NELNET INC. 10-Q Summary: Period Ended June 30, 2008
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Nelnet, Inc., a vertically integrated education planning and financing company. The report covers the three and six months ended June 30, 2008. The company operates five segments: Student Loan and Guaranty Servicing, Tuition Payment Processing and Campus Commerce, Enrollment Services and List Management, Software and Technical Services, and Asset Generation and Management. The reporting period was significantly impacted by disruptions in the credit markets, legislative changes (H.R. 5715), and the company's strategic restructuring efforts.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2008 | Six Months Ended June 30, 2008 | Six Months Ended June 30, 2007 |
|---|---|---|---|
| Net Income (Loss) | $43.7 million | $(26.1) million | $29.5 million |
| Net Interest Income | $73.3 million | $89.9 million | $136.0 million |
| Total Other Income | $92.5 million | $108.6 million | $164.6 million |
| Total Operating Expenses | $97.9 million | $226.8 million | $241.9 million |
| Provision for Loan Losses | $6.0 million | $11.0 million | $5.3 million |
| Student Loans Receivable (Net) | $25.99 billion | $25.99 billion | $26.74 billion (Dec 31, 2007) |
| Total Debt (Bonds & Notes) | $27.53 billion | $27.53 billion | $28.12 billion (Dec 31, 2007) |
| Cash and Cash Equivalents | $138.5 million | $138.5 million | $111.7 million (Dec 31, 2007) |
| Shareholders' Equity | $584.0 million | $584.0 million | $608.9 million (Dec 31, 2007) |
Material Changes vs. Prior Period
- Net Loss for Six Months: The company reported a net loss of $26.1 million for the six months ended June 30, 2008, compared to net income of $29.5 million in the same period in 2007. This was primarily driven by a $47.4 million loss on the sale of student loans in the first quarter of 2008 and a $18.8 million impairment charge related to intangible assets and goodwill.
- Quarterly Profitability: Despite the six-month loss, the company returned to profitability in the second quarter with net income of $43.7 million, compared to $14.8 million in Q2 2007. This improvement was aided by a $21.9 million benefit from variable-rate floor income and lower operating expenses.
- Loan Sales: To reduce exposure to equity support provisions in its financing facilities, the company sold approximately $1.3 billion of student loans in Q1 2008, recognizing a significant loss. No such large-scale sales occurred in Q2 2008.
- Operating Expenses: Excluding restructuring and impairment charges, operating expenses decreased by $22.4 million (Q2) and $41.1 million (YTD) compared to 2007, reflecting the impact of workforce reductions and facility realignments.
- Student Loan Spread: The core student loan spread (excluding fixed-rate floor income) was 92 basis points for Q2 2008, an improvement from 60 basis points in Q1 2008, but lower than the 123 basis points in Q2 2007. The spread compression was attributed to dislocation in interest rate indices and higher funding costs on asset-backed securities.
Guidance, Outlook, Risks, and Unusual Items
- Legislative Impact (H.R. 5715): The "Ensuring Continued Access to Student Loans Act of 2008" was signed into law on May 7, 2008. It allows the Department of Education to act as a secondary market. The company expects to utilize the Department's Loan Participation Program to fund a significant portion of its 2008-2009 loan originations.
- Liquidity and Funding Risks: The company faces significant liquidity risks due to credit market disruptions. On July 31, 2008, the company did not renew the liquidity provisions of its primary FFELP warehouse facility, converting it to a term facility. The company must refinance or remove approximately $900 million of loans by May 2009. Auction Rate Securities (ARS) held by the company have failed to clear since February 2008, though the company benefited from favorable maximum rate provisions in Q2.
- Restructuring: The company completed a restructuring plan in Q2 2008 related to credit market disruptions, reducing approximately 300 positions. A prior restructuring plan from late 2007 was also completed.
- Dividend Suspension: On May 21, 2008, the company announced the temporary suspension of its quarterly dividend program.
- Legal Proceedings: The company's subsidiary, Shockley Financial Corp., is under investigation by the DOJ, SEC, and various state attorneys general regarding municipal derivative bid practices. The company is also subject to industry-wide investigations regarding preferred lender lists and marketing practices.
Key Facts for Investor Verification
- Refinancing Requirement: Verify the company's ability to refinance or remove $900 million of loans from its FFELP warehouse facility by May 2009 to avoid termination of the facility.
- Auction Rate Securities Exposure: Assess the impact of continued ARS auction failures on the company's cost of funds and liquidity, noting that the favorable rates received in Q2 are not expected to be sustainable.
- Department of Education Programs: Monitor the company's progress in enrolling in the Department of Education's Loan Participation Program and Loan Purchase Commitment Program as alternative funding sources.
- Impairment Charges: Review the $18.8 million impairment charge recorded in Q1 2008 related to intangible assets and goodwill to understand the long-term impact on the balance sheet.
- Legal Investigations: Track the status of the municipal derivative bid practices investigations involving Shockley Financial Corp. and the potential for fines or settlements.