Putting Their Best Foot Forward
That's what companies try to do in their annual reports. Can we believe them?
(Article originally published in Jan/Feb 2013 edition.)
Open almost any annual report these days and you are greeted with photos of smiling employees, satisfied customers, new products and facilities and statements like “XYZ Corporation had an outstanding year in 2013 and expects to do even better in 2014.” It makes you want to drop whatever you’re doing and immediately rush out and buy the stock.
And that’s exactly what you’re supposed to do. Annual reports have one purpose and one purpose only: to get you to invest in the company. They are marketing tools, pure and simple. Oh sure, there are reporting requirements to be met and other strictures imposed by the SEC, but these are largely satisfied by the so-called Form 10-K. Companies don’t have to produce an annual report, but they do have to file a 10-K. They could simply mail the 10-K to shareholders, and some companies do just that to cut costs and impress shareholders with their thriftiness.
But 10-Ks send an entirely different message. They are full of “Risk Factors” and warnings about everything that could possibly go wrong and dry, boring descriptions of what the company does. A 10-K is like someone standing in the middle of the road with a big red STOP sign in his hand. Nobody would buy a company’s stock after reading its 10-K. They’d be too spooked. They’d stop and turn back around. And that’s precisely why annual reports were created – to present the company in the most appealing and favorable manner possible.
And what’s wrong with that? “Annuals” – as they’re known in the trade – are a romanticized version of what the company does. They make you fall in love with the company and its products and want to be a part of it. They contain essentially the same information as the 10-K but dressed up in dazzling photos, colorful charts and graphs, and language that is simple and straightforward. I have been reading them for 30+ years and never grow tired. I learn something new every time.
So let’s look at some of the best and see what makes them so special.
General Electric consistently produces outstanding annuals, and this year is no exception. Its cover features a technician with a clipboard staring up at a huge gas turbine destined for Sonelgaz in Algeria. The expression on her face is a mixture of wonder and awe. The back cover shows the same image from a distance, so you get a sense of the immensity of the turbine. The message is clear: We can make anything, no matter how big or complex. And we make things that count – like gas turbines for clean electric power.
Open the report and you discover that GE makes the biggest and most fuel-efficient jet engine in the world with 20 percent less “fuel burn” (I love phrases like “fuel burn”). It’s a global leader in wind turbines, locomotives, medical imaging technology, subsea technology, composite materials, ultrasound, and smart software. Its monitoring systems like Predix software connect hard assets like jet engines and locomotives and wind turbines to the so-called Industrial Internet, otherwise known as the Internet of things. They can tell you when a part is malfunctioning or about to malfunction, or the most efficient way to assemble and route trains, or when there’s dangerous pressure in that wellhead 10,000 feet below the ocean’s surface.
“GE builds, moves, powers and cures the world,” the company boasts. “We are the global leader in infrastructure.” GE is “winning” and “leading” because of its “big bet technologies, years in the making and delivered ahead of the competition.” Remember when GE used to make light bulbs and refrigerators? Well, it still does, but there is no mention of Appliances & Lighting in its annual. That’s the old GE. This is the new GE.
Nor is there any mention of GE Capital, except for a few sentences in the Chairman’s Letter. GE Capital still represents roughly a third of the company’s revenues and profits, but it became a major embarrassment five years ago during the global financial crisis when it nearly bankrupted the company and dragged its stock down to the $10 range. Now the stock is back up in the mid-20s, and GE is quietly but steadily exiting the retail finance business and reducing the size of GE Capital.
Winning the Consumer
Like GE, Procter & Gamble is busy “winning.” P&G makes household names like Tide, Bounty, Charmin, Pantene, Head & Shoulders, Old Spice, Olay, Duracell batteries, Gillette razors, Crest toothpaste and Oral-B toothbrushes – all market leaders. It’s “winning with those who matter most: consumers, customers and shareholders.” P&G’s priority #1 is “value creation,” and value creation starts with “winning the value equation with the consumer, who is always the boss.” (Is this the greatest corporate jargon ever or what?)
It gets better. Want to know what the “value equation” is? It consists of three “moments of truth.” The first moment of truth is “when the consumer chooses our product at the store shelf.” The second moment of truth is “when the consumer uses the product at home and decides whether to buy it again.” And then there’s the “‘zero moment of truth,’ when the consumer discovers information about our products and services before they shop.”
Have you ever heard anything this good? Is this what selling toilet paper and shampoo is all about? Winning the value equation? “When P&G products win the consumer value equation versus competitors, consumers reward us – and their shareholders – with their hard-earned money.” So there you have it. Take it from the world’s greatest consumer products company!
The Summary Annual Report
An alternative to and reader-friendly variation of the traditional annual report is the so-called “summary annual report” or SAR. If you want just pictures and text with minimal financial information, this is the one for you. But not all companies produce them. They’re expensive. And they don’t get around the requirement of disclosing certain financial information to shareholders. Companies that issue SARs must include the required financials when they mail out their “Proxy Statement and Notice of Annual Meeting.” SARs are popular with big companies that have large numbers of retail shareholders (people like you and me) and can easily afford the added expense.
One such company is Phillips 66. It was spun off two years ago from ConocoPhillips and has been on a roll ever since. Phillips is one of the biggest refiners in the world. It can process more than two million barrels of crude oil a day, and it’s benefiting from “cost-advantaged crudes” from the Bakken and Eagle Ford shale formations. Shale oil is “cost-advantaged” because it’s cheaper than imported oil from the North Sea or West Africa. Why? Because there’s a glut of it right now – more than the refiners can handle – and so the price differential can range from $5 to $15 a barrel.
Phillips’ goal is to have a “100-percent advantaged crude slate in the United States.” In other words, no imported oil for its refineries. On the contrary, it’s busy exporting more than 400,000 barrels a day of refined products like diesel and gasoline to places like Europe and South America. (Did you know that the U.S. is currently exporting more than four million barrels of day of refined products?)
Phillips is also busy building rail offloading facilities at its refineries to handle growing shale oil shipments and has taken delivery of 2,000 new crude railcars in the last year. In the words of Chairman, President & CEO Greg Garland, “We have laid the groundwork to…capitalize on the opportunities created by the American energy revolution.” The “American energy revolution” – I like that.
OK, I’ve carefully avoided any mention of shipping annuals till now, for a number of reasons. First, many of these companies are privately held and thus don’t publish annual reports. Second, many of those that do are content with the basic 10-K wrap and, as I’m sure you’ve figured out by now, I like stories, not numbers. However, since this is our annual shipyard edition, let me mention a few shipyard annuals.
The best is Aker Philadelphia Shipyard, the U.S. subsidiary of Norway’s Aker Group. Why is it the best? Because it has a great story to tell, and it’s at the heart of the American energy revolution. Aker Philadelphia (the former Kvaerner Philadelphia Shipyard) sits on the site of the old Philadelphia Naval Shipyard. It was all but given up for dead four years ago, and then the shale revolution changed everything.
Aker is now the leading builder of Jones Act product tankers as the demand for this type of vessel has skyrocketed. Its orderbook is full through 2018. It has gone from “Surviving to Thriving” in four short years through a combination of hard work, strategic risk-taking, and good timing.
Among its leading customers is Crowley Maritime, for whom it is building four new product tankers for delivery in 2015 and 2016. The vessels are a joint venture between the two companies, and Aker will share in their profits after delivery. SeaRiver Maritime, the maritime affiliate of ExxonMobil, is another customer. Aker is completing work on two Aframax tankers for SeaRiver for delivery this year. The tankers will work in the Alaskan trade and have a capacity of 750,000 barrels of crude. A third customer is Matson Line. Aker is building two 3,600-TEU containerships for Matson. When delivered in 2018, they will be the largest containerships in the Jones Act trade.
A distant second to Aker Philadelphia is Huntington Ingalls, the parent company of Newport News Shipbuilding in Virginia, Ingalls Shipbuilding in Mississippi, and the now-defunct Avondale yard in Louisiana. Its sole customer is the U.S. government, for whom it builds everything from nuclear aircraft carriers to amphibious assault ships to National Security Cutters, and its cover features a dramatic photo of the amphibious assault ship America. HI’s motto is “Hard Stuff Done Right,” which is actually trademarked. Sounds like a Jack Daniels commercial to me.
NASSCO in San Diego is owned by General Dynamics, whose annual is your basic 10-K wrap. The yard is not even mentioned by name, since it’s a small part of GD’s overall operations, yet it – like Aker Philadelphia – has an exciting story to tell and is currently building a series of Jones Act product tankers for customers like American Petroleum Tankers and Seabulk Tankers. These ECO-class product tankers have dual-fuel capability and are “LNG-conversion-ready.” Sounds like a winner.
The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.