NELNET INC. 2008 Annual Report (10-K) Summary
Business Context and Reporting Period
This report covers the fiscal year ended December 31, 2008. Nelnet, Inc. is a vertically integrated education planning and financing company headquartered in Lincoln, Nebraska. The company operates through five segments: Student Loan and Guaranty Servicing, Tuition Payment Processing and Campus Commerce, Enrollment Services, Software and Technical Services, and Asset Generation and Management. The 2008 reporting period was significantly impacted by the global financial crisis, disruptions in the capital markets, and legislative changes to the Federal Family Education Loan (FFEL) Program.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Total Revenue | $692.1 million | $675.9 million |
| Net Interest Income | $187.9 million | $244.6 million |
| Net Income | $28.7 million | $32.9 million |
| Earnings Per Share (Diluted) | $0.58 | $0.66 |
| Student Loan Portfolio (Net) | $25.4 billion | $26.7 billion |
| Total Debt Outstanding | $26.8 billion | $28.1 billion |
| Cash and Cash Equivalents | $190 million | $112 million |
| Core Student Loan Spread | 0.93% | 1.13% |
Material Changes vs. Prior Period
- Revenue Composition: While total revenue increased slightly, the mix shifted. Fee-based businesses (less dependent on government programs) grew by 19.5% to $153.1 million, offsetting declines in loan servicing income. However, total fee-based revenue declined due to a significant drop in list marketing services.
- Net Interest Income Compression: Net interest income fell by $56.7 million (23.2%) primarily due to the compression of the core student loan spread from 1.13% to 0.93%. This was driven by the College Cost Reduction Act of 2007, which reduced yields on new loans, and a dislocation between the commercial paper index (asset yield) and LIBOR (funding cost) caused by market disruptions.
- Loan Sales and Losses: To reduce exposure to its FFELP warehouse facility, the company sold $1.8 billion of student loans, recognizing a loss of $51.4 million. This contrasts with a $3.6 million gain on loan sales in 2007.
- Operating Expenses: Total operating expenses decreased by $95.0 million to $440.6 million. Excluding restructuring, impairment, and liquidity contingency fees, operating expenses decreased by $74.7 million (15.7%) due to cost-saving initiatives and workforce reductions.
- Dividends: The company temporarily suspended its quarterly dividend program in May 2008.
Guidance, Outlook, and Risks
Liquidity and Funding: The company faces significant liquidity risks due to the failure of the auction rate securities market and disruptions in the commercial paper market. As of December 31, 2008, all of Nelnet's Auction Rate Securities were in a "failed auction" status, resulting in higher interest costs. The company has relied heavily on the Department of Education's Loan Participation Program and Purchase Program to fund new originations, as its traditional warehouse facility liquidity was not renewed in July 2008.
Legislative Risk: The company is exposed to potential elimination of the FFEL Program in favor of the Direct Loan Program, which would significantly reduce origination volume and servicing fees. The Higher Education Opportunity Act (HEOA) and the College Cost Reduction Act have already reduced yields and increased regulatory burdens.
Counterparty Risk: The company noted funding delays from Lehman Brothers Bank (a 7% lender on its unsecured line of credit) following Lehman's bankruptcy filing in September 2008. The company does not expect Lehman to fund future requests.
Outlook: Management expects to continue using the Department of Education's Participation Program for funding. The company is actively seeking alternatives to reduce exposure to the auction rate market and is restructuring to reduce infrastructure costs.
Investor Verification Checklist
- Auction Rate Securities Status: Verify the current status of the $1.9 billion in Auction Rate Securities and the specific maximum interest rates being paid due to failed auctions.
- Warehouse Facility Refinancing: Confirm the company's progress in refinancing or removing the $1.4 billion outstanding under the FFELP warehouse facility, which matures in May 2010.
- Legislative Impact: Monitor Congressional action regarding the potential elimination of the FFEL Program and the expansion of the Direct Loan Program.
- Counterparty Exposure: Assess the impact of Lehman Brothers' bankruptcy on the company's $750 million unsecured line of credit and other derivative counterparties.
- Core Spread Trends: Track the spread between the commercial paper index and LIBOR to evaluate future net interest income compression.