In February you read here that Heidelberg would need a strong fourth quarter with equipment sales between Euro 500 and 550 million to put the company in the black for the fiscal year. In fact, in its annual report, released a few days ago, HD reported Euro 494 million, a third of its annual equipment sales, for the quarter. While the report's new format is probably not to everybody's taste, it provides interesting insights. The fairly narrow push over the goal line by Euro 1.7 million pre-tax profit on Euro 2.4 billion in sales makes one wonder how much help had to come from the balance sheet. A reduction of Euro 154 million in 'other provisions' of which only Euro 133 million appear in the cash flow statement is probably a first clue.
To be clear, there is nothing wrong with adjusting provisions when warranty reserves are not fully needed or a restructuring cost estimate was overly conservative. In addition, balance sheet adjustments are usually watched carefully by a company's auditors. However, these adjustments can distort the view of how far along a company is on its way to are real turn-around.
While Heidelberg's service segment is consistently profitable on an operating profit basis (albeit with relatively large quarterly swings) and the financial services segment seems to be doing really well (Euro 5 million operating profit on Euro 3 million sales in the fourth quarter), the equipment segment has not been profitable for several years.
As the chart below illustrates, HD's equipment segment was profitable only in the last quarter of the two last fiscal years, always on peak sales. (Note, for clarity, operating profit in red is tied to the right y-scale, while sales, orders and backlog use the left scale.)
To be clear, there is nothing wrong with adjusting provisions when warranty reserves are not fully needed or a restructuring cost estimate was overly conservative. In addition, balance sheet adjustments are usually watched carefully by a company's auditors. However, these adjustments can distort the view of how far along a company is on its way to are real turn-around.
While Heidelberg's service segment is consistently profitable on an operating profit basis (albeit with relatively large quarterly swings) and the financial services segment seems to be doing really well (Euro 5 million operating profit on Euro 3 million sales in the fourth quarter), the equipment segment has not been profitable for several years.
As the chart below illustrates, HD's equipment segment was profitable only in the last quarter of the two last fiscal years, always on peak sales. (Note, for clarity, operating profit in red is tied to the right y-scale, while sales, orders and backlog use the left scale.)
Equipment orders were virtually flat around Euro 350 million per quarter causing the backlog to drop to a new recent low. While there has been progress in the operational results, for Heidelberg to really turn around, the equipment segment needs to address its structural issues. Like any manufacturing company, there needs to be a certain volume to absorb overheads and throw off profits. Despite the strong quarter, the segment was unprofitable on an operating basis for the full year. Having one good quarter per year on above average volume won't work for much longer as flat orders result in skinny backlog cushions. At Euro 389 million the beginning backlog is Euro 75 million worse than last year's already mediocre position. Chances are the first quarter of FY14/15 won't be great and Heidelberg will start in the hole again.
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