By Ed Avis
There is a lot of noise about the state of the economy right now, and of course no one knows for sure how things will go this year. But for reprographics, there are a number of indicators that help us identify likely developments. Here the key points from four sources – the AIA Billings Index, the APDSP Index, ARC’s SEC filings, and Census data analyzed by ABC:
Work on the Drawing Board – 11-Month Lag
Since reprographics, at least in the traditional sense, depends on construction, work on the drawing boards of architects and developers is an important indicator. The best measure of that is the AIA Billings Index.
The AIA Billings Index is built around a survey of architects that asks them if they have more work, less work, or the same amount of work billed in the previous month as they had in the month before that. By “more” or “less” the AIA means 5 percent. About 700 AIA member firms participate in the monthly survey.
The result of the survey is some number that usually hovers around 50. If it’s exactly 50, that means billings are flat. If it’s under 50, billings are down. And if it’s over 50, billings are up. An AIA study in 2014 revealed that the billings index quite accurately tracks with construction spending (click here to read the whole study, which is loaded with related information). The study showed that the billings index precedes construction spending trends by 11 months. So if the index is significantly above 50 in January, for example, construction spending should be up an equivalent amount the following November.
In December, the billings index was 55.9, which is high. During the course of 2016, as you can see on the chart, the index looked like a mountain range, with high points in March, May,
and December, and troughs in January and September. What does this mean? If the trends hold true, this means construction should be strong in the spring and early summer, then drop in late summer and fall, and pick up again in late fall.
Fortunately, the AIA keeps data by region and sector from the billings index, so if you want to see more specifics about your own region or the area you get the most work from, click here.
Our own index, which works on the same concept as the AIA Index but is quarterly instead of monthly, showed strong but slowing growth during 2016. The first quarter APDSP Index for traditional reprographics work was 72, which means a majority of members saw growing work in reprographics during the quarter. It dipped slightly to 71 in the second quarter, then substantially to 63 in the third quarter. The fourth quarter survey has not been taken yet.
The APDSP Index is not as statistically rigorous as the AIA Index, insofar as we don’t try to even things out geographically or by area of expertise, as the AIA does. Nevertheless, we do make sure that all the responses that are counted are from reprographics firms (at least self-identified as such) by deleting any non-firm responses. We’ve averaged 54 responses over the past year.
Also unlike the AIA, we have not done a study to see how our index compares to overall construction or design work. It’s designed more as a comparative measure so that individual members see how they compare to the industry as a whole.
ARC’s SEC Filings – Packed with Info
There is only one public company in our industry, ARC Document Solutions, but its SEC filings are loaded with interesting info.
The latest quarterly filing, the 10-K for the third quarter of 2016, reveals that the company’s net sales for the quarter dropped to $100.4 million from $106.4 million in the third quarter of 2015, and net sales for the year-to-date fell to $307.8 million from $324.1 million.
It’s hard to sugar-coat those drops. Suri Suriyakumar, chairman of the company, said “This has been a tough quarter for us” in a press release about the results. But he went on to say that this was expected, and that the company is building for the future and overall, things are healthy.
If you are mining the ARC data for news about the industry, its drop in sales and revenue is not good news, despite Suriyakumar’s optimism. But you need to look beyond the press release and dig into the actual 10-K for some details. There you find that sales in all four major aspects of their business dropped during the first nine months of 2016. Construction Document and Information Management (CDIM) dropped 3.8 percent for the nine-month period ending Sept. 30; Managed Print Services (MPS) fell 8.1 percent during that period; Archiving and Information Management (AIM) fell 6.4 percent; and Equipment and Supplies slid 33.8 percent.
There is interesting info within those sections, too. For example, despite ARC’s attempts to diversify its market base beyond AEC, construction document and information work represented 53 percent of its business in that nine-month period, an increase of one percentage point over the same period in 2015.
Another tidbit: Even though sales in MPS dropped, the number of MPS locations jumped by 630, to 9,370, during that period. This presumably means sales to existing MPS clients fell, or they lost some major clients. In fact, a review of Suiryakumar’s 2015 end-of-year comments shows that yes, the company lost a $10 million MPS customer near the end of 2015, which surely impacted 2016 revenue in that area. (You can read that letter by clicking here.)
Another interesting bit of info in the ARC 10-K, and something that speaks to the strength of the industry going forward, is found in the discussion of a $73.9 million goodwill write-down the company took in the second quarter of 2016. Here’s the key paragraph:
At June 30, 2016, we determined that there were sufficient indicators to trigger an interim goodwill impairment analysis. The indicators included, among other factors: (1) the underperformance against plan of our reporting units, (2) a revision of our forecasted future earnings, and (3) a decline in the Company's market capitalization in 2016. The underperformance against plan of our reporting units and the resulting revision of our forecasted future earnings was driven by: (a) a larger than expected decline in our print-related sales which began during the second quarter of 2016 due to an acceleration in the adoption of new technology replacing printed documents in our industry, (b) the lack of new national customer acquisitions, which had been expected based on historical customer acquisition rates, and (c) lower than expected growth derived from our cloud-based digital document management solutions. Based on currently available information, we do not believe that the trend we have identified to replace traditional print-based document reproduction and management with digital document solutions is temporary, and we anticipate that such declines will continue to impact the Company’s net sales in the foreseeable future.
Overall, the information gleaned from the ARC report seems to indicate continued difficult times ahead. ARC is a large company, though, and has to consider all of its components together when it does this analysis; your own company might be more nimble and your local conditions might be better.
If you want to read the whole 10-Q, you can do so by clicking here.
The Census Bureau reports monthly data about construction, and the Associated Builders and Contractors analyzes that data each month to provide some solid guidance. The ABC’s chief economist, Anirban Basu, always provides some concise analysis after the presentation of the numbers. For example, after reporting that that Census Bureau showed spending on nonresidential construction down 0.7 percent in December, he wrote this analysis:
“Private spending growth, which has led nonresidential spending growth for months, remained flat in December and, as a result, the preexisting story of the industry remains fundamentally unchanged,” said ABC Chief Economist Anirban Basu. “Public construction spending has been soft for many years and the December spending data merely served to extend that part of the tale. Spending in the sewage and waste disposal, transportation, and public safety sectors was particularly weak during the past 12 months. Private spending growth has been on-again, off-again for much of the year, so it is not a surprise that last month’s robust spending report was followed by a flat one.
“On the bright side, the architectural community became much busier in December, signaling an acceleration of commercial activity to come,” said Basu. “In addition, the new administration appears committed to fulfilling its campaign promises, including a pledge to step up infrastructure spending. This has asphalt, pavement and other infrastructure-intensive contractors expressing more confidence in their economic future than they have for many years. As such, the December data provide little insight into the future trajectory of nonresidential construction spending, which is set to improve markedly during the next six to 12 months.”
So what do all these indicators tell us about 2017? They’re a mixed bag. ARC’s outlook, which has to be taken seriously, is not rosy. However, the AIA Billings Index and the ABC’s analysis point to solid construction in the next year. How much that construction will translate to work for your reprographics shop depends a lot on how much you are offering your clients beyond prints, but clearly more construction is better than less.