Nelnet, Inc. Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2017, compared with the same periods in 2016. The filing was dated August 7, 2017. Nelnet provides student-loan servicing, tuition payment and campus-commerce services, communications services through Allo, and student-loan asset management.
Key Financial Metrics
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Total interest income | $193.1 million | $186.3 million | $376.9 million | $378.3 million |
| Net interest income after provision | $77.8 million | $90.2 million | $153.8 million | $189.3 million |
| Total other income | $81.9 million | $58.4 million | $197.6 million | $143.3 million |
| Income before taxes | $40.7 million | $41.2 million | $117.4 million | $113.7 million |
| Net income attributable to Nelnet | $28.7 million | $26.2 million | $78.8 million | $74.1 million |
| Basic and diluted EPS | $0.68 | $0.61 | $1.86 | $1.73 |
| Operating cash flow | Not separately reported | Not separately reported | $132.1 million | $175.2 million |
GAAP net income attributable to Nelnet increased 9.9% in the quarter and 6.3% year to date. The implied net margin attributable to Nelnet was approximately 11.3% in the quarter and 13.7% year to date based on reported net income and total reported income components; the filing does not present a consolidated revenue line directly comparable to these calculations.
Balance Sheet, Debt, and Liquidity
- Total assets were $25.3 billion at June 30, 2017, down from $27.2 billion at December 31, 2016.
- Student loans receivable were $23.2 billion, compared with $24.9 billion at year-end 2016. The portfolio is expected to amortize over approximately 25 years.
- Bonds and notes payable were $22.8 billion, down from $24.7 billion at year-end 2016. Substantially all debt is variable rate; reported debt carrying amounts include $400.0 million of discounts and issuance costs.
- Cash and cash equivalents were $69.2 million, and available-for-sale investments had a fair value of $117.2 million.
- The $350.0 million unsecured line of credit was undrawn and fully available through December 12, 2021.
- FFELP warehouse facilities had $1.1 billion outstanding, $341.6 million available, and $45.4 million advanced as equity support.
- Net cash used in financing activities was $2.0 billion, primarily reflecting $2.5 billion of debt repayments, partly offset by $612.3 million of new debt issuance. Investing activities provided $1.8 billion, primarily from student-loan repayments and a decrease in restricted cash.
- Total equity was $2.1 billion at June 30, 2017, compared with $2.1 billion at December 31, 2016.
Material Changes Versus the Prior Comparable Period
- Net interest income after provision declined 13.7% in the second quarter and 18.8% for the first six months, primarily because of higher funding costs, portfolio runoff, and lower fixed-rate floor income.
- Fixed-rate floor income, net of derivative settlements, declined to $29.8 million from $39.5 million in the quarter and to $61.8 million from $80.1 million year to date, reflecting higher interest rates.
- Core student-loan spread decreased to 1.27% from 1.29% in the quarter and to 1.25% from 1.32% year to date.
- Fee-based revenues increased: Loan Systems and Servicing revenue rose to $56.9 million from $54.4 million in the quarter, and Tuition Payment Processing and Campus Commerce revenue rose to $34.2 million from $30.5 million.
- Allo Communications revenue increased to $5.7 million from $4.5 million in the quarter, but its net loss widened to $3.6 million from $0.7 million. Six-month capital expenditures were $49.0 million versus $12.0 million in 2016.
- Operating expenses increased to $119.0 million from $107.4 million in the quarter and to $234.0 million from $218.9 million year to date, driven mainly by salaries, GreatNet-related programming, servicing growth, and Allo network expansion.
- Derivative market value and foreign-currency adjustments remained a significant earnings item, producing a net expense of $27.9 million in the quarter and $32.7 million year to date, compared with expenses of $40.7 million and $69.4 million, respectively, in 2016.
- Management’s non-GAAP net income excluding derivative market value and foreign-currency adjustments declined to $45.8 million from $48.0 million in the quarter and to $98.0 million from $109.7 million year to date.
Outlook, Risks, and Unusual Items
- Management expects Allo to remain dilutive to consolidated earnings for the next several years because of network construction, depreciation, and customer-acquisition costs. Allo’s 2017 network capital-expenditure estimate was approximately $80 million, subject to customer demand.
- The Department of Education servicing contract, which generated $39.8 million of revenue in the quarter and $78.8 million year to date, was scheduled to expire June 16, 2019. The Department subsequently canceled its procurement process on August 1, 2017 and indicated that a new approach may involve separate contracts for database housing, system processing, and customer account servicing.
- GreatNet, Nelnet’s 50%-owned joint venture with Great Lakes, incurred operating costs and losses during 2017. GreatNet’s response to the revised procurement process was submitted July 7, 2017; the ultimate contract outcome remained uncertain.
- Nelnet completed a $535.0 million asset-backed securitization on May 24, 2017. A further $399.4 million securitization was completed July 26, 2017, after the reporting date, primarily to refinance warehouse-funded student loans.
- Nelnet repurchased $29.7 million principal amount of Hybrid Securities for $25.3 million in the first quarter, recognizing a $4.4 million gain. Hybrid Securities outstanding at June 30, 2017 totaled $20.5 million.
- Net stock repurchases totaled 415,777 Class A shares for $18.2 million during the first six months. From July 1 through August 7, 2017, the company repurchased an additional 376,703 shares for $18.1 million.
- The company paid $0.14 per share in the second quarter and declared a $0.14 per share third-quarter dividend. Dividend and repurchase capacity is subject to debt covenants and Hybrid Securities provisions.
- Principal risks include student-loan runoff and credit performance, interest-rate and basis risk, derivative collateral requirements, securitization and warehouse-market access, regulatory and government-program changes, cybersecurity, the Department of Education contract, Allo execution and construction risks, and litigation or compliance costs.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing reported no material changes to previously disclosed legal proceedings or risk factors.
Investor Verification Checklist
- Verify the replacement structure and award status of the Department of Education servicing contracts following the August 1, 2017 cancellation.
- Assess the sustainability of fixed-rate floor income and core student-loan spreads under higher interest rates.
- Review the timing, terms, and refinancing capacity of the $1.1 billion in warehouse debt and the broader $22.8 billion debt portfolio.
- Monitor Allo’s network buildout, approximately $80 million 2017 capital-expenditure plan, customer additions, and continued operating losses.
- Reconcile GAAP earnings with management’s non-GAAP results excluding derivative and foreign-currency adjustments.
- Evaluate projected $2.0 billion of future securitization cash flows, including sensitivity to prepayment rates, basis spreads, defaults, and interest rates.
- Review the impact of continued stock repurchases, dividends, strategic investments, and related-party transactions on liquidity and capital allocation.