UnitedHealth Group Inc. — Q1 2015 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2015, compared with Q1 2014. UnitedHealth Group operates UnitedHealthcare, which provides health coverage and benefits services, and Optum, which provides health services and technology-enabled services.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $35.756 billion | $31.708 billion | +13% |
| Operating earnings | $2.640 billion | $2.054 billion | +29% |
| Net earnings | $1.413 billion | $1.099 billion | +29% |
| Diluted EPS | $1.46 | $1.10 | +33% |
| Operating cash flow | $2.269 billion | $1.408 billion | +61% |
| Medical care ratio | 81.1% | 82.5% | Down 1.4 percentage points |
| Operating margin | 7.4% | 6.5% | Up 0.9 percentage points |
| Net earnings margin | 4.0% | 3.5% | Up 0.5 percentage points |
Premium revenue was $31.674 billion, up 13%; services revenue was $2.706 billion, up 13%; and product revenue was $1.230 billion, up 23%. Investment and other income declined 24% to $146 million. The effective tax rate increased to 43.3% from 42.0%.
Segments. UnitedHealthcare revenue was $32.623 billion (+12%) and operating earnings were $1.898 billion (+35%). Optum revenue was $12.815 billion (+15%) and operating earnings were $742 million (+14%). OptumHealth revenue grew 27%, while its operating margin declined to 7.1% from 8.2%, reflecting investments supporting future growth. Catamaran-related transaction costs of $42 million partially offset OptumRx growth.
Financial position and liquidity
At March 31, 2015, total assets were $89.719 billion and shareholders’ equity was $31.878 billion. Cash and cash equivalents were $8.650 billion, short-term investments $1.780 billion, and long-term investments $19.416 billion. The company reported $29.3 billion in cash, cash equivalents and available-for-sale investments; it stated that $574 million of cash and cash equivalents was available for general corporate use.
Balance-sheet commercial paper and current maturities of long-term debt totaled $2.797 billion; long-term debt, less current maturities, was $15.577 billion. The company reported $1.515 billion of commercial paper outstanding and $18.246 billion of commercial paper and long-term debt carrying value in its debt note. Its debt-to-debt-plus-equity ratio was 36.6%, below the 50% covenant limit; it was in compliance with debt covenants. No amounts were outstanding under its existing revolving credit facilities.
Operating cash flow was $2.269 billion; investing activities used $1.525 billion and financing activities provided $496 million. Cash increased $1.155 billion to $8.650 billion. The company repurchased $896 million of shares and paid $357 million in dividends. The quarterly dividend declared was $0.375 per share.
Changes, outlook, and management commentary
- Revenue and earnings growth reflected increased enrollment across benefits businesses and growth across Optum. Medical costs rose 11%, slower than the 13% increase in premiums; management attributed the improved medical care ratio partly to premium increases covering the 2015 health insurance industry tax and medical cost management.
- Domestic UnitedHealthcare medical enrollment increased by 1.595 million year over year, particularly in Medicaid, Medicare Advantage and Medicare Supplement. International medical enrollment declined 11%, primarily due to pricing and underwriting discipline in Brazil.
- The filing provides no specific consolidated full-year earnings or revenue guidance. Management described continued competitive and government-rate pressures. Medicare Advantage funding reductions continue through 2017; CMS’s April 2015 2016 rate notice indicated an average industry funding increase of 1.25%, which management said still trails medical cost growth. In 2015, 37% of the company’s Medicare Advantage members were enrolled in plans rated four stars or higher.
- The company participated in 23 individual and 12 small-group public exchanges in 2015. Management cited competition, medical-cost trends, exchange business mix, regulation, and the health insurance industry tax as factors that could affect results. The company expected its share of the 2015 industry tax to be $1.8 billion; at quarter-end it recorded a $1.8 billion related liability and $1.4 billion deferred cost asset.
- In March, the company agreed to acquire Catamaran for $12.8 billion in cash and assume its debt, net of acquired cash. Closing was expected in Q4 2015, subject to shareholder, regulatory and other approvals. The company planned to use existing cash and new debt and expected moderated share repurchases for the rest of 2015. It entered into additional financing arrangements on May 1, 2015; none had been drawn as of that date.
Risks, contingencies, and unusual items
- Foreign currency translation losses of $959 million contributed to other comprehensive loss of $893 million; comprehensive income was $520 million versus $1.434 billion in Q1 2014. Management attributed the foreign exchange exposure primarily to the Brazilian real.
- Favorable medical cost reserve development was $140 million, compared with $220 million in Q1 2014.
- A California insurance regulator imposed an approximately $174 million fine over claims-processing matters. The company challenged the decision and said it could not reasonably estimate the potential loss range.
- The company faces government audits and reviews, including Medicare risk-adjustment data validation reviews; it could not reasonably estimate potential losses for material investigations and reviews. A proposed Penn Treaty rehabilitation plan could result in state guaranty fund assessments, but the company could not estimate any loss range.
- Other identified risks include changes in Medicare and Medicaid payments and regulation, medical-cost estimation, litigation, cybersecurity and privacy, credit-rating downgrades, investment performance, foreign exchange, and completing or realizing anticipated benefits from acquisitions. The filing reported no material changes to the risk factors in the 2014 Form 10-K.
Most important facts for investors to verify
- Whether enrollment and pricing growth continue to support revenue and whether medical costs remain controlled, particularly in Medicare Advantage, Medicaid and exchange markets.
- The impact of Medicare Advantage payment rates, plan star ratings, health insurance industry taxes and premium stabilization programs on future margins and cash flows.
- Catamaran closing conditions, final funding and debt impact, integration risks, and whether expected strategic benefits offset transaction and integration costs.
- Potential outcomes of the California fine, CMS audits and other investigations, and possible Penn Treaty-related guaranty fund assessments.
- Cash availability and regulated-subsidiary dividend capacity, alongside the company’s plans for debt, dividends and share repurchases.