Mar 6, 2007 4:28 am US/Central
UnitedHealth Profits Cut By Billions
Minneapolis (AP) ―
Insurer UnitedHealth Group lopped as much as $1.5 billion off its historical earnings as it finished its accounting for backdated stock options on Tuesday.
The restatement, which was in line with the company's earlier estimates, removed much of the uncertainty that has hung over the nation's second-largest health insurer over the past year. But other questions remained, including whether the Internal Revenue Service would agree with UnitedHealth about the tax bill, and whether it would owe penalties.
The company also faces a formal investigation by the Securities and Exchange Commission and a review by the U.S. Attorney for the Southern District of New York.
UnitedHealth Group Inc. said it will make cash payments for additional corporate income taxes of about $100 million, and will record a charge of $55 million, or 4 cents per share, in the first quarter of 2007 for a settlement relating to some employees who exercised options in 2006.
But there's no guarantee the tax agency will agree with UnitedHealth's accounting, said CRT Capital analyst Sheryl R. Skolnick, and "I have to think that they probably will assess fines and interest."
Still, she said investors had good reason to believe some of the worst was over.
"From a company operating perspective, I think most of the extremely disruptive issues are done," she said.
An external report paid for by UnitedHealth had already found that many of the stock options it issued during the 1990s were probably backdated -- giving the recipient an instant profit and creating the tax and accounting problems that the company is only now sorting out. On Tuesday the company acknowledged that it "used incorrect measurement dates and made other errors . . . in accounting for stock option grants."
The scandal led former Chairman and Chief Executive William McGuire to step down late last year. More than 200 companies have disclosed SEC, Department of Justice, or internal probes into stock options granting practices, according to an Associated Press review.
On Tuesday, UnitedHealth said correcting the stock options accounting would cut $1.53 billion off its earnings from 1994 to the end of 2005 under the method of accounting it used at that time. (After taxes, the cost would drop to $1.13 billion.) Under its current method of accounting, the options expense would hurt historical earnings by $502 million before taxes, or $414 million after taxes.
The restatement included after-tax charges of $238 million for 2005, $158 million for 2004, and $738 million for 2003 and prior years under the method of accounting the company used at the time.
The company said it would resume share repurchases. It had more than $1.9 billion in cash at the end of 2006 and it has board authorization to repurchase up to 137 million shares.
"Most investors will be relieved to see the company done with this," Bank of America analyst Joseph France said in a note to investors.
UnitedHealth shares rose $1.02, or nearly 1.9 percent, to close at $53.98 on the New York Stock Exchange. That brings them nearly back where they were before the options problems surfaced, after dipping as low as $42 in late May.
In the future, France wrote, "Success will be increasingly determined by sales to individuals and smaller groups, rather than the large groups that have been key to the company's growth in the past."
UnitedHealth held back on acquisitions during the past year. Skolnick said it wasn't necessarily by choice.
"The company never stopped being in the acquisition business, it's just that I don't know anyone who would have taken their stock as currency until the re-filing was done," she said.
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