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Date: Wednesday April 6, 2011 08:42:31 am
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    Office Depot Off; Explains Impact Of IRS Tax-Credit Denial
    NEW YORK -Office Depot Inc. (ODP) plunged after it announced the Internal Revenue Service denied tax credits it planned to take, and Chief Financial Officer Mike Newman said its free cash flow in the just-ended quarter was negative by $100 million.Office Depot stock was off 14.9% at $3.94 in recent Friday trading, and Newman said on a conference call to discuss the IRS denial and its 2011 outlook that the company’s market capitalization, currently about $1.1 billion, represents just what its Mexican and European operations are worth together and places no value on its U.S. business.

    For the full year, Office Depot still expects positive free cash flow, even with it no longer able to use $63 million more in tax credits it planned for the current year, thanks to a "considerable" special dividend Office Depot plans to extract from its Mexican unit. When it thought it could use this year’s tax credits, it planned for free cash flow of $50 million, he said."I’m sick about it," Newman said of the mistake the company and its advisors made in thinking Office Depot could use tax credits of $80 million last year and $63 million this year, calling the mistake his responsibility. Office Depot and its tax advisors believed the company was eligible to use prior losses to get tax credits under the American Recovery and Reinvestment Act of 2009, but the IRS told the company that other tax rules superseded the ones under which Office Depot was using to determine eligibility.

    Responding to a question, Newman said Office Depot in the past had considered a tie-up with smaller rival OfficeMax Inc. (OMX), but noted that for such a merger to happen, "it takes two to tango." Even if both companies were willing to merge, which might allow the pair to better challenge office-products behemoth Staples Inc. (SPLS), Newman said there are also potential antitrust hurdles to clear.Gross margin in the fiscal first quarter that ended last month fell slightly from the prior-year period he said, which he attributed to pricing pressures in paper products, printer ink and toner.

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