Medtronic Swing to Loss in First Quarter After Covidien Deal — Update
Medtronic PLC reported a net loss of $1 million in its first combined quarter with Covidien, largely related to $ 880 million in charges for the Covidien acquisition and a $329 million expense from the resolution of a tax dispute with the Internal Revenue Service.
The medical-device maker said healthy product sales will help it record revenue growth of 4% to 6% for fiscal year 2016, excluding the expected negative impact of the strong U.S. dollar. It also forecast adjusted earnings per share in the range of $4.30 to $4.40.
The $43 billionCovidien acquisition closed in late January after drawing scrutiny over a tax-lowering tactic criticized by U.S. government officials. The acquisition involved Medtronic reincorporating from Minneapolis to Dublin, a so-called inversion deal that lowers the company’s tax burden.
The deal will help lower Medtronic’s global tax rate to a range of 16% to 18% in fiscal year 2016, from a previous rate of 18% to 20%, Chief Financial Officer Gary Ellis told analysts on a conference call Tuesday. That lower rate depends on Congress renewing a tax credit for companies that conduct research and development in the U.S., Mr. Ellis said, adding that he expects the tax perk to be renewed.
Reincorporating in Dublin allows Medtronic to use more of its overseas cash in the U.S. without incurring U.S. taxes. Chief Executive Omar Ishrak said Tuesday that Medtronic is using some of this money to acquire early-stage technologies in the U.S. As an example, he pointed to Medtronic’s acquisition in March of Sophono Inc. of Boulder, Colo., a privately held developer of hearing implants, for an undisclosed sum.
Mr. Ishrak said Medtronic will also look “opportunistically” at bigger deals.
For the fourth quarter ended April 24, Medtronic reported a net loss of $1 million, or less than one cent a share, down from a profit of $448 million, or 44 cents a share, a year ago. That result was hit by the $880 million in charges related to the Covidien acquisition, including the cost of laying off employees and writing down assets.
It was also hurt by the $329 million settlement Medtronic said it reached with the IRS to resolve a dispute tied to its 2008 acquisition of Kyphon, a spinal device maker. Medtronic acquired the company with cash repatriated from outside the U.S., but didn’t pay U.S. tax on that cash because it “didn’t believe it was taxable,” CFO Gary Ellis said. The IRS objected to this and hit Medtronic with a tax bill. Under the settlement, Medtronic is paying the IRS about $275 million plus interest, Mr. Ellis said.
Excluding one-time charges, earnings in the quarter were $1.68 billion, or $1.16 a share, helped by Medtronic’s newly lowered tax rate.
Largely due to the Covidien acquisition, revenue in the quarter grew 60% to $7.3 billion, from $4.57 billion a year earlier. On a comparable basis, which includes Covidien in the year-earlier results, revenue was roughly flat at $7.3 billion, hurt by the strong U.S. dollar. Stripping out negative currency impact, comparable revenue grew 7% in the quarter.
Revenue was helped by better-than-expected U.S. sales, which Mr. Ishrak said was partly due to an uptick in the number of hospital procedures. Sales were also strong in the company’s cardiac and vascular division, which markets pacemakers, heart valves and stents.
As it merges Covidien into its operations, Medtronic expects to achieve $350 million in cost synergies in fiscal year 2016, largely by eliminating redundant jobs and global office space, Mr. Ellis said. Later, Medtronic expects to achieve more savings by consolidating some manufacturing, he said. Over all, Medtronic has promised $850 million in synergies from the deal.
