UnitedHealth: Options to Cut Past Earns

MINNEAPOLIS -- UnitedHealth Group Inc. said Tuesday that accounting for its stock option scandal will chop $400 million to $1.7 billion from its historical earnings, and it warned that the tax bill isn't known yet.

A company-sponsored report in October found that stock options were probably backdated over several years at the nation's second-largest health insurer. That forced out former Chairman and CEO William McGuire.

UnitedHealth has said it will have to restate its earnings back to 1994, and the numbers it released on Tuesday were its first attempt at quantifying that.

Accounting for the stock options would cut $400 million to $600 million off earnings for 1994 to 2005 under the method of accounting it uses now, and another $25 million to $60 million for this year, the company said. On the other hand, if it accounts for the older stock options the way it used to, the cost would balloon to $1.5 billion to $1.7 billion, it said. New accounting rules this year required UnitedHealth and other companies to treat stock options as an expense.

New chief executive Stephen J. Hemsley apologized again for the stock options mess.

"I can only say how deeply we regret the shortcomings in the administration of our stock option programs. How sincerely we apologize for the difficulty this has caused for so many. It was embarrassing and we regret it," he told analysts at a conference in New York that was Webcast.

UnitedHealth said it is asking the Securities and Exchange Commission to review the accounting, and will wait for a decision before it formally restates its results. Hemsley said he didn't know how long that would take.

The SEC may want to take its time, said Jack Ciesielski, who writes the industry newsletter The Analyst's Accounting Observer.

"Whatever they decide here is going to set a precedent for the other 99 cases that they are investigating," he said.

While settling the tax bill from the stock options mess might require the company to write a check, restating prior years' books doesn't cost the company anything today. But Ciesielski said investors shouldn't ignore the restatement.

"I don't think you can say 'Maybe the last 12 years don't count.' Because during those 12 years people did look at the performance and decide 'Hey, this is a good company to invest in.'"

Stephen Zaharuk, who tracks UnitedHealth for bond rating service Moody's Investors Service, said the change to historical earnings won't be nearly as big a deal as the amount that UnitedHealth has to pay out for lawsuits, fines, and penalties. He guessed the number will be significant.

"When it's cash, we'll get more excited about it," he said. "That's real money."

UnitedHealth also updated its guidance for 2006 and 2007. It said it would earn $4.14 billion to $4.16 billion for 2006 on revenue of $71.5 billion, though it didn't give an earnings-per-share figure. Analysts surveyed by Thomson Financial had been expecting earnings of $2.97 per share on revenue of $71.4 billion.

For the fourth quarter, it said it expects to earn $1.17 billion to $1.19 billion.

For 2007, UnitedHealth said it expects to earn $4.7 billion to $4.75 billion on revenue of about $79.5 billion. Analysts had expected earnings of $3.42 per share on revenue of $77.9 billion.

For the first quarter of 2007, UnitedHealth said it expects to earn $980 million to $1 billion.

UnitedHealth shares rose $1.93, or 3.8 percent, to close at $52.33 on the New York Stock Exchange.