Commentary & Analysis
FREE: Top Stories in 2002: Strategy, People and Corporate News
By WTT Contributing Columnist Molly Joss with Gail Nickel-
By WhatTheyThink Staff
Published: December 29, 2002
By WTT Contributing Columnist Molly Joss with Gail Nickel-Kailing - The biggest traffic day in WTT’s history - Harry Quadracci - The Dot Com Review - Branch Printing - GPO Reform, Postal Issues, Intellectual Property - HP and Compaq - New faces and familiar places - “CreoSoft” - Special Report: Xerox’s Road to Financial Recovery In the year after the year in which the world was changed forever by the events of 9/11/01, most printing and publishing companies spent their time trying to stay in business. The economy was filled with ups and downs and the general business news was nothing if not uninspiring. Still, the world, and business, goes on. If nothing else, the events of 2002 demonstrate that it is possible (and desirable) to go forward. There were some sad moments; the saddest of which was the death of Harry Quadracci, founder of Quad/Graphics. Harry was a well-known and well-liked industry figure, and he will be sadly missed for many years to come. There were some bright spots, including a robust Graph Expo and improved advertising signals toward the end of the year. There were also indications that the industry as a whole was reacting forcefully and positively to gravely serious issues such as intellectual property threats and future postal increases. As the year drew to a close, it became apparent that the industry was surviving and, while not expecting 2003 to be a banner year, at least some major indicators were up instead of down. Editor’s Note: We did not include product news in this 2002 review. Certainly there were many including the Xerox iGen3, the Roland 500, Komori’s Lithrone S40, prepress software and workflow products from EFI, Heidelberg, Agfa, KPG and more. We decided to focus, instead, on the top people, companies and strategies in 2002. • 2002 Review • • Government Printing Office Reform: Millions of Dollars in Printing Up For Grabs? One of the most surprising turn of events in 2002 occurred in May when the Office of Management and Budget (OMB) instructed all federal agencies and departments to arrange for their own printing starting September 1. This order swept the Government Printing Office (GPO), the sole clearinghouse and manager of most federal documents and gateway to the majority of federal printing jobs, into a political maelstrom. Soon after this news broke, the OMB clarified that it had only said that agencies could bypass the GPO if the agencies thought that doing so would save money. The GPO responded by stating that existing regulations said that agencies must use its services. A political struggle between the OMB and GPO ensued with parties like PIA, R.R. Donnelley and ABC Advisors working in the background for the “right reform”. In the fall, in apparent defiance of the GPO, the Bush administration put the printing of the 2004 federal budget out for bid--the first such move in 81 years. The administration’s action was a clear signal to the GPO that it must change or get out of the way. Toward the end of the year, OMB and GPO seemed to have struck a polite agreement that promised GPO would reform its ways. GPO slightly praised a proposal drafted by the OMB on changes to federal print procurement policies. How did the bidding process go for the 2004 budget? Last year, GPO charged $505,370 to print the fiscal 2003 budget. This year, GPO has offered to print the 2004 budget for $387,000, a savings of 23.4 percent. OMB is saying, “We told you so.” GPO says the reduced price is a result lower material cost and market conditions. Stay tuned, we guarantee there will be more to this story in 2003. • Postage Increase and Calls for Reform This summer, the Postal Service raised its rates again. Postal increases of any degree are never good news for the printing and publishing industry. In addition to the rising postage costs, many printers fear that any increase prompts more and more customers to adopt non-print methods of communication, such as e-mail. The beleaguered agency reported that it has succeeded at reducing costs and improving productivity. To the industry’s collective consternation, the Post Office said that it has almost fully funded its pension fund and that this should help defer (but not eliminate) future postal increases. The industry was quick to respond to the pension news saying the Postal Service was feathering its own nest in spite of potentially serious consequences for many industries. In mid-December the Treasury Department announced the formation of a commission to study the Postal Service and make recommendations designed to hold postal rate increases at a minimum. The announcement of the Commission won immediate support from many publishing and printing associations. If the trade associations and major players in the graphic arts industry keep up the pressure in 2003, they should be able to give the Post Office and the Federal Government a clear signal that postal increases are bad for business. That may mean a reprieve for a year or two, but new increases are inescapable and will continue to affect the printing and publishing industries adversely. • Hewlett-Packard & Compaq Merge: When Giants Dance As a rule, the printing and publishing industries don’t pay much attention to mainstream computer industry news. The Hewlett-Packard merger with Compaq in the summer of 2002 was a notable exception to this rule, due in no small measure to HP’s purchase of Indigo in 2001. In June, the company signaled an even stronger interest in the graphics arts when it announced an investment of more than a billion dollars in R&D, product development and marketing in a variety of imaging and printing products. By early 2003, the company said, it will roll out more than 50 new imaging and printing products worldwide. WTT has reported on the challenges with HP’s strategy regarding the future direction of Indigo. But Hewlett-Packard, bolstered by its merger with Compaq, is too big of an industry player in the computer and graphic arts industries to be ignored. When giants dance, everybody watches--especially those who don’t want to get stepped on. • Graph Expo Offers a Glimmer of Hope WTT offered extensive coverage of several trade shows in 2002, and Graph Expo was no exception. While other trade shows didn’t fare as well in 2002 (economy concerns and travel fears in early 2002), Graph Expo was an exception. It was, by several accounts, one of the brightest glimmers of hope that the industry was coming around. The show was smaller than those of previous years, but the aisles and the conference sessions were busy. Vendors were happy with the number of orders taken at the show. Skeptical of the claims made by some vendors in the weeks after the show, Yves Rogivue, MAN Roland’s CEO, called for competitors to put names alongside the sales figures they were quoting. Not surprisingly, competitors declined. • The Dot Coms and Software Companies In previous years, they were proudly called “The Dot Coms”. This year, they have evolved into “The Dot Coms and Software Companies”. Next year, if all goes well, these companies most likely will be known as “Software Companies”. The Dot Coms of the industry were active in 2002. Many were active seeking funds while others hunkered down to create a sustainable business after the technology fallout. - Printcafe finally became a publicly traded company and later in the year acquired the assets of printChannel.com for around $200,000. - iPrint and ImageX suffered through similar financial problems, including the delisting of its stock from NASDAQ. In December, MadeToOrder.com, a provider of online and offline corporate branding solutions completed the purchase of substantially all of the assets of iPrint. ImageX announced in the fall that it was reducing staff and that its earnings were much less than projected. - ImageX announced several “significant” patent awards from the U.S. Patent Office. The company is seeking patent licensing revenue from printers and industry suppliers. Current and future litigation will no doubt determine the validity of these patents and perhaps the very existence of ImageX as a going concern. - Impressively, Bertelsmann Capital Ventures participated in funding httprint in 2002. In total, httprint secured $16 million in 2002. - HP participated in a $6.5 million funding round in Mimeo. - Sprockets quietly went out of business. - NowDocs was sold or reconfigured out of bankruptcy to Taylor Corp. - DiMS! roared onto the scene with a major account – R.R. Donnelley. - SAP with unitinc appear serious about competing in the commercial printing space. Web-based workflow solutions are here to stay, but we expect more consolidation in 2003. Some companies just do not have the capital to sustain the prolonged slowdown in technology spending. Unfortunately, printers and large print buyers who delay spending on effective print management and web based solutions may find themselves at a disadvantage in the coming years. • Branch-Smith Printing: Big League Win It’s always good news when a company in the industry wins an award. In November, President George W. Bush and Commerce Secretary Don Evans announced three winners of the 2002 Malcolm Baldrige National Quality Award. Winner Branch-Smith Printing Division, located in Fort Worth, TX, has more than $10 million in annual sales and 68 employees. It is one of two divisions within Branch-Smith, Inc., is a fourth-generation family business. BSPD specializes in providing a wide range of services—including designing, printing, binding, and mailing—related to sheet-fed printing of multi-page bound materials. • “CreoSoft” Creo’s decision to acquire ScenicSoft certainly created interest within the industry. WTT members read all about the acquisition, possible consequences and opportunities for the industry. ScenicSoft had OEM agreements with many companies who compete with Creo, including Agfa, Fuji, etc. The news sparked interest from printers who use ScenicSoft’s products in conjunction with non-Creo workflow solutions. Creo plans to keep ScenicSoft’s products available to all. • New Faces, Familiar Places Personnel changes are not hot news most of the time, except when they involve well-known faces and names or major companies. The year 2002 saw its share of personnel changes, with some familiar faces popping up in new places. Here are a few of the mixes and matches: In November, Quebecor World announced several senior and top management changes, including the pending departure of Charles Cavell, CEO and Christian Paupe, CFO. A succession plan review is underway. The shuffle follows the September resignation of Marc Reisch, Quebecor World’s North American CEO. In December, Moore Corporation Limited announced that Robert G. Burton will step-down as Chairman, President and Chief Executive Officer, effective at year-end after two years of service. His efforts at Moore have been roundly praised. (Moore’s stock price when he arrived: $3 per share. Price now: $9.) Burton will remain a Senior Advisor to the company. Moore named Mark A. Angelson, who has been the Company’s Non-Executive Chairman and Lead Independent Director, to be its Chief Executive Officer. In October, Banta appointed Stephanie Streeter as its new CEO. Streeter immediately expressed optimism regarding the company’s future. Excluding their healthcare unit, Banta appears to have one of the strongest and diverse businesses of the big printers. KBA’s North American Sheetfed division landed a new CEO. Ralf Sammeck, a former Heidelberg executive, was most recently president of the KBA Karat Digital Press Division responsible for sales and marketing worldwide of the Karat line. Ron Daly took over the helm of Oce-USA Holding, Inc., after 38 years with R. R. Donnelley -- a move that surprised many in the industry. He was rumored to be next in line to be the CEO of Donnelley in a few years assuming current CEO Bill Davis retired upon turning 62. In December, Chuck Gehman, another familiar name to many in the industry, joined Printcafe as its Director of Product Marketing. Gehman was formerly executive vice president and CTO of Printable Technologies, responsible for technology and marketing for the firm. Rochester Institute of Technology embarked on a new era unveiling expanded programs and other enhancements within the newly-named School of Print Media. Barbara Pellow, the Frank E. Gannett Professor of Integrated Publishing Sciences assumed the position of administrative chair of the School of Print Media. Matthew J. Espe was appointed President and Chief Executive Officer of IKON. Past CEO James J. Forese remains as Chairman of the Board of Directors until the Company's next annual meeting in February 2003. Michael Makin was named the first CEO of the combined PIA/GATF. NAPL announced that Gregg Van Wert would step down as president and CEO of the 69-year-old association, effective December 31, 2002. Joseph P. Truncale, NAPL’s Executive Vice President, will succeed Van Wert. Kinko’s made numerous executive changes in 2002 as the company settled into new corporate digs in Dallas. Kinko’s left California for several reasons, not the least of which was the state’s high tax rate. Bill Benac was named chief financial officer during the summer. • Print Outlook 2003 In what might be the industry’s closest match to a crystal ball, the Print Outlook conference, held each December in the Washington, DC area, is always a good way to look into the industry’s future--at least that future as seen through the eyes of several industry analysts. Individually, and collectively, the speakers urged conference attendees to re-evaluate how they do business and take active steps now to re-focus their businesses. One of the reasons for the urgency is the reality that the problems that beset the industry are broad and that an upswing in the economy (should it occur) will not be the magic fix for all the industry’s problems. - - - •• Top Story of the Year: Harry Quadracci The unexpected and untimely death of Harry Quadracci, founder of Quad/Graphics was certainly the saddest story of the year. In July, Quadracci was found dead in a lake near his home. The cause of death was ruled accidental drowning, and later in the summer police said there was absolutely no evidence of foul play. To illustrate his impact on the industry and the WhatTheyThink community: That day was the most visited event in the three-year history of WhatTheyThink.com’s web site. Harry Quadracci spent many of his working years in the industry. Quadracci developed Quad/Graphics into a leading printing, technology and media company from its modest beginnings in 1971. Today, Quad/Graphics services more than 1,000 magazine, catalog, retail insert and direct mail clients. The company, while mourning the loss, continued to function with family members stepping in to fill Quadracci’s role. In August, the company announced a $300+ million dollar deal with Time, Inc. which included the printing of In Style magazine. In November, it announced a significant multiyear agreement with Smithsonian Business Ventures to print high quality publications for the organization including the Smithsonian magazine. In the fall, the company announced a major financial donation to the WCTC Foundation to benefit Waukesha County Technical College. The company’s contribution, made in Harry Quadracci’s name, will be used to upgrade the training equipment, as well as provide scholarship assistance to students interested in a career in graphic arts. Major contributors were Time Inc., Heidelberg and MAN Roland among others. • See the free special from July - In Memory of Mr. Harry V. Quadracci: His Own Style •• Big in 2003: Content, Rights, Copyright and Intellectual Property Concerns Copyright and intellectual property protection rank third on PIA’s list of priorities for the 108th Congress. One of the reasons why PIA has an interest in copyright legislation because, as the law stands, printers can be sued for copyright infringement if they knowingly or unknowingly print materials for someone other than the copyright holder. You only have to take a quick look around in the local quick printing franchise to see copyright warning signs everywhere. Publishers have been concerned about protection their content from unfair use for years. In 2002 the concept that the people and companies that create the content should derive financial benefit from all uses of the content continued to be assailed by changes in information technology. In 2002, the music industry and well-known musicians were the most vocal in their demand for more protection of the rights of audio content creators. The print industry seems to be aware of the issue, but is too focuses on other concerns at the moment. Look for that to change in 2003. •• Xerox’s Road to Financial Recovery By Gail Kailing As this year has come to its close, Xerox reported yet another error that requires restating of financial statements for all of 2001 and the first three quarters of 2002. It sort of feels like adding insult to injury in a year that challenged one of the largest companies in the graphic arts industry. We examined the roller-coaster year Xerox experienced as the company turns itself around from serious financial trouble late in 2000 and heads into financial stability at the end of 2002. January 2002 January was a good month: 2001 finished strongly with a return to operational profitability during the fourth quarter. New financing from GE and a private placement brought in badly needed cash. - Xerox received $340 million in financing from GE Capital. With this funding and following the repayment of $1.1 billion in debt that matured first quarter, Xerox's cash position increased to approximately $3.9 billion. The $340 million is in addition to the $835 million received December 2001 from GE Capital, with additional funding expected. - Through a private placement offering, the company raised $746 million, including US $559 million and EUR 209 million, for general corporate purposes, including the payment of indebtedness or other obligations. As a result, Xerox's cash position increased to approximately $4.6 billion. March 2002 Xerox reported the steps taken in funding and managing its equipment leases; the bone of contention with the SEC: - Received $266 million of financing from GE Capital, secured by portions of Xerox's lease receivables in the United States. This is in addition to the approximately $1.2 billion of U.S. financing received last year from GE Capital. - Received $291 million of financing from GE Capital, secured by portions of Xerox's lease receivables in Canada. - Completed an agreement with Banco Itau, S.A to become the primary source of equipment financing for Xerox customers in Brazil. It is expected that beginning April 1, Banco Itau, S.A will provide the equipment financing for all new activations. - Completed an agreement with CIT Group affiliates in Mexico to become the primary source of equipment financing for Xerox customers in Mexico beginning in the second quarter of this year. - Activated the previously announced joint venture with De Lage Landen to manage equipment financing, billing and collections for the financing of Xerox equipment in the Netherlands. DLL owns 51 percent of the joint venture and provides the funding to support all new customer leases. Xerox owns the remaining 49 percent. - Secured a preliminary agreement to transfer Xerox's equipment financing operations in Italy to a financing partner for $230 million. In addition to purchasing Xerox's existing lease portfolio in Italy, the partner will also provide ongoing, exclusive equipment financing for new activations. Xerox's worldwide cash balance increased to approximately $4.8 billion. April 2002 April showers brought an agreement with the Division of Enforcement of the Securities and Exchange Commission (SEC). The agreement called for a restatement of Xerox's financials for the years 1997 through 2000 as well as an adjustment of previously announced 2001 results. The restatement will primarily reflect adjustments in the timing and allocation of lease revenue recognition and could involve a reallocation of equipment sales revenue in excess of $2 billion from 1997 through 2000. (An optimistic estimate, it turns out...) The SEC, as a result of the agreement, asked for a civil penalty of $10 million. Xerox paid the fine, but neither admitted nor denied the allegations of the complaint. Other activities in April: - A special committee of Xerox’s Board of Directors retained an independent consultant to review its material accounting controls and policies. The Board shared the outcome of the review with the SEC. - Xerox Canada also began a process to determine whether restatements of its financial reports were required under the same agreement. - Xerox also reported a current worldwide cash balance of $4.7 billion. May 2002 Xerox’s May bouquet came with a bunch of onions from Moody’s Investor Services. Moody’s downgraded Xerox’s senior unsecured debt, citing concerns about the company’s ability to generate cash flow going forward as well as high debt levels. At the same time - more funding from GE... Xerox received an additional $496 million in financing from GE Capital. Meanwhile, up north... Xerox Canada also determined that it was necessary to restate its financial statements for the year 2000. June 2002 Xerox announced the renegotiation of its $7 billion revolving line of credit. The company repaid $2.8 billion of the revolver and extended the maturity date for the remaining $4.2 billion. Xerox's worldwide cash position was about $1.7 billion. The company filed their 2001 10-K (annual report) including a restatement for the years 1997 through 2000 as well as adjustments to previously announced 2001 results. For 1997 through 2001, the company reversed $6.4 billion of previously recorded equipment sale revenue offset by $5.1 billion of revenue recognized and reported during the same period as service, rental, document outsourcing and financing revenues. Up considerably from original estimates! Revenues for 1997-2001 were reduced by 2 percent to $91 billion. In total, pre-tax income over the five-year period declined by $1.4 billion from previously reported amounts. July 2002 For the first quarter of 2002, Xerox reported a loss of $46 million. The results compared to a gain of $222 million for the same period a year ago. The first quarter filing, scheduled originally for April, was delayed because of plans to restate. In the company’s second quarter earnings announcement, Xerox reported a “return to profitability.” based on the company's strongest quarterly operational performance since beginning its turn around in October 2000. To fund maturing debt, Xerox also announced plans to seek shareholder approval to increase its number of shares by 66 percent. The statement says that Xerox believes it should have “sufficient authorized but unissued shares for issuance in order to access the capital markets by offering shares of common stock or other securities exchangeable or convertible into shares of common stock for cash.” It could be used in connection with equity for debt exchanges, employee benefit plans, mergers and acquisitions, stock splits, stock dividends and other business purposes. Back in Canada, Xerox Canada filed its consolidated financial statements for the year 2001 and its interim report for the period ended March 31, 2002. The 2000 adjustments, included in the Xerox Canada 2001 consolidated financial statements, had the effect of increasing previously reported revenues for 2000 by $15.8 million or 1 percent while decreasing net earnings by $2.2 million or 2.1 percent. The cumulative impact of the adjustments on net earnings of years prior to 2000 was a reduction of $37.5 million or 8.4 percent. September 2002 “A stronger, bolder” Xerox has overcome operational and liquidity issues, according to Anne Mulcahy, Xerox chairman and chief executive officer, and posted a $1.9 billion cash balance at the end of the second quarter and reduced its annualized cost base by almost $1.3 billion. Just as things started to look better, the U.S. attorney's office in Bridgeport, Conn., opened an investigation into Xerox's past accounting issues, which had been previously reviewed by the Securities and Exchange Commission. The company, of course, said it would cooperate fully with the U.S. attorney's office. October 2002 Strong third quarter earnings were announced. Margins up, costs down ... The company continued to generate significant cash from operations, reporting $611 million in operating cash flow for the third quarter. As of the end of September, Xerox's worldwide cash balance was $2.3 billion. November 2002 Xerox announced a fourth-quarter pre-tax charge in the range of $350 million to $400 million related to worldwide restructuring actions. The charge includes severance costs for worldwide workforce reductions, as well as about $50 million associated with facility consolidations and closings. The intent is to reduce employment by more than 2,400 by the end of January 2003. As of the end of September, Xerox's worldwide employment was 69,900 including 40,900 employees in the United States. December 2002 Happy Holidays!?! On Dec. 20, Xerox reported the discovery of an error in the calculation of its non-cash interest expense that resulted in an after-tax understatement of approximately $5 million to $6 million or less than 1 cent per share in each of the four quarters of 2001 and for the first three quarters of 2002. To adjust for the miscalculation, Xerox will restate its 2001 financial statements and revise 2002 quarterly financial information again. The company is expected to file the restated financial statements in January 2003.