Business Context and Reporting Period
POSCO filed an annual Form 20-F on April 29, 2020, covering the fiscal year ended December 31, 2019. The filing identifies the registrant as POSCO, although the request metadata states POSCO HOLDINGS INC. Financial statements are consolidated and prepared under IFRS as issued by the IASB, with comparative periods for 2017 and 2018.
POSCO is an integrated steel producer with trading, construction, energy, materials and other businesses. It produced approximately 42.9 million tons of crude and stainless steel in 2019, with approximately 47.5 million tons of annual production capacity.
Key Financial Metrics
| Metric | 2018 | 2019 | Change |
|---|---|---|---|
| Revenue | ₩65,155 billion | ₩64,786 billion | Down 0.6% |
| Gross profit | ₩8,026 billion | ₩6,324 billion | Down 21.2% |
| Gross margin | 12.3% | 9.8% | Down 2.5 percentage points |
| Operating profit | ₩4,042 billion | ₩3,223 billion | Down 20.3% |
| Operating margin | 6.2% | 5.0% | Down 1.2 percentage points |
| Profit | ₩1,932 billion | ₩2,038 billion | Up 5.5% |
| Profit attributable to controlling-company owners | ₩1,712 billion | ₩1,864 billion | Up 8.9% |
| Basic and diluted EPS | ₩21,177 | ₩23,189 | Up 9.5% |
| Net cash from operating activities | ₩5,870 billion | ₩6,005 billion | Up 2.3% |
| Cash and cash equivalents | ₩2,644 billion | ₩3,515 billion | Up 33.0% |
Profit increased despite lower operating profit primarily because income tax expense declined from ₩1,684 billion to ₩1,088 billion, finance income increased, and the share of profit from equity-accounted investees rose from ₩113 billion to ₩274 billion.
Liquidity, Debt and Capital Resources
- Working capital increased from ₩14,721 billion to ₩18,593 billion.
- Total assets increased from ₩78,777 billion to ₩79,371 billion; total equity increased from ₩46,673 billion to ₩47,763 billion.
- Short-term borrowings and current installments of long-term borrowings decreased from ₩10,290 billion to ₩8,548 billion.
- Long-term borrowings increased from ₩9,920 billion to ₩11,893 billion. Total borrowings were approximately ₩20,442 billion at year-end.
- Net borrowings-to-equity declined from approximately 37.6% to 35.4%.
- POSCO reported ₩1,064 billion of available credit lines, none of which was used at December 31, 2019.
- Contractual obligations totaled approximately ₩65,054 billion, including long-term debt, interest, lease obligations, purchase obligations, long-term shipping contracts and accrued severance benefits.
- Capital expenditures were ₩2,519 billion in 2019. Management planned approximately ₩6.0 trillion of capital expenditures for 2020, subject to market conditions.
Material Changes Versus the Prior Comparable Period
- Steel segment external revenue decreased 0.9% to ₩32,078 billion. Principal steel-product sales volume declined 3.2% to 30.4 million tons, while the weighted average unit price increased 2.3%.
- Steel segment gross profit fell 31.1% to ₩4,166 billion and gross margin declined from 12.0% to 8.4%, mainly because iron ore and other raw-material costs increased faster than selling prices.
- Trading segment external revenue decreased 1.1%, but segment gross profit increased 16.0% to ₩1,295 billion, supported by natural-resources development activities.
- Construction segment external revenue increased 2.6%, but gross profit declined 20.4% to ₩533 billion because of a less favorable project mix.
- Others segment external revenue declined 7.4%, while gross profit increased 10.7% to ₩659 billion, primarily reflecting improved performance at POSCO Chemical.
- Other operating expenses declined from ₩2,014 billion to ₩1,090 billion. The 2019 amount included ₩443 billion of property, plant and equipment impairment and ₩191 billion of intangible-asset impairment, compared with ₩1,005 billion and ₩338 billion, respectively, in 2018.
- 2019 unusual impairment items included ₩205 billion at POSCO SS VINA, ₩74 billion related to a discontinued ferrosilicon facility, ₩70 billion related to a discontinued compact endless cast-rolling mill, ₩118 billion related to termination of the Myanmar Block AD-7 exploration project and ₩55 billion of POSCO International goodwill impairment.
- POSCO adopted IFRS 16 leases on January 1, 2019 using the modified retrospective approach. Comparative figures were not restated; the adoption increased recognized right-of-use assets and lease liabilities.
Guidance, Outlook, Management Commentary and Risks
- The filing did not provide a clear 2020 revenue or earnings forecast. It indicated that capital expenditures could be adjusted, delayed or cancelled depending on demand, steel-industry production conditions and the global economy.
- Management expects steel demand and pricing to remain cyclical. Key drivers include construction, automotive, shipbuilding, appliances, downstream processors, global economic growth and Chinese steel overcapacity.
- Raw-material exposure is significant: POSCO imports virtually all iron ore and coal used in steelmaking. The 2019 average iron-ore price was US$93 per dry metric ton versus US$69 in 2018; coal averaged US$176 per wet metric ton versus US$207 in 2018.
- Approximately 62.7% of revenue from POSCO-produced steel sold by the group was generated in overseas markets in 2019. China represented 29.3% of steel export revenue, increasing geographic and foreign-exchange exposure.
- The filing, prepared during the early COVID-19 pandemic, warned that the pandemic could reduce customer demand, disrupt raw-material supply and product deliveries, interrupt operations, increase imported-input costs through currency depreciation and impair investments. It stated that the duration and full magnitude of the impact could not be predicted.
- Other material risks include foreign-exchange volatility, interest-rate exposure, raw-material price increases, global steel competition, trade remedies and tariffs, fixed-price construction contracts, environmental liabilities, cybersecurity, labor claims, geopolitical tensions involving North Korea and risks from overseas resources projects.
- POSCO E&C faced a claim of approximately ₩2.4 trillion related to the Songdo project. Management stated that it believed the claims were legally permissible and did not recognize a provision for the asserted obligation.
- The company provided guarantees with a 2019 maximum credit-risk exposure of approximately ₩4,959 billion. It also had substantial long-term raw-material purchase and shipping commitments.
- After year-end, POSCO issued approximately US$940 million of senior dollar bonds and €500 million of senior euro bonds on January 17, 2020. It also entered into a share-repurchase trust contract of up to ₩1.0 trillion in April 2020.
Important Facts for Investors to Verify
- Confirm that the intended issuer is POSCO rather than POSCO HOLDINGS INC., because the filing itself identifies POSCO as registrant.
- Reconcile the improvement in net profit and EPS with the 20.3% decline in operating profit and the lower steel-segment margins.
- Assess sensitivity to iron ore, coal, nickel and steel prices, including the company’s ability to pass raw-material cost increases to customers.
- Review the maturity profile and currency composition of approximately ₩20.4 trillion of borrowings, including the increase in long-term debt and foreign-currency exposure.
- Evaluate the ₩6.0 trillion 2020 capital-expenditure plan against projected demand, liquidity and pandemic-related operating conditions.
- Review guarantees, purchase obligations, shipping commitments and the approximately ₩2.4 trillion Songdo-related claim for potential cash or earnings exposure.
- Examine impairment assumptions for POSCO International goodwill, POSCO SS VINA and other overseas or discontinued operations.
- Check subsequent filings for the actual COVID-19 impact, 2020 capital spending, share repurchases, debt issuance and any changes in litigation or guarantee exposure.