Truth in Reporting –Dickeson

One thing that has puzzled me for many years is how printing companies can stay alive with the kind of operating income they report to the Printing Industries of America (PIA). These reports are the basis for the Ratio Studies that PIA publishes annually. Surely the reports of 600 to 900 companies, as a cross-section of our industry, must be true. Or…as true as can be expected with the general ledger financial reporting system we have in place.

Am I suggesting that there’s something wrong with the general ledger system we use? Do I join with Trevor Harris, chief accounting analyst at Morgan Stanley, in saying “the financial reporting system is completely broken?” Perhaps. Take a hard look at the last six years of the PIA Ratio Studies and tell me what you think.

Year Ending 2003 2002 2001 2000 1999 1998
Upper Quartile
Number of Firms 125 165 201 198 216 234
Sales 100% 100% 100% 100% 100% 100%
Less Materials, etc. 34.20% 35.97% 35.49% 35.72% 36.09% 36.76%
Value Added 65.80% 64.03% 64.51% 64.28% 63.91% 63.24%
Operating Income 8.03% 11.39% 15.01% 16.35% 15.35% 14.94%
Lower Three Quartiles
Number of Firms 371 493 599 587 641 699
Sales 100% 100% 100% 100% 100% 100%
Less Materials, etc. 35.57% 36.01% 36.60% 36.05% 36.29% 36.55%
Value Added 64.43% 63.87% 63.40% 63.95% 63.71% 63.45%
Operating Income -1.06% -2.66% 0.13% 0.28% 1.12% 0.83%

The Upper Quartile are the results of the upper one-fourth of the operating income-reporting printers. The Lower Three Quartiles are firms in the lower three-fourths. PIA usually reports only “All Firms” and the “Upper Quartile” of firms. Obviously, reporting the “Lower Three Quartiles,” as I’ve done, would be embarrassing to the industry and to the trade association. Broken or not, they’re reporting with measurements we’ve given them.

How did we get into this condition. . .or are we? It all depends on the assumptions you make and how you apply them. Goodness knows you’ve got to make a lot of assumptions.

First, there’s the difficulty of measuring when there’s more than one business in the firm. The report is premised on “operating” income of a printer. Suppose you have a profitable publishing firm, as well. How do you allocate many of the general, administrative and sales expenses? How many of those expenses were “operational” to printing alone between the two operations? You make assumptions, some of which may be true, but well wide of the actual results.

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