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Medtronic to pony up funds in $525M IRS tax settlement

Settlement stems from Covidien's former parent company, Tyco
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Medtronic ($MDT) inherited Covidien's tax-friendly Irish domicile last year after the companies finalized their $50 billion merger. But the devicemaker also picked up a tax scuffle from Covidien's former parent company, and now, Medtronic is laying that battle to rest in the form of a $525 million settlement.

Tyco International, which spun off Covidien in 2007, is settling with the Internal Revenue Service (IRS) after a years-long skirmish with the agency. Medtronic will be responsible for paying 42% of the settlement, and TE Connectivity, a manufacturer of electronic components, will shell out 31%, or $475 million. Tyco will pay 27% of the settlement, or about $128 million to $142 million, Medtronic said in a regulatory filing.

The beef dates back to 2013, when the IRS accused Tyco of trying to get around U.S. income taxes for loans between its foreign-based businesses from 1997 to 2000, to the tune of $2.8 billion. The latest settlement would also apply to similar claims pending from the IRS from 2001 to 2007, Medtronic said in the filing.

Dublin-based Medtronic is confident that it can put the matter behind it, saying that it "does not expect to recognize any additional charges related to the tentative resolution," the company said in its filing. And Tyco is optimistic about a resolution, saying that it expects to pay its portion of the settlement within the next 6 months.

Analysts are also on board with the recent settlement. "This is a favorable deal. It reduces the uncertainty of getting this done," William Blair & Co. analyst Nicholas Heymann said, as quoted by The Wall Street Journal.

Medtronic CEO Omar Ishrak

Meanwhile, Medtronic is charging into 2016 with big plans for growth. CEO Omar Ishrak recently talked up a double-digit plan at the J.P. Morgan Healthcare Conference, luring investors with talk of sustained mid-single-digit revenue growth, $150 million in additional cost savings over three years and amped up dividend and share purchase plans. Returning cash to shareholders also remains on top of the company's to-do list, Ishrak said.

"We've built the company up in terms of revenue performance for sustained mid-single-digit performance, and that's got some variation across the different growth vectors. But essentially, the diversification that we have, which has been further enhanced by the acquisition of Covidien, is what's enabling us to deliver this kind of consistent performance," Ishrak said at the conference.

- here's Medtronic's 8-K filing
- read the WSJ story (sub. req.)

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