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Medtronic defends tax inversion strategy

By Mark Basch, Contributing Writer

With the company facing a backlash over its strategy, Medtronic Inc. CEO Omar Ishrak last week defended its plan to merge with an Irish company and move its official headquarters overseas.

Minneapolis-based Medtronic in June announced a $42.9 billion merger with Dublin, Ireland-based Covidien PLC.

As part of the deal, Medtronic plans to keep its operational headquarters in Minneapolis but move its corporate headquarters to Ireland, allowing it to pay income taxes at the lower Irish rate than it currently pays in the U.S.

This strategy of re-incorporating a business in a lower tax-rate country is commonly known as a tax inversion, or corporate inversion.

Since Medtronic announced the deal, President Obama and other top government officials have publicly attacked inversion strategies and urged Congress to enact legislation to prevent U.S. corporations from taking advantage of them.

As Medtronic held its quarterly conference call last week, Ishrak took up the issue and said the company is not turning its back on America with its inversion.

“While there has been a lot of media and political noise about inversions, let me clarify that when the transaction closes, Medtronic will continue to pay significant U.S. taxes and increase our investments in the U.S.,” Ishrak said.

“We will continue to pay federal, state and local income taxes on all U.S. earnings as well as Social Security taxes, property taxes and the medical device tax,” he said.

He said this structure will put Medtronic on a more level playing field with foreign competitors and “allow us to invest much more aggressively in the U.S.,” which will create more U.S. jobs.

“We have a proven track record of creating U.S. jobs with our past acquisitions,” Ishrak said.

“In our view, acquiring Covidien is good for Medtronic, for our shareholders, for patients and for the med-tech industry and ultimately good for the U.S. economy,” he said.

Medtronic maintains the headquarters for its surgical technologies division in Jacksonville, where it employs about 700 people. The company has not said how the merger of the two medical device manufacturers will impact the Jacksonville operations.

Obama’s campaign against inversions is not specifically targeted at Medtronic but against a growing trend.

According to a recent Washington Post article, there were three inversions by U.S. companies in 2011 but already this year, 10 companies have undertaken inversion plans.

Ishrak said Medtronic is committed to completing the Covidien deal by early 2015 and it is not making any changes to the merger agreement because of the threat of new laws.

“We can only plan a deal structure based on facts and what the current regulations and law are,” he said.” If those things change before the close then we’ll have to take a look at what those changes reflect and see what we can do to structure a new contract of some sort.”

Analysts have said that beyond the tax strategies, the merger makes sound strategic sense for Medtronic, and Ishrak agrees.

“In all cases the strategic benefits do not go away and are clearly not affected by any legislative or regulatory changes,” he said.

Medtronic reported adjusted earnings of 93 cents a share for the first quarter ended July 25, up 5 cents from the previous year.

Total revenue for the company grew by 5 percent to $4.3 billion, and revenue in the Jacksonville-based surgical technologies division rose 6 percent to $381 million.

Health care costs hurt Stein Mart earnings

Stein Mart Inc. last week reported adjusted second-quarter earnings of 6 cents a share, down from 10 cents a share the previous year and 2 cents lower than the average forecast of analysts surveyed by Thomson Financial.

The Jacksonville-based fashion retailer said in a news release that earnings were impacted by higher health costs “due to unusually unfavorable claims experience” and higher pre-opening costs for new stores. Those two items reduced earnings by 4 cents a share.

In the company’s conference call with analysts, CEO Jay Stein also said sales growth in the quarter was not as strong as he would have liked.

“This retail environment has been very promotional lately. While some have successfully driven incremental sales, most have sacrificed their margins. As a value retailer and everyday low- price retailer, we will not participate in extreme promotions to drive sales,” Stein said.

“We believe that our best long-term approach is to continue executing our current growth strategy,” he said.

Stein Mart’s stock fell 78 cents to $12.88 Thursday after the earnings report, but Avondale Partners analyst Mark Montagna said the lower earnings were “explainable” because of the additional health costs.

“Second-quarter results disappointed, but we remain buyers, especially on today’s weakness,” Montagna said in a research note.

Latitude 360 files first financial report after going public

Latitude 360 Inc. generated nearly $1.4 million in sales from its three restaurant and entertainment venues in June, according to its first financial report since becoming a public company.

The Jacksonville-based company merged with a publiclytraded company called Kingdom Koncrete Inc. at the end of May and changed its name to Latitude

360.

It currently operates venues in Jacksonville, Pittsburgh and Indianapolis, and continues to own the small concrete business as a subsidiary.

In a quarterly report filed last week with the Securities and Exchange Commission, Latitude 360 reported net sales of $1.43 million for the second quarter and said that only included results for the three venues from May 30, when the merger was completed, through June 30.

The concrete business contributed just $43,000 in revenue for the full quarter.

Latitude 360 has announced plans to open two more venues in Albany, N.Y., and a Minneapolis suburb in the coming months. It hopes to have 12 venues operating by the end of 2016.

Retirement leads to St. Joe downgrade

The only analysts following The St. Joe Co. downgraded the real estate developer last week from “outperform” to “market perform” after the unexpected retirement of CEO Park Brady.

“In our view, this new development materially reduces the likelihood of a potential shareholder capital distribution

plan being announced anytime soon,” Raymond James & Associates analysts Buck Horne and Paul Puryear said in a research note.

After selling off its RiverTown development in St. Johns County and a large timberland sale in the Florida Panhandle, St. Joe is sitting on a pile of cash.

“Without definitive CEO leadership, maintaining St. Joe’s fortress balance sheet is the one axe it can still wield to demonstrate its long-term commitment to Northwest Florida residents,” the analysts said.

“However, with St. Joe shares trading 23 percent above our revised $18.54/share net asset value and now lacking a near-term catalyst to drive a short-squeeze, we believe a neutral rating is appropriate,” they said.

St. Joe, which moved its headquarters from Jacksonville to WaterSound in the Florida Panhandle in 2010, currently owns 182,000 acres of land for development located mainly between Tallahassee and Destin. Much of that land is targeted for a massive 110,500-acre retirement community planned in Bay and Walton counties.

The company announced Brady’s retirement Aug. 14 and said it is searching for a permanent replacement.

“St. Joe has very successfully moved past the point of needing to ‘stop the bleeding’ under Mr. Brady’s leadership. Nevertheless, the timing of Mr. Brady’s announcement did surprise us (though he will remain in a consultant role for up to three years), given the progress being made to advance approval of the new Bay-Walton Sector Plan,” Horne and Puryear said.

“Ultimately, a new executive with deeper expertise in complex master-planned communities could prove to be a net positive. But in the interim, we think a cloud of uncertainty has been created — which may cause local officials involved in the plan’s approval to slow their urgency until the CEO role is filled,” the analysts said.

ParkerVision adds Samsung to infringement lawsuit

ParkerVision Inc. has added another big-name technology manufacturer to its latest patent infringement lawsuit.

The Jacksonville-based company said Thursday that it added affiliates of Samsung Electronics Co. Ltd. to a lawsuit filed in May which alleges that several large manufacturers have been illegally using ParkerVision’s wireless technology.

Qualcomm Inc. and HTC Corp. were already named as defendants in that lawsuit, which is separate from another lawsuit against Qualcomm filed in 2011 which is currently heading to an appellate court.

“Since the original complaint was filed in this case, our team has continued to identify infringing products and evaluate our patent claims, resulting in the addition of Samsung and additional ParkerVision patents to this case,” CEO Jeff Parker said in a news release.

Jacksonville loses bragging rights with Winn-Dixie withdrawal

One consequence of Winn-Dixie’s parent company calling off plans for an initial public offering: It deprives Jacksonville of the bragging rights of having a fourth Fortune 500 company.

Jacksonville is home to three Fortune 500 companies: CSX Corp., which ranked No. 231 on this year’s list after reporting $12 billion in 2013 revenue; Fidelity National Financial Inc., which ranked No. 316th with $8.6 billion in revenue; and Fidelity National Information Systems Inc., ranked No. 426th with $6.1 billion.

Winn-Dixie’s parent company, which filed for an IPO last year under the name Southeastern Grocers Inc., reported $7.7 billion in revenue in the first nine months of the year in its last IPO filing, so its total revenue for the full year would have been well above $10 billion. That would have put the Jacksonville-based company among the 300 largest U.S. companies in Fortune’s annual list.

However, Southeastern Grocers never filed official year-end numbers and last week, it officially filed a withdrawal of its IPO registration.

So we won’t be seeing any more revenue figures from the company any time soon.

Fortune magazine says that to be included in the list of 500 largest, a company has to file a financial statement with a government entity.

Even though the parent of Winn-Dixie is undoubtedly one of the 500 largest in terms of revenue, it won’t be included on the Fortune 500 list.

mbasch@baileypub.com

(904) 356-2466

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