UnitedHealth Group Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014; unaudited. UnitedHealth Group operates through UnitedHealthcare (coverage and benefits) and Optum (health services). Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $32,574 | $30,408 | $64,282 | $60,748 |
| Operating earnings | $2,552 | $2,401 | $4,606 | $4,540 |
| Net earnings attributable to common shareholders | $1,408 | $1,436 | $2,507 | $2,628 |
| Diluted EPS | $1.42 | $1.40 | $2.52 | $2.56 |
| Medical care ratio | 81.6% | 81.5% | 82.0% | 82.1% |
| Operating margin | 7.8% | 7.9% | 7.2% | 7.5% |
| Effective tax rate | 41.3% | 35.5% | 41.6% | 36.1% |
- Q2 revenue rose 7% year over year; six-month revenue rose 6%. Q2 operating earnings increased 6%, while six-month operating earnings rose 1%.
- Q2 common net earnings declined 2% and six-month common net earnings declined 5%. Diluted EPS increased 1% in Q2 but decreased 2% for the half year.
- Optum revenue increased 28% in Q2 and 29% for the first half, led by OptumRx. Optum operating earnings rose 23% in Q2 and 22% for the first half. UnitedHealthcare operating earnings were nearly flat in Q2 and down 5% for the first half.
- The Q2 medical care ratio was nearly unchanged; the first-half ratio improved 0.1 percentage point. ACA-related fees lowered the 2014 medical care ratio by about 100 basis points, while increasing the operating cost ratio by about 120 basis points and the effective tax rate by about 5 percentage points, according to management.
Cash flow, balance sheet and capital
- First-half operating cash flow was $2.422 billion, versus $2.527 billion a year earlier. Cash and cash equivalents ended June at $6.412 billion, down from $7.276 billion at year-end 2013. Management said $1.1 billion was available for general corporate use.
- At June 30, total assets were $85.466 billion, total liabilities $51.228 billion, and shareholders’ equity $32.935 billion. Current assets were $22.851 billion and current liabilities $30.776 billion.
- Commercial paper and current maturities of long-term debt totaled $2.117 billion; long-term debt, less current maturities, was $14.630 billion. The company reported $1.014 billion of commercial paper outstanding, no borrowings under its revolving credit facilities, and compliance with debt covenants. Its debt-to-debt-plus-equity ratio was 33.7%, below the 50% covenant ceiling.
- First-half cash uses included $1.937 billion of share repurchases, $642 million of dividends, $716 million of capital expenditures, and $523 million for acquisitions, net of cash assumed. The company repurchased 25 million shares at an average $76.91. In June, the quarterly dividend was raised to an annualized $1.50 per share.
Material changes and management commentary
- Growth in public and senior markets and pharmacy services supported revenue. UnitedHealthcare revenue grew 6% in Q2, while Employer & Individual revenue fell 4%; Community & State grew 29% and Medicare & Retirement grew 7%.
- UnitedHealthcare served 44.935 million medical members, approximately unchanged year over year. Commercial membership fell 4%; public and senior membership rose 11%, including Medicaid growth of 19%. Medicare Advantage membership increased 2% despite funding reductions.
- OptumRx revenue increased 42% in Q2 and 43% for the first half, reflecting growth in public and senior markets, pharmacy benefit business brought in-house, and external clients. Its operating earnings nearly doubled in Q2 and more than doubled for the first half.
- Favorable medical cost reserve development was $260 million for the first half of 2014, compared with $400 million in 2013; Q2 amounts were $40 million and $120 million, respectively. Management attributed 2014 development to multiple individually immaterial factors.
- The company realigned certain technology and business-processing activities into OptumInsight in January 2014; prior segment comparisons were recast.
Outlook, risks and contingencies
- No specific consolidated earnings guidance is stated in the provided filing text. Management estimated Medicare Advantage funding reductions and the Industry Tax would reduce full-year 2014 consolidated net earnings by approximately $1.3 billion before mitigation efforts.
- Management expected a roughly $1.3 billion 2014 share of the nondeductible health insurance Industry Tax, with first payment due in September 2014, and approximately $0.5 billion of deductible reinsurance contributions for 2014, payable in 2015. Pricing was expected to recover $1.4 billion to $1.6 billion of additional annual premiums in 2014.
- Management cited continued competitive commercial pricing, lower government payment rates, ACA fees and benefit requirements, rising provider and specialty-drug costs, and Medicare Advantage funding reductions. The company exited certain Medicare Advantage markets for 2014 that had served about 150,000 beneficiaries in 2013; further membership and margin effects remain possible.
- For 2015, management cited additional Medicare Advantage funding reductions and noted that quality bonuses would be paid only to plans rated four or five stars. It planned participation in as many as two dozen individual exchanges and 14 small-group exchanges in 2015.
- Legal contingencies include a California regulatory decision imposing an approximately $174 million fine, which the company challenged in court in July 2014, and an appealed Nevada verdict whose award was reduced to $366 million. The company said it could not reasonably estimate potential losses in these matters. It also disclosed ongoing government audits and reviews, including Medicare risk-adjustment data validation audits.
- Other cited risks include regulatory changes, medical-cost estimation, litigation and investigations, foreign exchange exposure, investment and interest-rate risk, cyber and privacy risks, and access to capital. The filing reported no material change to the risk factors in the 2013 Form 10-K.
Important facts for investors to verify
- Whether medical-cost trends, reserve development and specialty-drug spending support the reported medical care ratio and earnings trajectory.
- The realized effects of Medicare Advantage rate cuts, star ratings, membership changes and management’s cost and pricing responses.
- Actual ACA Industry Tax and reinsurance costs, premium recoveries, and resulting tax-rate and margin effects.
- Cash available for general corporate use versus regulated-subsidiary funds, and the pace of buybacks, dividends, acquisitions and debt repayment.
- Developments and potential financial exposure in the California fine, Nevada litigation and government audits; loss ranges are not clearly quantifiable in the filing.