Business context and reporting period
POSCO filed its annual Form 20-F on April 27, 2018, covering the fiscal year ended December 31, 2017. The filing is for POSCO and consolidated subsidiaries and is prepared under IFRS as issued by the IASB. Although the request metadata refers to “2017 Q4,” the supplied filing is an annual report and does not provide a standalone fourth-quarter financial summary.
POSCO is an integrated Korean steel producer with complementary trading, engineering and construction, power generation, LNG, logistics and technology businesses. It produced approximately 42.2 million tons of crude and stainless steel in 2017 and had approximately 47.6 million tons of annual consolidated capacity.
Key financial metrics
| Metric | 2016 | 2017 | Change |
|---|---|---|---|
| Revenue | ₩52,940 billion | ₩60,187 billion | +13.7% |
| Gross profit | ₩6,668 billion | ₩8,271 billion | +24.0% |
| Gross margin | 12.6% | 13.7% | +1.1 percentage points |
| Operating profit | ₩2,282 billion | ₩4,196 billion | +83.8% |
| Operating margin | 4.3% | 7.0% | +2.7 percentage points |
| Profit | ₩1,032 billion | ₩2,909 billion | +181.9% |
| Profit attributable to controlling-company owners | ₩1,355 billion | ₩2,756 billion | +103.4% |
| Basic and diluted EPS | ₩16,521 | ₩34,040 | +106.0% |
| Operating cash flow | ₩5,269 billion | ₩5,607 billion | +6.4% |
| Capital expenditures on property, plant and equipment | ₩2,324 billion | ₩2,288 billion | -1.6% |
| Cash and cash equivalents | ₩2,448 billion | ₩2,613 billion | +6.7% |
| Total borrowings | ₩22,705 billion | ₩21,064 billion | -7.2% |
| Net borrowings-to-equity ratio | 44.26% | 38.99% | -5.27 percentage points |
| Working capital | ₩10,711 billion | ₩12,354 billion | +15.3% |
Investing cash outflow was ₩3,818 billion and financing cash outflow was ₩1,566 billion in 2017. Cash increased by ₩165 billion during the year after a ₩2,424 billion decrease in 2016.
At December 31, 2017, total assets were ₩79,786 billion, total liabilities were ₩32,459 billion and total equity was ₩47,327 billion. Short-term borrowings and current maturities were ₩11,275 billion, while long-term borrowings excluding current maturities were ₩9,789 billion. POSCO reported available credit lines of ₩1,574 billion, of which ₩300 billion was used.
The annual dividend remained ₩8,000 per common share, comprising a ₩3,500 annual dividend and ₩4,500 interim dividends. The filing does not provide a separate 2017 fourth-quarter dividend amount.
Material changes versus the prior comparable period
- Revenue growth reflected higher steel prices, increased trading activity and the March 2017 merger of POSCO Processing & Service into POSCO Daewoo. The merger shifted certain steel sales from the Steel segment to the Trading segment.
- Steel external revenue rose 12.6% to ₩30,230 billion. The weighted average selling price for principal steel products increased 21.3% to approximately ₩904 thousand per ton, while reported external sales volume decreased 8.6% to 30.0 million tons, partly because of the segment reclassification and facility rationalization.
- Trading external revenue increased 24.0% to ₩20,802 billion, primarily from the POSCO Processing & Service merger, increased third-country trades and higher slab and petrochemical sales.
- Construction external revenue increased 1.7% to ₩6,887 billion, but the segment’s total revenue declined 2.6% because of lower intercompany activity. Construction gross profit improved from a ₩82 billion loss in 2016 to ₩688 billion of profit in 2017, following losses on overseas projects in 2016, including the CSP steel plant project in Brazil.
- Raw-material prices increased materially: average premium hard coking coal rose from US$114 to US$217 per wet metric ton, and average iron ore rose from US$54 to US$64 per dry metric ton. POSCO reported that higher steel prices more than offset the raw-material pressure.
- Finance costs declined 17.6% to ₩2,484 billion, while finance income increased 6.3% to ₩2,373 billion. Currency effects improved as the Won appreciated against the U.S. dollar during 2017.
- Profit benefited from a ₩133 billion tax refund related to a successful tax-audit appeal, higher gains on disposals of investments and a ₩56 billion gain from valuation of firm commitments. These benefits were partly offset by ₩168 billion of goodwill and intangible-asset impairment, ₩117 billion of property, plant and equipment impairment and ₩123 billion of available-for-sale investment impairment.
Guidance, outlook, commentary and risks
Management planned approximately ₩4.2 trillion of capital expenditures for 2018, subject to adjustment based on market demand, global steel conditions and economic conditions. Planned investment emphasizes facility rationalization, premium steel products, environmental efficiency and improvements to older facilities.
The filing does not provide a formal 2018 revenue or earnings guidance range. Management expects steel demand, prices and trading conditions to remain subject to cyclical fluctuations and intends to adjust production, pricing and capital spending as market conditions change.
- Steel demand is sensitive to global economic conditions and construction, automotive, shipbuilding, electrical-appliance and downstream-processing activity. Global steel overcapacity and competition, particularly from China and other large producers, may pressure prices and margins.
- Korea represented 39.0% of steel-product revenue, while export and overseas sales represented 61.0%. China accounted for 28.5% of export revenue from POSCO-produced steel, creating exposure to Asian demand and Korea-China economic and trade relations.
- POSCO imports substantially all coal and virtually all iron ore used in steel production. Price increases, supply disruptions and the inability to pass through raw-material costs could reduce profitability. Long-term purchase commitments included 116 million tons of iron ore and 18 million tons of coal at year-end.
- Foreign-exchange risk remains significant because exports and raw-material purchases are largely denominated in foreign currencies. A hypothetical 10% adverse U.S. dollar movement was estimated to affect annual profit by approximately ₩173 billion.
- Construction operations face fixed-price contract risk, cost overruns, delays, claims and uncertain project estimates. The filing states that 2017 changes in estimated construction costs reduced current-period profit before tax by approximately ₩70 billion and future-period profit by approximately ₩6 billion.
- Other risks include environmental liabilities, cybersecurity, intellectual-property disputes, labor claims relating to ordinary wages, geopolitical tensions involving North Korea, sanctions-related business exposure and contingent guarantees for subsidiaries, associates and joint ventures.
- Outstanding guarantee exposure related to financial guarantees was approximately ₩3,135 billion at December 31, 2017. Total contractual obligations disclosed were ₩38,225 billion, including debt, interest, leases, purchase obligations and accrued severance benefits.
- IFRS 9 and IFRS 15 were adopted beginning January 1, 2018. Management estimated an initial reduction in total equity of approximately ₩182 billion, primarily from IFRS 15 and expected-credit-loss effects. The filing states that the impact could differ from these estimates.
Most important facts for an investor to verify
- Confirm that the filing is an annual fiscal-year report rather than a standalone 2017 fourth-quarter filing.
- Reconcile the improvement in operating profit and margins with higher steel prices, raw-material inflation, lower reported external steel volume and the POSCO Processing & Service merger.
- Assess the sustainability of 2017 earnings excluding the ₩133 billion tax refund, disposal gains, hedge-accounting valuation effects and other unusual items.
- Review debt maturities, variable-rate exposure, foreign-currency borrowings, available credit lines and the ₩3,135 billion financial-guarantee exposure.
- Evaluate construction-contract estimates, fixed-price project exposures, provisions and potential litigation outcomes, including the ₩461 billion of claims disclosed for POSCO Engineering & Construction arbitration and related matters.
- Monitor coal, iron ore and nickel prices, steel selling prices, capacity utilization and demand in Korea, China and other Asian markets.
- Verify the actual accounting effects of IFRS 9 and IFRS 15 after adoption and compare them with the filing’s estimated January 1, 2018 adjustments.
- Consider the effect of currency movements, trade remedies, sanctions, environmental obligations and geopolitical developments on future cash flow and ADS value.