One of my long-term mentors in this industry sent me a note after reading a recent post, saying "if orders are your number one problem, you don't have a number two problem".

Looking at KBA's third quarter report, one has to give the management team credit for not only doing a good job making the most out of a continuing difficult market situation, but also trying to adjust to the new reality by making strategic moves in order to add to the core business and (maybe late but probably not too late) addressing structural issues at the expense of short term results.  
Orders increased over the last two quarters but are below the DRUPA year 2012. The company still lives off its backlog of what I believe to be an exceptionally strong order intake of good margin specialty presses (booked in 2011, and visible in the three large red columns below), but eventually that rat will have gone through the python, as the saying goes.  

Orders for the last four quarters added up to €999.8 million.  That is still a big number for any printing equipment manufacturer, but the last time KBA shipped less then a billion was in 1999.  Since then annual sales have averaged €1.36 billion and topped out at €1.74 billion in 2006. 

Assuming that the reported shipment delays are only short term issues and given the current adequate backlog in sheetfed and web as well as increased inventories, the company should be able to achieve its new sales forecast of €1.1 billion for the year (vs. a plan of €1.3 billion), still requiring it to ship 1/3 of annual sales in the last quarter.  However, and there is the problem, barring a surprise order spike the backlog will likely end up between €520 and €550 million, uncomfortably low for a billion Euro company with an unusually wide product portfolio, requiring special engineering (and thus longer lead times) for many of its orders.  2014 is going to be another challenge.

In my August post I already mentioned the need for further downsizing because of the shrinking backlog.  While it might have been tempting to delay the inevitable further and squeeze out another break-even year with a strong fourth quarter, KBA management is not pushing its problems into next year hoping for a gift from the market.  While it is the right thing to do, the stock market did not like it much.

Heidelberg focused on the good news in its latest quarterly report and the company confirmed its positive net income target, with six months to go.  A look at the numbers reveals that the challenge is formidable and long-term structural questions remain. 

Orders continue to be slow as the chart below illustrates and per the trusted German VDMA report "sales of printing presses form German printing press manufacturers in the period from January to August 2013 were down 7% on the previous year.  Incoming orders declined 12% in the same period".  Well, of course 2012 was a DRUPA year, but still, it is not a pretty picture. 

Heidelberg sees the Japanese Yen and the US Dollar as the culprits, which should not come as a surprise to readers of this blog. We looked at the effect of currency back in July.  http://www.cmyktrends.com/1/post/2013/07/komori-bucking-the-trend.html

My back-of-the-envelope calculation suggests that, in order to achieve management's positive net income target, operating results in the next six months will have to improve by some €90 million, with the biggest swing being required in the equipment division.   

The challenge is that the equipment division needs sales volumes significantly north of €400 million a quarter to contribute meaningful profits.

The division shipped  €631 million in last fiscal year's fourth quarter (€379 million in this quarter) and generated a solid operating profit.   However, today's equipment backlog is about €180 million below last year's September number, which makes it so much harder to achieve a blow-out fourth quarter.  

With almost no change in headcount over the last two quarters, it appears that the organization is being maintained to support a strong fourth quarter in order to achieve its volume targets.  Long-term this strategy will not work unless the offset equipment market grows again so that Heidelberg can be profitable four quarters a year.

If the market continues to shrink and Heidelberg struggles to become profitable it will eventually become even harder to make (and pay for) the headcount reductions necessary to be reasonably profitable at revenues below €2.5 billion.