Medtronic (NYSE:MDT) CFO Gary Ellis told analysts during a conference call today that the recently closed $50 billion acquisition of Covidien frees up 25% more cash for the combined entity.
"About 35% of Medtronic legacy cash flow was in effect available and 65% was in effect unavailable for use in the U.S.," Ellis said during the call to discuss Medtronic’s fiscal 3rd-quarter results.
The Covidien deal, which gives Medtronic an Irish corporate domicile, means "basically about 60% of the combined company will have cash that is un-trapped and available going forward," Ellis said, noting that he expects the new Medtronic to throw off about $7 billion a year in free cash flow.
"Over time as you have more and more the cash flow being generated from in effect un-trapped subsidiaries or un-trapped parts of the organization, then your cash flow will start to improve from that 60% to, whether it 65%, 70%, 75%, over time," he added. "But that occurs as that basically product shift and you get cash coming from basically un-trapped locations. You can’t just make changes without making basically product shifts and making some decisions that really organizationally and operationally shift where the cash is being generated. And that’s what’s going to take time as you’ve heard as both organizations continue to grow and as we make investments in new product innovation going forward."
The Covidien acquisition, which closed Jan. 26, will take Medtronic’s tax rate on an earnings-per-share basis from the 18% to 19% range down to the 16% to 17% range, Ellis said.
"We’ll get more guidance as we get in to FY16, but those numbers right now are still what we would expect," he said. "That should start happening right away here in [fiscal] Q4."
Earlier today Medtronic shares jumped to a 52-week high after the company said profits grew 28.2% to $977 million, or 98¢ per share, on sales growth of 3.7% to $4.32 billion for the 3 months ended Jan. 23. Adjusted to exclude 1-time items, earnings per share were $1.01; on Wall Street, analysts were looking for adjusted EPS of 97¢ on sales of $4.25 billion for the quarter.
MDT shares closed at $78.07 each today, after reaching a high of $78.30 in heavy trading.
