POSCO(PKX) - 2022 Q4 - Annual Report

Part I Item 3. Key Information This section details significant economic, competitive, operational, and geopolitical risks impacting the company's business and financial performance - The company's business is highly sensitive to the global economic cycle, with fluctuating demand and production levels influenced by economic slowdowns, rising interest rates, and geopolitical conflicts[12][14] Financial Performance (2021 vs 2022) | Metric | 2021 (Billion Won) | 2022 (Billion Won) | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | 76,009 | 85,004 | +11.8% | | Profit | 7,176 | 3,586 | -50.0% | - The company faces intense competition across its segments, including price pressure in steel from Chinese overcapacity and rivalry from major trading and construction firms[17][23][25] - Korea is the company's most important market, accounting for 40.7% of 2022 revenue, making performance highly dependent on the Korean economy and geopolitical stability[31][101] - Heavy reliance on imported raw materials like iron ore and coal exposes the company to significant price volatility, with coal prices increasing from US$226/ton in 2021 to US$364/ton in 2022[43][44] - Natural disasters, such as Typhoon Hinnamnor in September 2022, caused significant operational disruptions and expenses, including Won 790 billion in unallocated overheads and Won 380 billion in restoration costs[45][47] - As a holding company, POSCO HOLDINGS INC. relies on subsidiary dividends for operations and its own dividend payments, subject to their financial performance and legal requirements[75][78] Item 4. Information on the Company This section provides an overview of POSCO HOLDINGS INC.'s history, corporate structure, and diverse business operations across six segments History and Development of the Company Established in 1968, the company privatized by 2000 and transitioned to POSCO HOLDINGS INC., a holding company, in March 2022 - On March 2, 2022, the company transitioned to POSCO HOLDINGS INC., a holding company, after spinning off its domestic steel business into a wholly-owned subsidiary, POSCO[120][122] Business Overview The company's operations are structured into six segments, with Steel as the largest, contributing 52.4% of 2022 revenue, alongside growing Green Infrastructure and Materials businesses Revenue by Segment (2022) | Segment | Revenue (Billion Won) | % of Total | | :--- | :--- | :--- | | Steel Segment | 44,547 | 52.4% | | Green Infrastructure - Trading | 25,955 | 30.5% | | Green Infrastructure - Construction | 7,668 | 9.0% | | Green Infrastructure - Energy and Other | 3,999 | 4.7% | | Green Materials and Energy Segment | 2,452 | 2.9% | | Others Segment | 129 | 0.2% | | Total | 85,004 | 100.0% | Organizational Structure As a holding company, POSCO HOLDINGS INC. oversees key subsidiaries including POSCO (100%), POSCO International (62.9%), and POSCO Future M (59.8%) Significant Subsidiaries and Ownership (as of Dec 31, 2022) | Name | Jurisdiction | Ownership % | | :--- | :--- | :--- | | POSCO | Korea | 100.0% | | POSCO International Corporation | Korea | 62.9% | | POSCO Engineering & Construction Co., Ltd | Korea | 52.8% | | POSCO DX Co, Ltd. | Korea | 65.4% | | POSCO Future M Co., Ltd. | Korea | 59.8% | | POSCO (Zhangjiagang) Stainless Steel Co., Ltd. | China | 82.5% | Property, Plants and Equipment The company's principal steel production facilities in Korea and overseas saw a decrease in aggregate capacity utilization to 84.1% in 2022 Capacity Utilization Rates of Major Steel Facilities | Facility | 2021 Rate | 2022 Rate | | :--- | :--- | :--- | | Pohang & Gwangyang Works (Korea) | 94.1% | 84.1% | | PT. Krakatau POSCO (Indonesia) | 104.5% | 101.0% | | POSCO (Zhangjiagang) (China) | 89.9% | 99.6% | | POSCO YAMATO VINA (Vietnam) | 104.9% | 72.2% | Item 5. Operating and Financial Review and Prospects This section analyzes 2022 financial performance, highlighting a 50.5% decrease in operating profit despite revenue growth, and discusses liquidity, capital resources, and R&D efforts Operating Results In 2022, revenue grew 11.8% to Won 85.0 trillion, but surging raw material costs led to a 50.5% drop in operating profit to Won 4.3 trillion Consolidated Statement of Comprehensive Income Summary (2021 vs 2022) | Item (in billions of Won) | 2021 | 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | 76,009 | 85,004 | 11.8% | | Cost of sales | 64,154 | 77,321 | 20.5% | | Gross profit | 11,855 | 7,682 | (35.2)% | | Operating profit | 8,775 | 4,342 | (50.5)% | | Profit | 7,176 | 3,586 | (50.0)% | - The Steel Segment's external revenue grew 8.4% to Won 44.5 trillion in 2022, driven by a 17.2% increase in unit sales price despite a 7.2% decrease in sales volume[269] - Increased cost of sales was primarily due to higher raw material prices, including coal rising from US$226/ton in 2021 to US$364/ton in 2022, and Korean Won depreciation[283] - The gross profit margin declined from 15.6% in 2021 to 9.0% in 2022, primarily due to raw material cost increases, lower trading margins, and Typhoon Hinnamnor expenses[284] Liquidity and Capital Resources The company maintains solid liquidity with Won 24.8 trillion working capital and stable operating cash flow, planning Won 11 trillion in 2023 capex, while improving its leverage ratio Summary of Cash Flows (in billions of Won) | Cash Flow Activity | 2021 | 2022 | | :--- | :--- | :--- | | Net cash from operating activities | 6,259 | 6,187 | | Net cash used in investing activities | (5,584) | (4,220) | | Net cash (used in) provided by financing activities | (769) | 1,319 | - Capital expenditures for property, plant, and equipment increased to Won 4.9 trillion in 2022 from Won 3.1 trillion in 2021, with a projected Won 11 trillion in 2023[316][330] - The net borrowings-to-equity ratio improved from 31.01% in 2021 to 27.93% in 2022, reflecting an enhanced leverage position[326] Research and Development, Patents and Licenses, Etc. The company's robust R&D programs focus on advanced steel, AI, battery materials, and hydrogen, with 872 personnel and 11,300 registered industrial rights - In 2022, the company launched the New Experience of Technology Hub, focusing on R&D in AI, rechargeable battery raw materials, and hydrogen/environmentally-friendly energy solutions[332] Item 6. Directors, Senior Management and Employees This section details the company's governance, including a board with seven independent directors, and human resources, with 38,175 employees as of 2022 - The Board of Directors comprises five Inside Directors and seven Outside Directors, ensuring an independent majority[337] - Aggregate compensation for Directors and executive officers in 2022 was approximately Won 50.2 billion, plus Won 6.5 billion for pension and retirement benefits[344] - The company maintains five special board committees, including an Audit Committee composed entirely of three independent Outside Directors[338][349] - As of December 31, 2022, the company and its subsidiaries employed 38,175 people, an increase from 36,619 in 2021[352] Item 7. Major Shareholders and Related Party Transactions This section identifies major shareholders, with the National Pension Service holding 9.11%, and details related party transactions disclosed in financial statements Major Shareholders as of December 31, 2022 | Shareholder | Percentage | | :--- | :--- | | National Pension Service | 9.11% | | BlackRock Fund Advisors | 5.19% | | Government of Singapore | 4.67% | | Nippon Steel Corporation | 3.42% | | FMR LLC | 3.29% | | Treasury shares | 10.31% | Item 8. Financial Information This section references consolidated financial statements, details the dismissal of a US$2.3 billion arbitration case, and outlines the Won 12,000 per share 2022 dividend - A major arbitration claim of approximately US$2.3 billion against POSCO E&C was dismissed by the International Court of Arbitration in October 2022[367] Total Dividend per Common Stock (in Won) | Year | Dividend per Share | | :--- | :--- | | 2020 | 8,000 | | 2021 | 17,000 | | 2022 | 12,000 | Item 10. Additional Information This section details share capital, articles of association, exchange controls, and taxation, including Korean regulations for foreign investors and U.S. tax considerations - The company's authorized share capital is 200 million shares, with 84.6 million common shares issued and 8.7 million held as treasury shares as of December 31, 2022[377] - Korean law requires foreign investors to register with the Financial Supervisory Service to trade shares, and report ownership of 5% or more of a listed company's equity[417][429] - Non-resident holders face a 22% Korean withholding tax on dividends (or lower treaty rate), while capital gains from KRX KOSPI sales are generally exempt if ownership is less than 25%[440][443] - For U.S. holders, the company believes it was not a PFIC in 2022 and expects dividends to be 'qualified dividends' eligible for preferential U.S. tax rates[462][468] Item 11. Quantitative and Qualitative Disclosures about Market Risk The company faces market risks from foreign exchange, interest rates, and commodity prices, with a 10% Won depreciation impacting profit by Won 344 billion Sensitivity to 10% Foreign Exchange Rate Change vs. Won (2022) | Currency | Impact on Profit/Loss (Billion Won) | | :--- | :--- | | U.S. Dollar | (344) / 344 | | Euro | (186) / 186 | | Japanese Yen | 14 / (14) | Sensitivity to 1% Interest Rate Change (2022) | Change | Impact on Profit/Loss (Billion Won) | | :--- | :--- | | 1% Increase | (82) | | 1% Decrease | 82 | Item 15. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, based on the COSO framework - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[501] - Management assessed and concluded that internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework[506] Item 16. Corporate Governance This section highlights differences between the company's Korean-law-based corporate governance and NYSE standards, particularly regarding committee structures and shareholder approvals - The company's board has a majority of independent directors (7 out of 12), meeting NYSE standards, and maintains key committees composed primarily of Outside Directors[519][530][531] - Unlike NYSE standards, Korean law does not require shareholder approval for the Employee Stock Ownership Program, and the board can generally issue new shares without shareholder approval, with limitations[533][534] Part III Item 18. Financial Statements This section presents the company's audited consolidated financial statements for 2020-2022, with KPMG providing an unqualified opinion on both financial statements and internal controls - KPMG Samjong Accounting Corp. issued an unqualified opinion on the consolidated financial statements, affirming fair presentation of financial position and results in conformity with IFRS[545] - The auditor also issued an unqualified opinion on the effectiveness of internal control over financial reporting as of December 31, 2022, based on the COSO framework[546][559] - Critical Audit Matters include goodwill impairment assessment for POSCO INTERNATIONAL and estimation of total contract costs for construction revenue recognition at POSCO E&C[550][553] Consolidated Statements of Financial Position Total assets increased to Won 99.0 trillion in 2022 from Won 92.3 trillion in 2021, with corresponding increases in liabilities and equity Key Balance Sheet Items (in millions of Won) | Item | Dec 31, 2021 | Dec 31, 2022 | | :--- | :--- | :--- | | Total current assets | 47,419,860 | 48,243,041 | | Total non-current assets | 44,879,030 | 50,778,709 | | Total assets | 92,298,890 | 99,021,750 | | Total current liabilities | 21,271,371 | 23,434,705 | | Total non-current liabilities | 16,313,553 | 17,395,148 | | Total liabilities | 37,584,924 | 40,829,853 | | Total equity | 54,713,966 | 58,191,897 | Consolidated Statements of Comprehensive Income In 2022, revenue grew to Won 85.0 trillion, but operating profit declined 50.5% to Won 4.3 trillion, with basic EPS falling to Won 41,634 Key Income Statement Items (in millions of Won) | Item | 2021 | 2022 | | :--- | :--- | :--- | | Revenue | 76,009,201 | 85,003,616 | | Gross profit | 11,854,862 | 7,682,417 | | Operating profit | 8,775,305 | 4,341,686 | | Profit | 7,175,982 | 3,585,957 | | Basic earnings per share (Won) | 87,191 | 41,634 | Consolidated Statements of Cash Flows In 2022, operating cash flow was stable at Won 6.2 trillion, investing cash outflow decreased, and financing cash flow turned positive, increasing cash and equivalents to Won 8.1 trillion Key Cash Flow Items (in millions of Won) | Cash Flow Activity | 2021 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | 6,259,365 | 6,186,765 | | Net cash used in investing activities | (5,583,507) | (4,219,871) | | Net cash provided by (used in) financing activities | (768,666) | 1,319,408 | | Net increase in cash and cash equivalents | 20,142 | 3,277,562 | | Cash and cash equivalents at end of period | 4,775,720 | 8,053,282 | Note 41. Operating Segments and Geographic Information This note details 2022 segment performance, with Steel generating Won 1.7 trillion in profit, Green Infrastructure contributing, and the 'Others' segment recording a Won 1.1 trillion loss Segment Profit (Loss) for the year ended Dec 31, 2022 | Segment (in millions of Won) | Segment Profit (Loss) | | :--- | :--- | | Steel | 1,711,940 | | Green Infrastructure - Construction | 137,911 | | Green Infrastructure - Trading | 525,500 | | Green Infrastructure - Energy and Others | 293,859 | | Green Materials and Energy | 109,209 | | Others | (1,087,428) | | Total Segment Profit | 1,690,991 | Revenue by Geographic Area (2022) | Region (in millions of Won) | Revenue | | :--- | :--- | | Domestic | 54,519,647 | | Japan | 2,651,584 | | China | 7,430,619 | | Asia-other | 12,614,612 | | North America | 2,413,054 | | Others | 5,120,688 |