBA debentures was approximately $6.4 million for fiscal 2012 compared to $5.5 million for 2011. Administrative and service expenses, professional fees and other general and administrative expenses totaled approximately $2.7 million for the year ended 2012 compared to approximately $1.6 million in 2011. This increase is primarily related to the cost of being a publicly traded company for a full year in 2012 compared to approximately a half year in 2011. As a result, net investment income for the full year ended December 31, 2012 was $15.7 million or $1.54 per share compared to $11.5 million or $1.22 per share for the full year 2011.
During fiscal year 2012, we reported net realized and unrealized appreciation on investments of approximately $3.7 million or about $0.37 per share. This included realized gains of approximately $2 million and unrealized appreciation on investments of approximately $1.7 million. This resulted in a net increase in net assets resulting from operations for the year ended December 31, 2012 of $19.4 million or $1.91 per share compared with a net increase in net assets resulting from operations of $15.4 million or $1.63 per share for the full year of 2011. The income per share figures are based on weighted average shares outstanding of 10.2 million shares for fiscal year 2012 compared to 9.4 million shares for fiscal year 2011.
Turning now to portfolio statistics as of December 31, 2012, our total investment portfolio ended the year with a fair market value of $274.2 million or 105% of cost. Consistent with our debt oriented investment strategy, our portfolio on a cost basis was comprised of approximately 74% subordinated debt, 12% senior secured loans, and 14% equity and warrant securities. Our average investment was $8.7 million at the end of the quarter. We held equity investments in 93% of our portfolio companies with an average fully diluted equity ownership of 8.4%. The weighted average effective yield on debt investments was 15.3% as of December 31, 2012 and there were no investments on non-accrual.
Finally, I’d like to touch on our liquidity position and capital resources. As of December 31, 2012, total cash was approximately $52 million. There is also an additional $5.5 million available in unfunded SBA commitments resulting in approximately $57.5 million of available liquidity for additional investments in operations as of December 31, 2012. As Ed mentioned earlier, we raised an additional $28.8 million in a follow-in equity offering that closed on February 8, 2013.
Finally, our application for a second SBIC license continues to work its way through the SBA review process. As a reminder, we filed this second application on October 15 after receiving a green light letter from the SBA. If approved, the second license will provide us with access to an additional $75 million of long-term, low-cost SBA debentures.
I’ll now turn the call back to Ed for concluding comments. Ed?
Thanks, Cary. In closing, I would like to thank the outstanding team at Fidus for their commitment and great work. In addition, we’d like to thank our shareholders for their continued trust and confidence in us, and thank you all again for joining us today.
I’ll now turn the call back to Stephanie for Q&A. Stephanie?
Question and Answer Session
I am currently showing no questions at this time. I will now turn the call back over to management for further remarks.
Okay, well thank you, Stephanie – appreciate it. And thank you everyone for joining us today. We greatly appreciate your time and your interest, and we also look forward to visiting with you in early May to discuss our first quarter 2013 results. So thank you again and have a good day.
Ladies and gentlemen, that does conclude today’s conference. You may all disconnect and have a wonderful day.
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