POSCO 2018 Form 20-F Summary
Business context and reporting period
POSCO, headquartered in Korea, is a fully integrated steel producer with complementary trading, construction, power-generation, materials and resources businesses. This Form 20-F was filed April 30, 2019 and covers the fiscal year ended December 31, 2018. The consolidated financial statements are prepared under IFRS as issued by the IASB. The filing provides annual results; it does not present a separately identified 2018 fourth-quarter income statement.
POSCO produced 42.9 million tons of crude and stainless steel in 2018, versus 42.2 million tons in 2017. Consolidated production capacity was approximately 47.6 million tons annually, with a 90.1% utilization rate.
Financial performance and position
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | ₩65,155 billion | ₩60,187 billion | Up 8.3% |
| Gross profit | ₩8,026 billion | ₩8,271 billion | Down 3.0% |
| Gross margin | 12.3% | 13.7% | Down 1.4 percentage points |
| Operating profit | ₩4,042 billion | ₩4,196 billion | Down 3.7% |
| Operating margin | 6.2% | 7.0% | Down 0.8 percentage points |
| Profit | ₩1,932 billion | ₩2,909 billion | Down 33.6% |
| Profit attributable to controlling-company owners | ₩1,712 billion | ₩2,756 billion | Down 37.9% |
| Basic and diluted EPS | ₩21,177 | ₩34,040 | Down 37.8% |
| Operating cash flow | ₩5,870 billion | ₩5,607 billion | Up 4.7% |
| Capital expenditures | ₩2,136 billion | ₩2,288 billion | Down 6.6% |
Revenue growth reflected higher steel volumes and prices, increased trading activity and growth in the Others segment. The principal steel-product sales volume increased 4.4% to 31.4 million tons, while the weighted average unit price increased 3.3% to ₩934 thousand per ton.
Cost of sales increased 10.0% to ₩57,129 billion, outpacing revenue growth. Raw-material costs rose, and IFRS 15 caused ₩1,230 billion of freight and custody expenses to be classified in cost of sales rather than selling expenses. Selling and administrative expenses declined to ₩2,430 billion, largely because of this reclassification.
At December 31, 2018, total assets were ₩78,777 billion, total liabilities were ₩32,104 billion and total equity was ₩46,673 billion. Working capital was ₩14,721 billion and cash and cash equivalents were ₩2,644 billion. Total borrowings were ₩20,209 billion, producing net borrowings of ₩17,565 billion and a net borrowings-to-equity ratio of 37.64%, compared with 38.99% in 2017. Available credit lines totaled ₩1,375 billion, of which ₩300 billion was used.
Cash flow from investing activities was negative ₩2,648 billion, while financing activities used ₩3,195 billion, including ₩1,160 billion of hybrid-bond repayments and ₩724 billion of dividends. Cash increased by ₩31 billion during the year.
Material changes versus the prior comparable period
- Steel external revenue increased 7.0% to ₩32,358 billion; trading external revenue increased 7.7% to ₩22,408 billion; construction external revenue decreased 1.7% to ₩6,769 billion; and Others external revenue increased 25.8% to ₩3,443 billion.
- Steel gross margin declined from 12.9% to 12.0%, while trading gross margin declined from 4.3% to 2.9%, primarily reflecting freight-cost classification under IFRS 15 and weaker trading margins.
- Other operating expenses increased to ₩2,014 billion from ₩691 billion, driven by impairment charges and provisions.
- Finance income fell 28.1% to ₩1,706 billion. Finance costs fell 9.7% to ₩2,244 billion, but foreign-exchange results shifted from net gains in 2017 to net losses in 2018 as the Won depreciated.
- The effective tax rate increased from 29.0% to 46.6%, partly because impairment losses on the synthetic natural gas facility were non-deductible and because of a ₩130 billion tax effect related to differing interpretations of tax law.
- POSCO adopted IFRS 15 and IFRS 9 in 2018. Comparative periods were not restated for IFRS 15; the initial IFRS 15 adjustment reduced retained earnings by approximately ₩70.9 billion and non-controlling interests by ₩59.0 billion. IFRS 16 was scheduled for adoption January 1, 2019, with management estimating right-of-use assets and lease liabilities of approximately ₩619 billion.
Guidance, outlook, commentary, risks and unusual items
Management planned approximately ₩6.1 trillion of 2019 capital expenditures, subject to adjustment based on steel demand, industry capacity and macroeconomic conditions. Planned investment emphasizes facility rationalization, higher-value-added steel, operating efficiency, battery materials and other non-steel businesses.
- Unusual impairments: ₩810 billion related to discontinuation of the Gwangyang synthetic natural gas facility; ₩54 billion related to the fuel-cell business; ₩158 billion of goodwill impairment at POSCO International; ₩66 billion of goodwill impairment at POSCO E&C; and ₩78 billion related to Hume Coal industrial property rights.
- Market exposure: Steel demand is cyclical and global steel prices weakened in the fourth quarter of 2018, particularly amid lower Chinese demand and additional Chinese production capacity. Korea represented 38.4% of steel-product revenue, while overseas markets represented 61.6%.
- Input-cost exposure: POSCO imports virtually all iron ore and all coal used in steelmaking. Average coal prices increased from US$188 per wet metric ton in 2017 to US$207 in 2018; long-term contracts still covered 100 million tons of iron ore and 14 million tons of coal to be purchased.
- Currency and interest-rate risk: A hypothetical 10% unfavorable movement in the Won against the U.S. dollar would have reduced annual profit and equity by approximately ₩204 billion at 2018 exposure levels. A 1% increase in floating borrowing rates would have reduced annual profit by approximately ₩85 billion.
- Legal and contingent matters: A former POSCO E&C joint-venture partner sought approximately ₩2.4 trillion in damages in U.S. litigation and arbitration concerning the Songdo project. The Financial Supervisory Service was reviewing POSCO E&C’s 2015 annual report and financial statements. The filing also describes trade-remedy proceedings, guarantees and other litigation; management recorded ₩50.9 billion of provisions for legal contingencies and claims.
- Other risks: Key risks include global and Korean economic weakness, Chinese overcapacity, raw-material supply and price volatility, construction-project cost overruns, environmental liabilities, cybersecurity, geopolitical tensions on the Korean peninsula, sanctions-related business and execution risk in overseas resources and diversification projects.
- Dividend: The 2018 average total dividend was ₩10,000 per common share, compared with ₩8,000 in 2017. Future dividends are not assured.
Most important facts an investor should verify
- Whether 2019 capital expenditures of approximately ₩6.1 trillion were ultimately incurred and how they affected leverage and free cash flow.
- The sustainability of steel margins after the 2018 decline and the extent to which raw-material costs can be passed through to customers.
- The final accounting and cash-flow effects of IFRS 16 adoption and the comparability impact of IFRS 15 freight-cost reclassification.
- Developments and potential exposure from the approximately ₩2.4 trillion Songdo-related claims and the Financial Supervisory Service review of POSCO E&C.
- Whether further impairments arise from the discontinued synthetic natural gas business, fuel cells, POSCO International, POSCO E&C or overseas resource investments.
- The composition, maturity and refinancing requirements of ₩20,209 billion of total borrowings, along with guarantees and purchase obligations totaling approximately ₩67,125 billion under the filing’s contractual-obligations schedule.
- Exposure to Chinese steel capacity, coal and iron-ore prices, foreign exchange, construction execution, environmental obligations and geopolitical or sanctions-related disruptions.