LINCOLN, Neb., May 8, 2018 /PRNewswire/ -- Nelnet
(NYSE: NNI) today reported GAAP net income of $113.9 million, or $2.78 per share, for the first quarter of 2018,
compared with GAAP net income of $50.0
million, or $1.18 per share,
for the same period a year ago.
Net income, excluding derivative market value and foreign
currency transaction adjustments, was $68.3
million, or $1.67 per share,
for the first quarter of 2018, compared with $52.2 million, or $1.23 per share, for the same period in 2017. For
additional information on these non-GAAP metrics, including
reconciliations to GAAP net income, see "Non-GAAP Performance
Measures" below.
Several factors increased GAAP net income for the three months
ended March 31, 2018, as compared with the same period in
2017:
- The company's effective tax rate decreased to 24.0 percent from
36.5 percent due to the Tax Cuts and Jobs Act, effective
January 1, 2018;
- The contribution to net income from the acquisition of Great
Lakes on February 7, 2018;
- Gains recognized by the company from real estate and other
investment activities; and
- Larger gains due to changes in the fair values of derivative
instruments that do not qualify for hedge accounting.
These factors were partially offset by the increase in expenses
for the continued build-out of the company's ALLO fiber
communications network in Lincoln,
Nebraska.
"This quarter comes with mixed emotions. We mourned the passing
of one of our founders this last month," said Jeff Noordhoek, chief executive officer of
Nelnet. "Steve 'Butter' Butterfield was our current vice
chairman and served as co-CEO until 2007. He was a close friend and
mentor to us all. In his role as vice chairman and a major
shareholder, Steve would get excited when we reported
earnings. I can imagine that Butter is smiling from heaven
over this quarter's earnings."
Nelnet operates four primary business segments, earning interest
income on student loans in its Asset Generation and Management
segment, and fee-based revenue in its Loan Servicing and Systems,
Education Technology, Services, and Payment Processing (formally
known as Tuition Payment Processing and Campus Commerce), and
Communications segments.
Asset Generation and Management
For the first quarter of 2018, Nelnet reported net interest
income of $67.3 million, compared
with $76.9 million for the same
period a year ago. The company maintains an overall risk
management strategy that incorporates the use of derivative
instruments to reduce the economic effect of interest rate
volatility. Derivative settlements for each applicable period
should be evaluated with the company's net interest income.
The company recognized income from derivative settlements of
$6.8 million during the first quarter
of 2018, compared to an expense from derivative settlements of
$1.4 million for the same period in
2017.
The company's average balance of loans decreased to $21.9 billion for the first quarter of 2018,
compared with $24.8 billion for the
same period in 2017. Core loan spread increased to 1.29 percent for
the quarter ended March 31, 2018,
compared with 1.23 percent for the same period in 2017.
Year to date, through May 8, 2018,
the company has purchased $2.44
billion in federally insured student loans, including
$584.6 million during the three
months ended March 31, 2018.
Loan Servicing and Systems
On February 7, 2018, the company
completed its acquisition of Great Lakes Educational Loan Services,
Inc. (Great Lakes) from Great Lakes Higher Education Corporation.
The company paid $150.0 million in
cash for 100 percent of the stock of Great Lakes. Beginning
February 7, 2018, the operating
results of Great Lakes are included in the company's Loan Servicing
and Systems segment.
Revenue from the Loan Servicing and Systems segment was
$100.1 million for the first quarter
of 2018, including $43.5 million of
revenue contributed by Great Lakes, compared with $54.2 million for the same period in 2017. In
February 2018, Great Lakes recognized
revenue of $4.6 million ($3.5 million after tax, or $0.09 per share) in deconversion fees related to
a private education loan servicing customer leaving its servicing
platform.
As of March 31, 2018, the company
was servicing $470.8 billion in
government-owned, Federal Family Education Loan (FFEL) Program,
private education, and consumer loans, including $255.1 billion as a result of the acquisition of
Great Lakes.
Nelnet Servicing, LLC (Nelnet Servicing) and Great Lakes are two
of the organizations that have student loan servicing contracts
awarded by the U.S. Department of Education (Department) to provide
servicing for loans owned by the Department. As of March 31, 2018, Nelnet Servicing was servicing
$176.6 billion of student loans for
5.8 million borrowers under its contract, and Great Lakes was
servicing $242.1 billion of student
loans for 7.5 million borrowers under its contract. These contracts
are currently scheduled to expire on June
19, 2019.
On February 20, 2018, the
Department's Office of Federal Student Aid released information
regarding the new federal student loan servicing procurement
process. The contract solicitation process is divided into two
phases. The company responded to Phase One on April 17, 2018.
Education Technology, Services, and Payment
Processing
For the first quarter of 2018, revenue from the Education
Technology, Services, and Payment Processing segment was
$60.2 million, an increase of
$4.2 million, or 7 percent, from the
same period in 2017, which prior period revenues were restated,
without any impact on prior period net income, in connection with
the implementation of a new revenue recognition accounting standard
effective January 1, 2018. The
increase in revenue was primarily driven by growth in managed
tuition payment plans, campus commerce customer transactions and
payments volume, and new school customers.
This segment is subject to seasonal fluctuations. Based on
the timing of when revenue is recognized and when expenses are
incurred, revenue and operating margin are higher in the first
quarter as compared to the remainder of the year.
Communications
Revenue from ALLO Communications was $9.2
million for the first quarter of 2018, compared with
$5.1 million for the same period in
2017. The number of households served as of March 31, 2018, was 23,541, an increase of
13,017, or more than 100 percent, from the number of households
served as of March 31, 2017.
For the first quarter of 2018, ALLO recognized a net loss of
$7.0 million, compared with a net
loss of $2.8 million for the same
period in 2017. The company anticipates this operating segment will
be dilutive to consolidated earnings as it continues to build its
network in Lincoln, Nebraska and
other communities, due to large upfront capital expenditures and
associated depreciation and upfront customer acquisition costs.
ALLO's management uses earnings (loss) before interest, income
taxes, depreciation, and amortization (EBITDA) to eliminate certain
non-cash and non-operating items in order to consistently measure
performance from period to period. For the first quarter of 2018,
ALLO had negative EBITDA of $1.8
million, compared with negative EBITDA of $1.7 million for the same period in 2017. For
additional information on this non-GAAP metric, including a
reconciliation to ALLO's GAAP net loss, see "Non-GAAP Performance
Measures\" below.
ALLO incurred capital expenditures of $17.9 million in the first quarter of 2018. The
company currently anticipates total network expenditures for the
remainder of 2018 will be approximately $65
million; however, the amount of capital expenditures could
change based on customer demand for ALLO's services. The number of
residential households passed, which represents the estimated
number of single residence homes, apartments, and condominiums that
ALLO already serves, and those in which ALLO has the capacity to
connect to its network distribution system without further material
extensions to the transmission lines (but have not been connected),
increased to 84,475 as of March 31,
2018, compared with 71,426 as of December 31, 2017.
Other Income
Other income for the three months ended March 31, 2018 included unrealized gains of
$6.7 million ($5.1 million after tax, or $0.12 per share) related to the change in fair
value of certain equity securities, and a realized gain of
$1.7 million ($1.3 million after tax, or $0.03 per share) related to the sale of a real
estate investment.
Liquidity and Capital Activities
For the first quarter of 2018, the company generated
$58.0 million in net cash from
operating activities. In addition, as of March 31, 2018, the company had a total of
$151.4 million in cash and cash
equivalents and available-for-sale investments, consisting
primarily of student loan asset-backed securities. The company also
has a $350.0 million unsecured line
of credit that has a maturity date of December 12, 2021. As of March 31, 2018 and May 8,
2018, $150.0 million and
$190.0 million, respectively, were
outstanding on the line of credit and $200.0
million and $160.0 million,
respectively, were available for future use.
During the three months ended March 31,
2018, the company repurchased a total of 222,174 shares of
Class A common stock for $11.4
million ($51.39 per share).
The majority of these repurchases were made pursuant to a trading
plan adopted by the company in accordance with Rule 10b5-1 under
the Securities Exchange Act of 1934.
The company paid cash dividends of $6.5
million, or $0.16 per share,
during the first quarter of 2018.
The company intends to use its liquidity position to capitalize
on market opportunities, including: FFEL Program, private
education, and consumer loan acquisitions; strategic acquisitions
and investments; expansion of ALLO's communications network; and
capital management initiatives, including stock repurchases, debt
repurchases, and dividend distributions. The timing and size of
these opportunities will vary and will have a direct impact on the
company's cash and investment balances.
Board of Directors Declares Second Quarter Dividend
The Nelnet Board of Directors declared a second quarter cash
dividend on the company's outstanding shares of Class A common
stock and Class B common stock of $0.16 per share. The dividend will be paid on
June 15, 2018 to shareholders of
record at the close of business on June 1,
2018.
Non-GAAP Performance Measures
The company prepares its financial statements and presents its
financial results in accordance with GAAP. However, it also
provides additional non-GAAP financial information related to
specific items management believes to be important in the
evaluation of its operating results and performance. A
reconciliation of the company's GAAP net income to net income,
excluding derivative market value and foreign currency transaction
adjustments, and a discussion of why the company believes providing
this additional information is useful to investors, is provided
below.
|
Three months ended
March 31,
|
|
2018
|
|
2017
|
|
(dollars in
thousands, except share data)
|
GAAP net income
attributable to Nelnet, Inc.
|
$
|
113,925
|
|
|
50,026
|
|
Realized and
unrealized derivative market value adjustments
|
(60,033)
|
|
|
(1,238)
|
|
Unrealized foreign
currency transaction adjustments
|
—
|
|
|
4,690
|
|
Net tax
effect
|
14,408
|
|
|
(1,312)
|
|
Net income, excluding
derivative market value and foreign currency transaction
adjustments
|
$
|
68,300
|
|
|
52,166
|
|
|
|
|
|
Earnings per
share:
|
|
|
|
GAAP net income
attributable to Nelnet, Inc.
|
$
|
2.78
|
|
|
1.18
|
|
Realized and
unrealized derivative market value adjustments
|
(1.46)
|
|
|
(0.03)
|
|
Unrealized foreign
currency transaction adjustments
|
—
|
|
|
0.11
|
|
Net tax
effect
|
0.35
|
|
|
(0.03)
|
|
Net income, excluding
derivative market value and foreign currency transaction
adjustments
|
$
|
1.67
|
|
|
1.23
|
|
"Derivative market value and foreign currency transaction
adjustments" include (i) both the realized portion of gains and
losses (corresponding to variation margin received or paid on
derivative instruments that are settled daily at a central
clearinghouse) and the unrealized portion of gains and losses that
are caused by changes in fair values of derivatives that do not
qualify for "hedge treatment" under GAAP; and (ii) the unrealized
foreign currency transaction gains or losses caused by the
re-measurement of the company's Euro-denominated bonds to U.S.
dollars. In October 2017, the company
remarketed its Euro-denominated bonds to denominate those bonds in
U.S. dollars. "Derivative market value and foreign currency
transaction adjustments" does not include "derivative settlements"
that represent the cash paid or received during the current period
to settle with derivative instrument counterparties the economic
effect of the company's derivative instruments based on their
contractual terms. The tax effects in the preceding table are
calculated by multiplying the realized and unrealized derivative
market value adjustments and unrealized foreign currency
transaction adjustments by the applicable statutory income tax
rate.
The company believes these point-in-time estimates of asset and
liability values related to its derivative instruments and
Euro-denominated bonds that are or were subject to interest and
currency rate fluctuations are or were subject to volatility,
primarily due to timing and market factors beyond the control of
management, and affect the period-to-period comparability of the
results of operations. Accordingly, the company's management
utilizes operating results excluding these items for comparability
purposes when making decisions regarding the company's performance
and in presentations with credit rating agencies, lenders, and
investors. Consequently, the company reports this non-GAAP
information because the company believes that it provides
additional information regarding operational and performance
indicators that are closely assessed by management. There is no
comprehensive, authoritative guidance for the presentation of such
non-GAAP information, which is only meant to supplement GAAP
results by providing additional information that management
utilizes to assess performance.
A reconciliation of ALLO's GAAP net loss to earnings (loss)
before net interest expense, income taxes, depreciation, and
amortization (EBITDA), is provided below.
|
Three months ended
March 31,
|
|
2018
|
|
2017
|
|
(dollars in
thousands)
|
Net loss
|
$
|
(7,040)
|
|
|
(2,821)
|
|
Net interest
expense
|
2,508
|
|
|
711
|
|
Income tax
benefit
|
(2,223)
|
|
|
(1,730)
|
|
Depreciation and
amortization
|
4,921
|
|
|
2,135
|
|
Earnings (loss)
before interest, income taxes, depreciation, and amortization (EBITDA)
|
$
|
(1,834)
|
|
|
(1,705)
|
|
EBITDA is a supplemental non-GAAP performance measure that is
frequently used in capital-intensive industries such as
telecommunications. ALLO's management uses EBITDA to compare ALLO's
performance to that of its competitors and to eliminate certain
non-cash and non-operating items in order to consistently measure
performance from period to period. EBITDA excludes interest and
income taxes because these items are associated with a company's
particular capitalization and tax structures. EBITDA also excludes
depreciation and amortization expense because these non-cash
expenses primarily reflect the impact of historical capital
investments, as opposed to the cash impacts of capital expenditures
made in recent periods, which may be evaluated through cash flow
measures. The company reports EBITDA for ALLO because the company
believes that it provides useful additional information for
investors regarding a key metric used by management to assess
ALLO's performance. There are limitations to using EBITDA as a
performance measure, including the difficulty associated with
comparing companies that use similar performance measures whose
calculations may differ from ALLO's calculations. In addition,
EBITDA should not be considered a substitute for other measures of
financial performance, such as net income or any other performance
measures derived in accordance with GAAP.
Forward-Looking and Cautionary Statements
This press release contains forward-looking statements within
the meaning of federal securities laws. The words "anticipate,"
"continue," "expect," "future," "intend," "scheduled," "will," and
similar expressions, as well as statements in future tense, are
intended to identify forward-looking statements. These statements
are based on management's current expectations as of the date of
this release and are subject to known and unknown risks and
uncertainties that may cause actual results or performance to
differ materially from those expressed or implied by the
forward-looking statements. Such risks include, but are not limited
to: risks related to the company's student loan portfolio, such as
interest rate basis and repricing risk and changes in levels of
student loan repayment or default rates; the use of derivatives to
manage exposure to interest rate fluctuations; the uncertain nature
of the expected benefits from the acquisition of Great Lakes on
February 7, 2018 and the ability to
successfully integrate technology, shared services, and other
activities and successfully maintain and increase allocated volumes
of student loans serviced under existing and any future servicing
contracts with the Department; risks to the company related to the
Department's initiative to procure new contracts for federal
student loan servicing, including the risk that the company on a
post-Great Lakes acquisition basis may not be awarded a contract;
risks related to the development by the company and Great Lakes of
a new student loan servicing platform, including risks as to
whether the expected benefits from the new platform will be
realized; the uncertain nature of expected benefits from FFEL
Program, private education, and consumer loan purchases and
initiatives to purchase additional FFEL Program, private education,
and consumer loans; financing and liquidity risks, including risks
of changes in the securitization and other financing markets for
student loans; risks and uncertainties from changes in the
educational credit and services marketplace resulting from changes
in applicable laws, regulations, and government programs and
budgets, such as the expected decline over time in FFEL Program
loan interest income and fee-based revenues due to the
discontinuation of FFEL Program loan originations in 2010 and the
resulting initiatives by the company to adjust to a post-FFEL
Program environment; the uncertain nature of the expected benefits
from the acquisition of ALLO on December 31,
2015, and the ability to successfully integrate its
communications operations and successfully expand its fiber network
in existing service areas and additional communities and manage
related construction risks; risks and uncertainties related to
initiatives to pursue additional strategic investments and
acquisitions, including investments and acquisitions that are
intended to diversify the company both within and outside of its
historical core education-related businesses; and changes in
general economic and credit market conditions.
For more information, see the "Risk Factors" sections and other
cautionary discussions of risks and uncertainties included in
documents filed or furnished by the company with the Securities and
Exchange Commission, including the cautionary information about
forward-looking statements contained in the company's supplemental
financial information for the first quarter ended March 31, 2018. All forward-looking statements in
this release are as of the date of this release. Although the
company may voluntarily update or revise its forward-looking
statements from time to time to reflect actual results or changes
in the company's expectations, the company disclaims any commitment
to do so except as required by securities laws.
Consolidated
Statements of Income
|
(Dollars in
thousands, except share data)
|
(unaudited)
|
|
|
Three months
ended
|
|
March
31, 2018
|
|
December
31, 2017
|
|
March
31, 2017
|
Interest
income:
|
|
|
|
|
|
Loan
interest
|
$
|
197,723
|
|
|
193,556
|
|
|
181,207
|
|
Investment
interest
|
5,134
|
|
|
3,080
|
|
|
2,617
|
|
Total
interest income
|
202,857
|
|
|
196,636
|
|
|
183,824
|
|
Interest
expense:
|
|
|
|
|
|
Interest on bonds and
notes payable
|
135,550
|
|
|
123,401
|
|
|
106,899
|
|
Net
interest income
|
67,307
|
|
|
73,235
|
|
|
76,925
|
|
Less provision for
loan losses
|
4,000
|
|
|
3,750
|
|
|
1,000
|
|
Net
interest income after provision for loan losses
|
63,307
|
|
|
69,485
|
|
|
75,925
|
|
Other
income:
|
|
|
|
|
|
Loan servicing and
systems revenue
|
100,141
|
|
|
55,921
|
|
|
54,229
|
|
Education technology,
services, and payment processing revenue
|
60,221
|
|
|
43,326
|
|
|
56,024
|
|
Communications
revenue
|
9,189
|
|
|
8,122
|
|
|
5,106
|
|
Other
income
|
18,198
|
|
|
7,952
|
|
|
12,632
|
|
Gain (loss) from debt
repurchases, net
|
359
|
|
|
(2,635)
|
|
|
4,980
|
|
Derivative market
value and foreign currency transaction adjustments and derivative
settlements, net
|
66,799
|
|
|
7,014
|
|
|
(4,830)
|
|
Total
other income
|
254,907
|
|
|
119,700
|
|
|
128,141
|
|
Cost of
services:
|
|
|
|
|
|
Cost to
provide education technology, services, and payment processing
services
|
13,683
|
|
|
11,223
|
|
|
12,790
|
|
Cost to
provide communications services
|
3,717
|
|
|
3,160
|
|
|
1,954
|
|
Total
cost of services
|
17,400
|
|
|
14,383
|
|
|
14,744
|
|
Operating
expenses:
|
|
|
|
|
|
Salaries and
benefits
|
96,643
|
|
|
81,201
|
|
|
71,863
|
|
Depreciation and
amortization
|
18,457
|
|
|
11,854
|
|
|
8,598
|
|
Loan servicing
fees
|
3,136
|
|
|
3,064
|
|
|
6,025
|
|
Other
expenses
|
33,417
|
|
|
38,455
|
|
|
26,161
|
|
Total
operating expenses
|
151,653
|
|
|
134,574
|
|
|
112,647
|
|
Income
before income taxes
|
149,161
|
|
|
40,228
|
|
|
76,675
|
|
Income tax (expense)
benefit
|
(35,976)
|
|
|
5,486
|
|
|
(28,755)
|
|
Net income
|
113,185
|
|
|
45,714
|
|
|
47,920
|
|
Net loss
attributable to noncontrolling interests
|
740
|
|
|
2,386
|
|
|
2,106
|
|
Net income
attributable to Nelnet, Inc.
|
$
|
113,925
|
|
|
48,100
|
|
|
50,026
|
|
Earnings per common
share:
|
|
|
|
|
|
Net income
attributable to Nelnet, Inc. shareholders - basic and
diluted
|
$
|
2.78
|
|
|
1.17
|
|
|
1.18
|
|
Weighted average
common shares outstanding - basic and diluted
|
40,950,528
|
|
|
41,012,731
|
|
|
42,291,857
|
|
Condensed
Consolidated Balance Sheets
|
(Dollars in
thousands)
|
(unaudited)
|
|
|
As
of
|
|
As
of
|
|
As
of
|
|
March 31,
2018
|
|
December 31,
2017
|
|
March 31,
2017
|
Assets:
|
|
|
|
|
|
Loans receivable,
net
|
$
|
21,562,030
|
|
|
21,814,507
|
|
|
24,003,386
|
|
Cash, cash
equivalents, investments, and notes receivable
|
327,712
|
|
|
307,290
|
|
|
381,978
|
|
Restricted
cash
|
855,986
|
|
|
875,314
|
|
|
881,334
|
|
Goodwill and
intangible assets, net
|
265,648
|
|
|
177,186
|
|
|
192,746
|
|
Other
assets
|
887,026
|
|
|
790,138
|
|
|
681,776
|
|
Total
assets
|
$
|
23,898,402
|
|
|
23,964,435
|
|
|
26,141,220
|
|
Liabilities:
|
|
|
|
|
|
Bonds and notes
payable
|
$
|
21,227,349
|
|
|
21,356,573
|
|
|
23,594,516
|
|
Other
liabilities
|
425,827
|
|
|
442,475
|
|
|
419,037
|
|
Total
liabilities
|
21,653,176
|
|
|
21,799,048
|
|
|
24,013,553
|
|
Equity:
|
|
|
|
|
|
Total Nelnet, Inc.
shareholders' equity
|
2,235,753
|
|
|
2,149,529
|
|
|
2,108,187
|
|
Noncontrolling
interests
|
9,473
|
|
|
15,858
|
|
|
19,480
|
|
Total
equity
|
2,245,226
|
|
|
2,165,387
|
|
|
2,127,667
|
|
Total
liabilities and equity
|
$
|
23,898,402
|
|
|
23,964,435
|
|
|
26,141,220
|
|
(code #: nnif)
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SOURCE Nelnet