Korean steelmaker POSCO (PKX) reported rather disappointing financial results for the third quarter of 2010 as its net income plummeted 8.6% year over year to KRW 1,044 billion (US$0.88 billion) and also registered a sequential decline of 12.7%. The fall was due to higher costs that more than offset positive revenue results in the quarter.
Earnings per share were KRW 11,966 (US$2.52 per ADR), down compared with KRW 13,089 (US$2.76 per ADR) in the comparable quarter of 2009.
Consolidated net income in the third quarter was KRW 1,070 billion (US$0.90 billion), down 4.9% year over year and 8.8% sequentially. Consolidated EPS was KRW 12,264 (US$2.58 per ADR).
Revenue
POSCO reported healthy top-line results, with revenue totaling KRW 8,524 billion (US$7.2 billion), up 24.4% year over year and 7.5% sequentially. The sequential growth was attributable to higher sales volume and sales price.
Consolidated revenue in the quarter jumped 146.9% year over year and 111.4% sequentially to KRW 23,286 billion (US$19.6 billion).
During the third quarter, facility rationalization brought down crude steel production by 1.8% sequentially to approximately 8.2 million tons. However, production registered a year-over-year growth of 4.2%.
Sales volume was 7.7 million tons of finished products, up 2.8% year over year but down 1.2% sequentially. The year-over-year growth was driven by solid growth across all product categories, except for Plate (down 9.3%), Hot Rolled (down 8.0%) and Wire Rod (down 1.0%). Of the total sales, 36% was from export and 64% from domestic sales.
As a percentage of revenue, cost of goods sold increased to 82.4% from 80.3% in the comparable quarter of 2009. EBITDA in the quarter was KRW 1,687 billion (US$1.42 billion), or 19.8% of revenue versus KRW 2,378 billion (US$2.05 billion), or 30% of revenue in the second quarter 2010.
Operating margin was 13.0% versus 14.9% in the third quarter of 2009 and 23.1% in the second quarter of 2010 due to an increased usage of expensive raw material. Interest expense was KRW 23 billion (US$0.02 billion), flat year over year and up from KRW 9 billion (US$0.01 billion) in the second quarter due to a rise in the company’s debt level.
Consolidated operating margin in the third quarter of 2010 was 6.1% compared with 17.8% in the second quarter of 2010 and 12.6% in the comparable quarter of 2009.
Balance Sheet
POSCO’s cash and cash equivalents fell 41.5% year over year and 51.5% sequentially to KRW 3,394 billion (US$2.97 billion) at the end of the third quarter of 2010.
Long-term debt balance at KRW 6,775 billion (US$5.9 billion) reflected year-over-year and sequential increases of 5.8% and 12.2%, respectively.
Outlook
POSCO remains committed to working for facility additions and upgrades for capacity expansion. The company has opened new processing centers to strengthen its global marketing networks. Global steel demand is expected to grow 13% in 2010 due to continued economic recovery.
For fiscal year 2010, POSCO expects consolidated revenue of approximately KRW 58.8 trillion (versus its prior expectation of KRW 46.5 trillion) and consolidated steel production to reach 35.4 million tons. Sales volume is likely to be roughly 31.7 million tons (versus its prior expectation of 32.3 million tons) and consolidated operating profit is expected to be roughly KRW 6.0 trillion (versus its prior expectation of KRW 6.2 trillion).
The company targets to save costs amounting to KRW 1,150 billion with roughly KRW 1,022.7 billion (89%), achieved by the end of the third quarter of 2010.
POSCO maintained its investment target for 2010 to KRW 10.4 trillion, with approximately 4.9 trillion allocated for domestic steel, 1.5 trillion for overseas investments and 4.0 trillion for new growth opportunities.
POSCO is the largest fully integrated steel producer in Korea, and one of the premier steel producers in the world. Prime competitors of the company are Arcelor Mittal (MT) and privately-held Hyundai Steel Company.
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