Medtronic Reports Net Loss, Hit with $330M IRS Bill

While the medtech behemoth's moved to Ireland could ultimately lower its tax bill, the company could owe the IRS over $1 billion in taxes stemming from its previous use of tax shelters.

Brian Buntz

Medtronic has seen better days. Despite solid revenue, the company is now reporting a net loss of $1 million in the first quarter following its merger with Covidien, which shifted its operating headquarters to Ireland.

The company was hit with a $329 million IRS bill related to its 2007 acquisition of Kyphon, a spinal device firm, for $4.2 billion. To acquire the firm, Medtronic partly used cash repatriated from overseas-- $3.3 billion worth--but neglected to pay tax on it because it didn't think it was taxable. The IRS disagreed and is charging the firm with a roughly $275 million with $54 million of added interest.

"[W]e used about $3.3 billion of OUS cash to do that transaction," explained Gary Ellis, chief financial officer in a transcript of the earnings call from Seeking Alpha. "What we've ended up agreeing with preliminary decision, the Board still has to approve this, but we agreed basically the settlement with the IRS where we ended up paying about $275 million to settle that and then interest on top of that gets you to the charge we took for the quarter overall."

In other tax-related news, Medtronic could also be on the hook for taxes based on transfers from various business dating back to 2005 and 2006.

Law360 has reported that Medtronic is resisting the IRS's request to the U.S. Tax Court to publicly open hundreds of documents related to a $561 million tax bill. IRS believes Medtronic owes it $958 million based on the firm's use of offshore tax shelters dating back a decade.

In addition, Medtronic's merger with Covidien is ending up being costlier than the $42.9 billion it had initially anticipated last summer. When the final deal was completed, it would cost Medtronic $49.9 billion. Then, there would be an additional $880 million in charges related to the acquisition this year.

As for the tax benefits of the Covidien deal, they will likely be felt next year, when the company's global tax rate dips to 16% to 18% in the 2016 fiscal year--the range is two points lower than it was before, according to Medtronic's CFO Gary Ellis told analysts.

The 16-18% range is partly based on Medtronic's hope that the U.S. Congress will renew a tax credit for companies that perform R&D domestically.

Medtronic's revenue in the 2015 fiscal year ticked up 6%, which was in line with the company's  the upper end of our mid single-digit baseline goal and represented a 230 basis point improvement from FY14.