UnitedHealth Group Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; comparative periods ended June 30, 2015. Unaudited results. UnitedHealth Group operates UnitedHealthcare, providing health coverage and benefits, and Optum, providing pharmacy, health services and technology offerings.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $46.485bn | $36.263bn | $91.012bn | $72.019bn |
| Operating earnings | $3.203bn | $2.895bn | $6.163bn | $5.535bn |
| Net earnings attributable to common shareholders | $1.754bn | $1.585bn | $3.365bn | $2.998bn |
| Diluted EPS | $1.81 | $1.64 | $3.48 | $3.10 |
| Medical care ratio | 82.0% | 81.7% | 81.9% | 81.6% |
| Operating margin | 6.9% | 8.0% | 6.8% | 7.7% |
| Net earnings margin | 3.8% | 4.4% | 3.7% | 4.2% |
- Revenue increased 28% in Q2 and 26% in the first half; common-shareholder earnings rose 11% and 12%, respectively. Diluted EPS rose 10% and 12%.
- Revenue growth reflected the Catamaran acquisition, organic growth in people served, and growth across Optum. Optum revenue grew 52% in Q2, including 69% growth at OptumRx; UnitedHealthcare revenue grew 14%.
- Optum operating earnings rose 46% in Q2, while UnitedHealthcare operating earnings declined 4%. UnitedHealthcare’s operating margin fell to 5.2% from 6.1%; consolidated margin also declined, despite higher operating earnings.
- Management attributed pressure on medical costs to membership growth, medical cost trends and losses in ACA-compliant individual products. It cited changes in business mix, including Catamaran, as contributing to a lower operating cost ratio.
Cash flow, balance sheet and capital
- First-half operating cash flow was $4.001bn, versus $3.432bn. Investing activities used $6.413bn, principally reflecting net investment purchases and acquisitions; financing activities used $359m. Cash and equivalents decreased $2.706bn to $8.217bn.
- At June 30, cash and equivalents were $8.217bn, short-term investments $2.757bn and long-term investments $22.211bn. The company reported $32.7bn of cash, cash equivalents and available-for-sale investments, but only $500m of cash was identified as available for general corporate use.
- Total liabilities were $81.572bn. Commercial paper and current debt were $6.364bn and long-term debt was $26.834bn. The company issued $2.485bn of long-term debt and repaid $1.601bn during the first half.
- Debt covenant leverage was approximately 46%, below the 55% maximum; no amounts were drawn on $6bn of revolving credit facilities. Commercial paper’s weighted-average annual interest rate was 0.7%. Credit rating outlooks from Moody’s, S&P and Fitch were negative.
- First-half share repurchases were $980m; dividends paid were $1.071bn. The Board raised the annualized dividend rate to $2.50 per share in June. Authorization remained for repurchases of up to 53m additional shares.
Outlook, risks and unusual items
- The filing provides no quantified full-year earnings or EPS guidance. Management expected continued competition in commercial products and pressure from government funding; Medicaid growth but potential downward pressure on net margins; and ongoing medical-cost pressure, including specialty pharmacy costs.
- Final 2017 Medicare Advantage industry base rates increased approximately 0.85%, below the cited 3% forward medical cost trend. Management said this could pressure benefit design, pricing, growth and earnings. It expected at least 63% of Medicare Advantage members to be in plans rated four stars or higher for 2017 payment years, compared with approximately 57% for 2016.
- UnitedHealth participated in individual public exchanges in 34 states in 2016, recorded a premium deficiency reserve for expected remaining 2016 losses, and expected to participate in only a few exchanges in 2017. The company expected to pay its estimated $1.8bn share of the 2016 health insurance industry tax in September; a one-year moratorium applies to the 2017 tax.
- Material uncertainties include medical-cost estimates and reserve adequacy, regulatory and reimbursement changes, Medicare risk-adjustment audits, exchange performance, cybersecurity and privacy, acquisition integration, competition, foreign currency exposure, and access to capital.
- Legal and regulatory matters include a disputed California claims-processing penalty of approximately $174m, a DOJ review of risk-adjustment processes and CMS audits, and potential state guaranty-fund assessments related to Penn Treaty. The company said it could not reasonably estimate potential losses for these matters.
- Catamaran materially affected year-over-year comparisons, particularly OptumRx product revenue and cost of products sold. Management reported no material change to previously disclosed contractual obligations, no material change to 2015 Form 10-K risk factors, and effective disclosure controls as of June 30, 2016.
Important facts for investors to verify
- How much of reported revenue and earnings growth reflects Catamaran versus organic growth, and how integration and pharmacy mix affect margins.
- Whether ACA individual-market losses, medical trends and Medicare Advantage funding pressure persist, and how they affect UnitedHealthcare’s margin.
- The adequacy and development of medical-cost reserves, including the filing’s reserve-development disclosures and management’s comments on favorable development.
- Cash available for general corporate use, debt maturities and refinancing needs, and the effect of negative credit-rating outlooks.
- Potential outcomes and financial exposure from the California proceeding, risk-adjustment reviews and audits, and Penn Treaty assessments.