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Oops! Bad tax advice costs Office Depot $80 million

4/1/2011

The $33 million profit Office Depot posted in 2010 turned into a $46 million loss late Thursday after the company released restated financial results that reflected an unfavorable tax ruling by the Internal Revenue Service.


Office Depot said it consulted with its tax advisor and determined it was entitled to carry back tax losses to prior years under economic stimulus-based tax legislation enacted in 2009. However, the IRS disagreed, and the result was the company had to reduce the full-year tax benefit contained in its 2010 financial statements to the tune of $80 million. That turned the one-cent-a-share loss the company reported last year into a per-share loss of 30 cents. Damage from the unfavorable ruling will extend to the current year as well with the company’s operating cash flow expected to be negatively impacted by the removal of a $63 million current tax receivable from the balance sheet for the fiscal year ended Dec. 25, 2010.


During a Friday morning conference call to discuss the issue, Office Depot CFO Mike Newman said he didn’t want to diminish the significance of the matter, but noted that, “this is just a tax issue,” that resulted from a misread of statutes. “I’m sick about it. It is my responsibility.”


While the restatement affects the company’s net profitability, Newman pointed out that operating results from 2010 were unaffected. That said, the company used the occasion of the financial restatement to preannounce weak first quarter results. Total company sales declined 3% compared with the prior year and same-store sales at the North American retail division declined 1%. North American Business Solutions sales also declined 3% and international division sales on a constant currency basis were down 5%.


“I know it looks ugly,” Newman said, but “I feel optimistic about the balance of the year. I’m still feeling like we are going to get growth year over year.”


If that proves to be the case it will likely be under the leadership of a new CEO as Office Depot has been operating under the leadership of interim CEO and board member Neil Austrian since last November. No mention was made on the conference call and none of the analysts who participated asked about the company’s search for a permanent CEO. However, it has been five months since former CEO Steve Odland left the company and Austrian stepped in for what at the time was expected to be a six-month search process.

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