Survey: Industry Profits Decline Slightly
by Stuart Margolis, of Margolis Partners; and Ed Gleeson, of Printing Industries of America
According to the 2014 Ratios survey (the 2013 fiscal year end results), the participating printing companies produced a profit of 2.6 percent on sales before taxes, a minor – yet telling – decrease in profits over the previous year.
The variance (or spread) between the Profit Leaders and All Printers groups increased during the most recent recession, then diminished in the years immediately following the recessionary period.
Printers with sales greater than $18 million averaged an overall return on sales of 13.1 percent (a large increase from last year), and the printers with sales under $3 million followed with 12.0 percent.
The difference in major cost items as a percent of sales for commercial printers vs. trade binders/finishers is illustrated.
Of the 10 printing product specialties covered in the survey, the top profit producing segment was Quick Printers.
The results are in from the 2014 Ratios, Printing Industries of Americas Financial Benchmarking Survey for the graphic arts industry. The report presents results from the 2013 fiscal year financial information.
The recession resulted in three years of consecutive declines in profits (2007-09) for the industry. The 2010 fiscal year was the first full recovery year, with print markets continuing for three consecutive increases through 2012, resulting in a profit of 2.7 percent on sales before taxes. As reported in this 2014 Ratios survey (the 2013 fiscal year end results), the participating printing companies produced a profit of 2.6 percent on sales before taxes, a minor – yet telling – decrease in profits over the previous year (Graph 1).
This years slight decrease terminates the previous three years upward trend.
The calculated trailing 12-year average profit for all printers is 2.0 percent, up from lasts year average of 1.8 percent, indicating this years profit is well past the average. The 2007-09 recession and the previous recovery period from the 2000-01 recession contributed significantly to a low 12-year industry profitability average. Notably, industry profitability hovered above three percent when averaged for the prior 91 years in which these surveys have been compiled.
Separating the Profit Leaders
Just when the printing industry business leaders were predicting a continued return from the recession lows, industry profits stalled. The industry produced approximately $2.2 billion in total profits over the course of the 2013 fiscal year, which is the same dollar profit amount from the prior year.
The number of printers who reported losses in the current year was 30 percent of those participating in the Ratio Study, up significantly from 2012s 19 percent but down from the 33, 38 and 55 percent who reported losses in 2011, 2010 and 2009, respectively.
The industrys profit leaders, those printers in the top 25 percent of profitability, saw their profits rise over the year, increasing 0.4 percent from the previous year to 10.3 percent. Their performance for the last three years (10.3, 9.9 and 9.6 percent, respectively) is above this elite groups average of 9.4 percent over the last 12 years.
Graph 2 is a measure of the variance between “All Printers” performance and “Profit Leaders” performance, including its 12-year average. Note that All Printers include the Profit Leaders or, to say it another way, the Profit Leaders are a subset of the All Printers industry-wide set. It is interesting that the variance (or spread) between the Profit Leaders and All Printers groups increased during the most recent recession, then diminished in the years immediately following the recessionary period.
A conclusion one might reach is that during tough times, the Profit Leaders kept their firms from being pulled down by economic downturns, leading to a larger divide.
This year, small firms (under $3 million in sales) and large firms (over $18 million in sales) saw increases in profit over 2012 results among both the “All Firms” and “Profit Leader” categories.
Collectively, firms from $3 million in sales to $18 million in sales saw drops in profit as a percentage of sales. Most notably, the group of firms in the $10-18 million category showed resulting profits as a percentage of sales decline a full percentage point in 2013.
The largest firms average profits of 4.4 percent of sales are well above the industry average, and the categories with smaller sales had profits near or below the industry average of 2.6 percent.
Profit Leaders and All Firm categories followed the same pattern. Profit Leaders at the high and low ends of the size categories out-performed the middle groups. Printers with sales greater than $18 million averaged an overall return on sales of 13.1 percent (a large increase from last year), and the printers with sales under $3 million followed with 12.0 percent (Reference Graph 3). These were followed by 9.3 percent achieved by the category of sales in the $6-10 million range. These sales categories outperformed the Profit Leader groups in the sales ranges of $6-18 million.
The sales category for Profit Leaders in the $3-6 million and the $10-$18 million categories had returns of an 8.6 and 7.9 percent, respectively. Both of these segments showed decreases in profits as a percent of sales from the previous year.
Within each size category, the threshold for attaining Profit Leader status changes and the variance between categories can be significant. For example, a printer with a profit of only 4.4 percent (or greater) was considered a profit leader in the $10 to $18 million category, where profit leaders averaged a 7.9 percent return. Yet, printers with sales over $18 million had a higher threshold and needed a profit of 7.7 percent or greater to be considered a Profit Leader, where the average profit leader return was 13.1 percent.
Major cost items
For the printing industry, major cost items as a percent of sales remained constant in 2013 compared to 2012. Overall Factory Cost of Product as a Percent of Sales was unchanged at 77.5 percent, and sales/administrative expenses decreased by 0.2 percent. In Graph 4, the difference in major cost items as a percent of sales for commercial printers vs. trade binders/finishers is illustrated. The expenses that go into total factory cost of product vary greatly, but in the end the average total factory cost of product was 77.5 percent for both industries.
Trade binders/finishers on average had a more profitable year – 3.3 percent compared to 2.6 percent for commercial printers. The sample size of trade binders/finishers is not large enough to make generalizations concerning the entire industry, but for the group of survey respondents, it was the first year they reported profits since 2010.
Profit rates always vary significantly by product specialty. Of the 10 printing product specialties covered in the survey, the top profit producing segment was Quick Printers, showing a 9.11 percent rate in Profit by Product Specialty – a full 3.49 percent increase over the prior year (Reference Graph 5).
The biggest leap in Profit by Product Specialty was seen in Trade Binding & Finishing Services, where the rate jumped 6.28 percent (from a loss of 2.95 percent to a gain of 3.33 percent). Packaging stayed toward the top of the list, with profits at 6.84 percent of sales. Label/Converter, Forms and Documents and Book Printers all achieved above industry average profits of 4.43, 3.33 and 2.92 percent, respectively.
Although the Magazine/Periodical segment showed a gain (up 0.53 percent from the previous year and 2.02 percent over 2011), the Commercial and Advertising and Magazine/Periodicals segments both were below industry average profit. Commercial and Advertising printers, which are the bulk of the printers reporting, averaged a profit of 1.74 percent, which is a decrease from its previous years posting of 2.33 percent.
According to the 2014 Mid-Year Outlook Survey, the printing industry should see a slight increase in profits in 2014. Overall, 53 percent of survey respondents report profits increasing in 2014 compared to only 30 reporting declining profits.
Respondents also report a similar trend with print sales (51 percent sales increasing, while 29 percent sales decreasing compared to 2013). Based on midyear results, we expect sales for Commercial Print and Related Support Activities (NAICS 323) to increase by 2.0 percent in 2014 compared to a 1.0 percent increase experience in 2013. Profits also are expected to increase from 2.6 percent in 2013 to 2.7-2.9 percent.