NELNET INC. 10-Q Summary: Quarter Ended March 31, 2009
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for NELNET, INC., an education planning and financing company, for the period ended March 31, 2009. 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 reporting period reflects a challenging capital market environment, with the company actively managing liquidity risks associated with its Federal Family Education Loan Program (FFELP) warehouse facility and navigating potential legislative changes to the student loan industry.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Income (Loss) | $25.5 million | ($69.8 million) |
| Earnings Per Share (Basic/Diluted) | $0.52 | ($1.42) |
| Total Interest Income | $175.0 million | $341.7 million |
| Net Interest Income | $28.5 million | $16.5 million |
| Provision for Loan Losses | $7.5 million | $5.0 million |
| Total Operating Expenses | $92.6 million | $128.8 million |
| Student Loans Receivable (Net) | $25.6 billion | $25.4 billion |
| Bonds and Notes Payable | $27.1 billion | $26.8 billion |
| Cash and Cash Equivalents | $243.7 million | $189.8 million |
| Operating Cash Flow | $110.4 million | $74.7 million |
Material Changes vs. Prior Period
- Profitability Turnaround: The company reported a net income of $25.5 million in Q1 2009, a significant improvement from a net loss of $69.8 million in Q1 2008. This reversal was driven by a reduction in operating expenses, derivative settlements, and the absence of large impairment charges and loan sale losses recorded in the prior year.
- Operating Expenses: Total operating expenses decreased by $36.3 million (28%) compared to Q1 2008. Excluding restructuring and impairment charges present in 2008, operating expenses decreased by $10.0 million due to cost-saving initiatives and restructuring plans implemented in late 2007 and early 2008.
- Loan Portfolio and Funding: The student loan portfolio grew slightly to $25.6 billion. The company reduced its exposure to its FFELP warehouse facility by selling loans and completing a $294.6 million asset-backed securitization, reducing equity funding support posted from $280.6 million (Dec 2008) to $96.6 million (May 2009).
- Derivative Activity: The company recorded $24.4 million in derivative settlements in Q1 2009, compared to $40.8 million in Q1 2008. Unrealized gains/losses on derivatives were less volatile in 2009 compared to the significant losses recorded in 2008 due to foreign currency and market value adjustments.
- Debt Repurchases: The company purchased $34.9 million of its 5.125% Senior Notes due 2010 for $26.8 million, recognizing an $8.1 million gain included in "Other income."
Guidance, Outlook, Risks, and Unusual Items
- Legislative Risk (FFELP Elimination): The President's FY 2010 budget proposal and subsequent Congressional budget resolution include a proposal to eliminate the FFEL Program for loans originated on or after July 1, 2010. This would significantly impact the company's ability to originate new FFELP loans, reduce interest revenue, and potentially impair goodwill and intangible assets related to these activities.
- Regulatory Review: The Department of Education issued a preliminary program review report on May 1, 2009, citing initial findings of noncompliance with prohibited inducement provisions. The company must provide an explanation within 30 days; final action could include fines or suspension of participation in FFELP.
- Restructuring Plan: On May 5, 2009, the company announced a new restructuring plan impacting approximately 300 associates. The estimated before-tax charge is $14 million to $16 million, consisting of severance, contract termination, and asset impairment costs.
- Liquidity and Credit Markets: The company faces ongoing challenges in the capital markets, including failed auctions for Auction Rate Securities (ARS) and reliance on the Department of Education's Participation Program for funding new originations. The unsecured line of credit availability is reduced due to the bankruptcy of Lehman Brothers Bank, a participating lender.
- Interest Rate Risk: The company is exposed to basis risk due to the mismatch between asset indices (Commercial Paper) and liability indices (LIBOR). Government intervention in commercial paper markets has distorted this relationship, negatively impacting net interest income in Q1 2009.
Investor Verification Checklist
- FFELP Legislation Status: Verify the final outcome of the proposed elimination of the FFEL Program and its specific impact on Nelnet's future origination volumes and asset valuations.
- DOE Review Outcome: Monitor the final determination letter from the Department of Education regarding the prohibited inducement review to assess potential fines or operational restrictions.
- Restructuring Execution: Track the actual costs and timeline of the May 2009 restructuring plan to ensure they align with the estimated $14-$16 million charge.
- Warehouse Facility Exit Strategy: Confirm the company's progress in removing loans from the FFELP warehouse facility via the Conduit Program or other financing to release the remaining equity funding support.
- Auction Rate Securities (ARS): Assess the company's strategy for managing the $1.9 billion in ARS currently in failed auction status and the associated interest cost risks.
- Non-Federally Insured Loans: Review the credit quality and delinquency trends of the non-federally insured loan portfolio, which carries a significantly higher allowance for loan losses (9.70%) compared to federally insured loans (0.11%).