UnitedHealth Group Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. UnitedHealth Group operates through UnitedHealthcare (health coverage and benefits) and Optum (pharmacy, health services, and technology businesses).
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $41,489 | $32,759 | $113,508 | $97,041 |
| Operating earnings | $3,018 | $2,903 | $8,553 | $7,509 |
| Net earnings attributable to common shareholders | $1,597 | $1,602 | $4,595 | $4,109 |
| Diluted EPS | $1.65 | $1.63 | $4.75 | $4.15 |
| Medical care ratio | 80.6% | 79.7% | 81.0% | 81.3% |
| Operating margin | 7.3% | 8.9% | 7.5% | 7.7% |
| Net earnings margin attributable to common shareholders | 3.8% | 4.9% | 4.0% | 4.2% |
- Q3 revenue increased 27%, while operating earnings rose 4%; common-shareholder net earnings were nearly flat and diluted EPS increased 1%. Nine-month revenue grew 17%, operating earnings 14%, and diluted EPS 14%.
- Q3 medical costs were $25.6 billion, up 11% year over year. Management attributed the higher quarterly medical care ratio to increased spending related to Medicare Star quality performance, a greater mix of government-sponsored benefits, and less favorable reserve development. The nine-month ratio was modestly lower than the prior-year period.
- Cash provided by operating activities was $6.229 billion for the nine months, up from $5.622 billion. Capital expenditures were $1.072 billion.
- At September 30, cash and cash equivalents were $7.983 billion; short- and long-term investments were $20.477 billion on the balance sheet. The company said $983 million of cash and cash equivalents was available for general corporate use.
- The debt table reported $31.647 billion of carrying value for commercial paper, term loan, and long-term debt, versus $17.256 billion at year-end 2014. Commercial paper outstanding was $2.986 billion, and no bank credit facilities were drawn. The company reported covenant compliance; its defined debt-to-debt-plus-equity ratio was approximately 47%, against a 50% limit.
Material changes versus prior comparable period
- Catamaran was acquired on July 23, 2015, for $14.3 billion in cash, including repayment of its debt and credit facility. The acquisition was primarily financed with new debt. It contributed $5.3 billion of revenue after closing and had an immaterial effect on net earnings for that period.
- Catamaran drove much of the sharp increase in OptumRx product revenue and Optum growth. Q3 Optum revenue increased 61% and operating earnings increased 32%; UnitedHealthcare revenue increased 9%, but its operating earnings declined 8%.
- Total assets rose to $108.272 billion from $86.382 billion at year-end 2014, principally reflecting the acquisition. Goodwill increased to $43.680 billion from $32.940 billion.
- Year-to-date financing included $11.982 billion of long-term debt proceeds and $2.665 billion of net commercial paper proceeds. Cash paid for acquisitions was $16.183 billion. Share repurchases declined to $1.130 billion from $3.024 billion in the prior-year period.
- Foreign currency translation losses were $1.859 billion for the nine months, contributing to a $1.955 billion other comprehensive loss.
Outlook, management commentary, and risks
- The filing provides no specific consolidated earnings or revenue guidance. Management expected moderated share repurchases for the remainder of 2015 due to the Catamaran acquisition.
- Management cited continued commercial pricing competition, government reimbursement pressure, rising medical and specialty-drug costs, and Medicare Advantage funding reductions phased through 2017. The 2016 CMS rate notice indicated an average industry funding increase of 125 basis points, but management said rates remained below medical cost growth.
- For Medicare Advantage quality bonuses, 39% of members were in plans rated at least four stars for the 2015 bonus year; management estimated approximately 56% and 63% for the 2016 and 2017 bonus years, respectively, based on current enrollment.
- The company paid its $1.8 billion 2015 Health Insurance Industry Tax in September; $450 million remained deferred in prepaid expenses at quarter-end.
- Material uncertainties include medical-cost estimation, regulatory and reimbursement changes, health insurance exchange performance, CMS audits and risk-adjustment reviews, privacy and cybersecurity, acquisition integration and goodwill valuation, foreign exchange exposure, litigation, and access to capital. The company reported negative outlooks from Moody’s, S&P, and Fitch for senior unsecured debt.
- In a California claims-processing matter, a state court invalidated certain regulations supporting a $174 million fine; the company said the potential loss could not be reasonably estimated. The company also could not estimate potential state guaranty-fund assessments related to Penn Treaty or losses from ongoing government investigations and audits.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its 2014 Form 10-K.
Most important facts for investors to verify
- How much of revenue, earnings, and future growth is attributable to Catamaran versus organic performance, and how integration affects OptumRx margins.
- Whether medical-cost trends, Medicare Star performance, reserve development, and pricing keep pace with benefit and reimbursement costs.
- Debt repayment plans and the effect of acquisition financing on leverage, ratings, interest expense, and available corporate liquidity.
- Actual cash available to the parent and regulated-subsidiary dividend capacity, given that only $983 million of cash was identified as available for general corporate use.
- Updates to the California fine, CMS audits, Penn Treaty assessments, and other legal or regulatory exposures for which the filing gives no clear estimated loss.
- Whether currency movements, particularly the Brazilian real, continue to affect reported equity and results.