UnitedHealth: Problem options could cut $660M from past earnings

UnitedHealth Group CEO Bill McGuire
Dr. Bill McGuire, former chairman and CEO of UnitedHealth Group.
MPR Photo/Jeff Horwich

UnitedHealth CEO Stephen Hemsley told analysts attending an investment conference that the company is well on its way to correcting the numbers after identifying backdated options awarded to McGuire and other executives. And Hemsley forecast strong earnings ahead for UnitedHealth.

Wall Street responded by sending UnitedHealth's stock up about four percent. The earnings adjustment covers 1994 to 2005. During that time, UnitedHealth earned nearly $14 billion. That figure may be reduced by up to $1.7 billion under the accounting rules the company used during that period. Under UnitedHealth's current rules, the hit to profits would be much smaller -- up to $660 million.

But either way the reduction will be in the form of a non-cash charge, the company says. Essentially, it's a bookkeeping adjustment, as far as Wall Street is concerned.

Meanwhile, UnitedHealth forecasts that its profit next year will rise more than 13 percent to $4.7 billion

Analyst Dave Heupel at Thrivent Financial for Lutherans says Wall Street believes UnitedHealth is definitely putting the options issue in its past.

"The simple explanation is Wall Street just doesn't care about that anymore," says Heupel. "What they wanted and needed to hear was a return to the operations and the focus on the ability of this company to grow earnings and sales for the next year and years to come. And they got that."

University of Minnesota business professor Alfred Marcus says Wall Street just doesn't see the non-cash charge to past earnings as a significant factor for UnitedHealth.

"It's old money. Ho-Hum. That's probably the Street's reaction to it. It's not their future earnings stream . It doesn't really affect their future earnings stream in a serious way," he said.

UnitedHealth has asked the Securities and Exchange Commission to review its accounting for stock options before it finishes restating its earnings. Its eventual restatement could change.

And there could well be more painful hits down the road. The company faces investigations by securities regulators, federal prosecutors and the IRS, as well as a slew of lawsuits. They could result in fines, and payouts involving actual cash -- and lots of it.

Former UnitedHealth Chief Executive Officer William McGuire resigned last month. A company investigation found he may have backdated stock options worth hundreds of millions of dollars. Backdating allows a buyer to purchase a stock for a past, lower price. Backdating is not illegal. But it must be disclosed.

At Tuesday's meeting, UnitedHealth's new CEO, Stephen Hemsley, apologized to investors again for the stock-option mess.

"I can only say how deeply we regret the shortcomings in the administration of our stock option programs," he said.

Nearly 200 companies are being investigated for possible abuses in the award of stock options. Some 70 executives have have left their jobs as a result of the probes.

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