A Good Year

This year’s crop of annual reports says 2014 was a good year and 2015 should be even better. So far they’re right. 

Spring is the season for annual reports. They sprout like crocuses from the hard soil, and they’re just as attractive. They come in every color of the rainbow (even red, which used to be a no-no), and they feature stunning graphics and charts, gleaming plants and factories that look like they’ve never been worked in, lots of smiling employees and customers, and plenty of purple prose with extravagant praise for all the company’s “stakeholders” – management, employees, investors, customers, suppliers, the local community, you and me. I love them.

If you can cut through all the hype (I actually love the hype because it’s so well done), there’s no better way to gauge the state of the global economy than by reading the reports of the companies that run it – the Apples, Boeings, ExxonMobils, GEs and Googles of the world. And from all indications and with only a few exceptions, the world economy is in good shape. The U.S. economy is in even better shape.

Here’s how Warren Buffett, the granddaddy of all investors, described the year just ended: “It was a good year for Berkshire on all major fronts, except one.” That “except one” is part of what distinguishes the Sage of Omaha from other CEOs: He doesn’t mind admitting his mistakes. In this case, it involved service failures on the part of the company’s railroad subsidiary, BNSF, which resulted in disappointed customers: “These shippers depend on us, and service failures can badly hurt their businesses.” To remedy the situation, Berkshire will invest a whopping $6 billion in plant and equipment this year to expand BNSF’s system capacity and improve service.

Role of the Annual

Savvy MarEx readers know that annual reports (“annuals” in corporate-speak) are mandated by the Securities & Exchange Commission for all publically traded U.S. companies. They must contain a certain minimal amount of financial and legal information, and the rest is up to them. In practice, companies meet the reporting requirements of the Securities Exchange Act of 1934 by filing so-called 10-Ks, which are written in legalese and impossible to read. The annual report is the reader-friendly version of the 10-K, complete with pictures and all.

One of the best is GE’s. It’s loaded with useful facts and figures and bold statements like “GE’s mission is to invent the next industrial era, to build, move, power and cure the world.” How’s that for chutzpah? But wait, there’s more: “GE imagines things others don’t, builds things others can’t and delivers outcomes that make the world work better. GE brings together the physical and digital worlds in ways no other company can.” Boastful, yes. But largely true, as a review of its product portfolio will certify.

Every year GE’s writers come up with new buzzwords that, for a wordsmith like me, are irresistible. “Pivot” is the key one this year:

• We have reshaped the portfolio from a broad conglomerate to a more focused infrastructure leader and took important steps in that pivot last year.
• From 2014 to 2016, we are focused on delivering an important financial pivot, and
• We are convinced that this pivot will deliver a much higher valuation over time.

Get the idea? Maybe they could pivot their way to a higher stock price while they’re at it.

One of my former employers, W.R. Grace & Co., takes a more straightforward approach: “Grace’s 2014 performance marked another year of increasing value for our shareholders, customers and employees.” Boring, maybe, but to the point. Because that’s what it’s really all about. Increasing value. That’s why you invest in the first place. You’re hoping for a decent return on your money.

Grace is content with publishing an annual that includes just the Shareholder Letter, a segment analysis and the Form 10-K, a trend being followed by many others these days in an effort to cut costs and send a message that “Hey, we’re thrifty with your money.” Even more thrifty – or barebones, depending on your point of view – is the aptly named “10-K wrap,” consisting of nothing more than the cover and Form 10-K. No pictures, no charts, no information about products or services or trends except what’s buried deep inside the 10-K and written in a language that only a lawyer could love.

Shipping Annuals

Not only do annuals tell you about the global economy, they tell you about specific sectors of the economy – the sector they’re in. So if you want to learn about retail, read the Target annual report. If you’re interested in energy, try ExxonMobil or Shell. Offshore drilling? Transocean. Consumer products? Procter & Gamble. Banking? Wells Fargo or Bank of America. (By the way, did you know that Wells Fargo is the most profitable bank in the U.S. and the world’s most valuable bank by market cap? I didn’t either until I read it in their annual report.)

All of which brings us to the wonderful world of shipping, the heartbeat of the global economy and the engine of world trade. Many of these companies are private, so they are under no obligation to publish an annual accounting of their activities, and they don’t. MSC, for example. And many of the public ones are content with the basic 10-K wrap, saving money but discouraging readership. But there are enough public ones that do go the whole nine yards and give us our money’s worth, and some of these are worth looking at.

Let’s start with shipyards, since this is our annual shipbuilding edition. One of the best is Aker Philadelphia Shipyard, the U.S. subsidiary of Norway’s Aker Group and the former Kvaerner yard, built on the site of the old Philadelphia Navy Yard. It’s got a stunning cover photo of a huge gantry crane on rails framed by the rising sun – or maybe it’s the setting sun – hard to tell. But the sun is clearly rising on Aker as its orderbook is full through 2018 and totals over $1 billion.

Aker is benefiting from the boom in Jones Act shipping triggered by the shale revolution and is now the leading builder of Jones Act product tankers. It has, in fact, delivered over 50 percent of all large ocean-going Jones Act commercial ships since 2000 (14 product tankers, four containerships and

one Aframax tanker). “2014 was a transformative year for Aker Philadelphia Shipyard,” states Steinar Nerbovik, President and CEO, “with changes in leadership, new strategic investments and multiple projects underway.” And the future looks just as bright.

So while some of the world’s leading yards may be struggling for orders (see Wendy Laursen’s insightful article elsewhere in this edition), the ones that build Jones Act vessels are doing just fine, thank you.

Kirby Corp. is an interesting company with a footprint in two separate but related segments of the industry – coastal and inland waterways transportation. It’s the biggest operator of inland tank barges in the U.S. and one of the largest operators of coastwise tankers, and it’s benefited from the shale oil boom from the very beginning. Here’s how Kirby’s Shareholder Letter begins: “The 2014 year was our fourth consecutive year of record-setting operating results. Our 2014 results reflected continued strong inland and coastal marine transportation markets throughout the year.”

It expects more of the same going forward. The steep drop in oil prices in the last six months doesn’t faze Kirby at all: “For both our inland and coastal markets, today’s lower energy prices are a net positive. In a consumer-driven economy, lower energy prices mean more money in the consumers’ hands, which is good for the economy and, therefore, positive for the volumes we transport.”

In the LPG space, where our cover story company Dorian operates (Dorian’s annual report is not out), BW LPG of Norway is currently the world’s biggest operator with 33 VLGCs on the water and eight more scheduled for delivery this year and next. Naturally it has a VLGC on the cover. Here’s what its Chairman, Andreas Sohmen-Pao, has to say about the industry: “2014 is a year in which we saw the global LPG export market change dramatically with the United States, until recently a net importer of LPG, becoming the world’s largest exporting nation. This has resulted in a substantial growth in seaborne LPG, both in terms of volumes carried and distance travelled, creating a very positive environment for BW’s core business of LPG transportation in VLGCs (Very Large Gas Carriers).”

Huh? I didn’t know that. But if the head of the world’s biggest shipper of LPG says the U.S. is #1, who am I to argue? No wonder U.S.-based Dorian has commissioned all those newbuilds.

Trinity Industries is a leading builder of two products in high demand these days – rail tank cars and inland tank barges. It seems it can’t build them fast enough to carry all that shale oil. It also makes the structural towers for wind turbines. So it’s no surprise to read in its current annual report that “During 2014, Trinity utilized the strengths of its integrated business model to achieve new records for revenues, net income, and earnings per share.”

As for 2015, “We continue to closely monitor business conditions, in particular, fluctuations in oil prices and their potential impacts on our businesses,” says Tim Wallace, Chairman, CEO and President. “I am confident, given the diversity and size of our backlogs along with our proven ability to execute, that we will successfully navigate the challenges we may encounter in 2015.”

Best Annual Report

I know you’ve all been waiting for my choice this year, and here it is – Northwestern Mutual. You know, the one that used to call itself “The Quiet Company”? Well, it’s not the quiet company anymore, and its annual is a refreshing departure from the norm in almost every way. It’s short (only 24 pages), colorful and easy-to-read, and focuses on real-life people – customers in Florida, Texas, Connecticut and New Jersey who use its services. And that makes it credible, perhaps the most important element in any annual report. – MarEx