DSME 2010 Annual Report
Riding the waves of change
Company Overview 03 / Key Figures 04 / CEO Message 06 / 2010 at a Glance 08 Operation Review 10 / Financial Review 24 / Corporate History 84 / Global Network 85
Contents
For Daewoo Shipbuilding & Marine Engineering Co. Ltd., 2010 was truly a remarkable year — one of the strongest and most memorable in our company’s history. Not only did we achieve impressive financial results and eclipse one of our most challenging years with one of our best, but we also worked together to enhance our value and solidify our position in the international markets.
The collective strength of our experienced leadership, premier assets, efficient operating structure and flexible financial position underlies a resilient, stable operation that allows us to effectively maneuver and prosper, enriching all of our stakeholders.
BEyonD RESiliEncE
Company Overview 03 / Key Figures 04 / CEO Message 06 / 2010 at a Glance 08 Operation Review 10 / Financial Review 24 / Corporate History 84 / Global Network 85
Contents
Daewoo Shipbuilding & Marine Engineering Co. Ltd. (hereafter
DSME) began operation in 1973 at the Okpo Shipyard in Geoje
Island, South Gyeongsang Province. As a global leader in the
building of ships and offshore structures, our product portfolio
includes a wide range of commercial ships such as LNG carriers,
LPG carriers, bulk carriers, oil tankers, containerships and pure car
carriers; offshore structures such as fixed platforms, drilling rigs,
semi-submersible drilling rigs, FPSO, and drillships; as well as naval
vessels and passenger ships including submarines, destroyers,
rescue ships and patrol boats.
DSME actively pursues eco-friendly management activities
through our commitment in 1995 to establish green shipyards
and in our operation of the world’s largest dry dock, with a
capacity of one million tons on an area spanning 4.3 million
square meters. We have optimal facilities ranging from block
manufacturing plants to PE sites, dry docks and inner walls.
Moreover, equipped with our IT-based shipbuilding technologies,
offshore structure building capabilities, large-scale plant project
management capabilities, and advanced technologies for building
submarines and destroyers, DSME produces a wide variety of
ships and offshore structures of outstanding quality.
In 2010 when we announced our decision to focus on ethical
management – a qualitative leap that will allow DSME to become
the world’s No.1 heavy industries group – our revenues amounted
to KRW 12.075 trillion and our operating income reached KRW
1.011 trillion. As a result, we rejoined the ‘10-1 trillion club’ – a term
for firms that achieve more than 10 trillion won in revenue and 1
trillion won in operating profit on a yearly basis. At the same time,
we engaged in a number of innovative activities to reduce costs
by approximately KRW 600 billion, enabling us to improve our
management structure in all areas.
Company Overview With regards to our yard facilities, we are currently working
on the Neutae Breakwater Reclamation Project and have
constructed additional inner walls in anticipation of future
increases in orders in our offshore business. Construction is
also underway for the in-house PE zone, the Heavy Zone in
the G2 area and on inner walls. Our investment in new growth
engines in different fields include the equity acquisition of the
Paenal Yard in Angola, development of the DeWind model,
and equity acquisition of mining areas in Cepu, Indonesia.
Production-wise, we successfully constructed our first
exclusively developed model of the DSME 10000 Drillship in
2010, and are within three years of full-scale construction. We
have also delivered Asia’s largest semi-submersible drilling
rigs, providing owners with greater economies of scale, thus
allowing us to increase the number of orders we received in
offshore structures. We successfully built and delivered the
ROKS Yulgok Yi Yi, the Korean navy’s second Aegis Destroyer,
equipped with the Aegis combat system and the most up-to-
date anti-ship, aircraft and submarine capacities.
In the technology sector, we have focused on securing
value-added core technologies. We co-developed a green
ship propulsion system in collaboration with MAN Diesel,
exclusively developed the world’s largest stand-alone LNG
storage tank, developed the shipping industry’s first ship
maintenance management software (CMMS) and developed a
large gradual roll molding and bending machine for large ship
plates. We won the bronze medal in the Korean Technology
Awards for our 14000 TEU containership, and our exclusive
technology for LNGCs was selected as one of Korea’s top 100
technologies. In addition, nine of our vessels (containerships,
VLCCs, LNGCs, LNG-RVs, etc.) were recognized as the world’s
best by globally renowned marine publications including
Naval Architect, Maritime Reporter, Marine Log and Fair Play.
In our efforts to ensure future growth engines, we have also
created business models targeting North America and China
to develop our wind turbine business into one of the world’s
top three by 2010. Additionally, we are actively working
to secure production bases in major hubs in Korea, China
and North America, and have also secured the basic design
capacity to advance into the clean coal power plant business.
DSME has paved the way to become the world’s No.1 heavy
industries group with annual revenue projections of KRW
40 trillion by 2020, receiving orders for ships and offshore
plants through local contacts and establishing joint ventures
with Zvezda (Russia), equity investments in the Paenal Yard
(Angola), etc.
Despite the sluggish recovery in the shipbuilding industry,
the volume of orders received in 2010 topped USD 10 billion
due to product portfolio diversification: the world’s largest
platform plant installation vessels from Allseas Group SA
in Switzerland; luxury ferries from Tunisian state-owned
company CoTuNav; FPSOs from France‘s Total; and Type-214
submarines from the Korean navy.
While we expect to witness a shrinkage in logistical volume
resulting from the lower production rates worldwide and
delays in the recovery of ship prices this year, we are also
projecting potential growth in the offshore plant business.
Against this backdrop, we plan to achieve revenues of
over KRW 10 trillion, and an operating income of over
KRW 1 trillion through such key strategies as maintaining
competitiveness in our key products such as ships and
offshore structures; sustainably improving our management
fundamentals to obtain higher efficiency in our operations;
securing growth engines such as wind power and modular
plants, optimizing our business, production and workforce
globally; and contributing to society. Our target order volume
is set at USD 11 billion, up USD 650 million on the previous
year due to an expansion in orders received for FPSOs and
drillships.
Key Figures
Major Operating Performance
2010 2009 2008
Sales 12,074.5 12,442.5 11,074.6
Operating Income 1,011.1 684.5 1,031.6
Net Income before Income Taxes 1,024.3 768.1 579.7
Net Income 780.1 577.5 401.7
(KRW Billion)
Net Income(KRW Billion)
780.1
577.5
401.7
2010
2009
2008
Total Assets(KRW Trillion)
14.2
15.1
16.0
2010
2009
2008
Sales(KRW Billion)
12,074.5
12,442.5
11,074.6
2010
2009
2008
DSME ANNUAL REPORT 2010 04
2010
2010 New Orders(%)
Sales Breakdown(%)
New Order Breakdown(%)
Order Backlog Breakdown(%)
49.3Offshore
44.4Commercial Ships
2010
2010 Shareholder Structure(%)
31.26KDB
22.91Foreigner Ownership
1.22 Treasure & ESOP
25.50 Others 19.11
KAMCO
● LNGC ● Tanker ● Containership ● Offshore ● Others
2010
2009
2008
9 19 1322 37
15 11 1227 35
31 12 1414 29
2010
2010
2009
2009
2008
2008
17
17
23
15
11
23
28
49
40
18
17
36
11
46
34
4
5
10
15
27
14
13
10
21
28
35
33
6.3 Others
05KEy FIGURES
CEO Message
As an environmentally responsible heavy industries
group, we will work toward ensuring future growth and
profitability in partnership with our shareholders. I hope
you will join us as we create a better future.
DSME ANNUAL REPORT 2010 06
Last year represented a breakthrough in our efforts to overcome the
global economic crisis that began in 2008, as we made a qualitative
leap forward. DSME has successfully pursued its goal of becoming one
of the world’s top heavy industries groups thanks to your unyielding
dedication and loyalty as shareholders.
Although the global economy has begun to recover, turmoil in the
European economy still threatens to impede future economic growth.
However, with all our employees and executives joining forces and
working together over the past year, we have successfully received
orders for ships and offshore plants worth over USD 10 billion,
maintaining our world’s No.1 position for two years running. The
volume of orders DSME received in 2010 made it the most successful
year since the onset of the economic downturn in 2008.
We have achieved significant advances in revenue and operating
income with revenue amounting to KRW 12.075 trillion and an
operating income of KRW 1.011 trillion. Through these figures, DSME
has rejoined the ‘10-1 trillion club’ – a term for firms that achieve more
than 10 trillion won in revenue and 1 trillion won in operating profit
on a yearly basis – for the second time since 2008. It is never easy for a
non-conglomerate to achieve such a goal. All of this is attributable to
your unsparing support and devotion, and I sincerely pledge that we
will dedicate all of our efforts to fulfill your continuing expectations.
This year will be another challenging year. Despite the surging volume
in shipping orders and the global economy recovery, we cannot
be complacent. China, in particular, out performs Korea in terms of
order volume and the industry’s strong government support, despite
being technologically behind Korea. As a result, competition among
shipbuilders will certainly intensify over the short- to mid-term.
Regardless, DSME is committed to transforming any threats into
opportunities and further develop by regrouping and outlining new
goals to achieve. We will maintain our current status as a member of
the ‘10-1 trillion club’ and strive to receive orders worth over USD 11
billion. This will spur us further to achieve projected revenues of KRW
40 trillion by 2020 as we become a heavy industries company capable
of providing total solutions to our customers.
We have three key management principles in place to achieve our
goals: securing the No.1 position in terms competitiveness in the
shipbuilding and offshore industries; securing future growth engines;
and maintaining a sense of ownership.
First of all, the shipbuilding and marine engineering industry faces
fierce competition with the benefits of the economic turnaround yet
to arrive. However, for us, this industry is analogous to seed money
for our sustainable growth. We will maintain our leading presence
in the market by securing a technological advantage for the next
generation of products, and ensuring cost competitiveness through
efficient operations. Moreover, we will strive to generate profits while
acquiring new orders in partnership with the countries we tapped
into over the past year.
We will strengthen our position to secure future growth engines
such as modular-based onshore plants and power facilities utilizing
CO2 capture technologies, while securing cost competitiveness and
expanding our market share in the wind power business. To this end,
we will do the utmost to globally optimize our business, production
and workforce.
Lastly, we will imbue our workforce with a sense of ownership. We
will act with the mindset of ‘owners’ wherever we may be in order to
practice our two management principles set out above. Our business
environment is rapidly changing, requiring us to advance into new
fields, and our sense of ownership will be a weapon that ensures
our workforce successfully adapts to these changing conditions.
We are dedicated to seeking creative solutions to any problems we
encounter as we actively work to provide our customers with the best
desired results, and we hope we can count on your continued trust
and support as we makes this journey together.
Through these endeavors, DSME will achieve its goals regardless of
the challenges or circumstances confronting it, and will continue to
be the world’s No.1 integrated heavy industries group so that we may
share the fruits of our harvest with you.
While there are many changes ahead, including changes in corporate
governance, we will do our utmost to reward your support and
encouragement. By embodying the ideal that each and every worker
is an owner of DSME, we will continue to strive toward achieving our
goal of becoming the world’s No.1 integrated heavy industry group.
We will ensure your satisfaction as shareholders, enable all our
employees and executives to find value in their work, and grow into
a top-ranked enterprise that benefits society through its continuing
social contributions. Once again, thank you for your encouragement
and support, and I wish you and your family good health and
prosperity.
Nam, Sang-taePresident & CEO of DSME
07CEO MESSAGE
THE FIRST QUARTER
1. Develops a strategic partnership with Russia
DSME’s President & CEO Mr. Sang-Tae Nam met
with Russian Prime Minister Vladimir Putin in
Vladivostok to develop a strategic partnership.
During the meeting, Prime Minister Putin pledged
to make the new USC-DSME joint venture a
top government priority. The shipyard, to be
constructed in the Russian city of Bolshoi Kamen
in Primorsky Krai, will focus on various large-sized
commercial vessels as well as offshore & onshore
projects needed in Shtokman, Yamal and the
Sakhalin Oil & Gas Fields.
2. Wins an order for five SUEZMAX crude oil carriers from Angola-based Sonangol
DSME signed a USD 350 million order for five
SUEZMAX crude oil carriers with Angola based,
Sonangol. DSME is scheduled to deliver the
vessels from the middle of 2011 to early 2013.
DSME and Sonagol have maintained a close
relationship since their first offshore plant contract
was signed in 1995. This order marks the pinnacle
of a fifteen-year relationship built on mutual trust
and respect.
3. Partners with MAN Diesel to develop environmental-friendly vessels
MAN Diesel, the world’s leading providers of diesel
engines for marine and power plant applications,
signed an agreement with DSME develop a high
pressure gas ship propulsion system. If applied to
a 14000 TEU container vessel, this system could
reduce annual operating costs by around USD 12
million, based on current gas and oil prices. The
two companies will develop an environmentally
friendly system to supply high-pressure gas for
MAN Diesel’s ME-GI engine.
4. Signs MOU with Nova Scotian government on wind power
DSME reached an agreement with the provincial
authorities regarding the creation of a joint
business venture to produce a wind turbine
plant in the Canadian province of Nova Scotia,
with a capital investment of 40 million Canadian
dollars. DSME also signed a Memorandum of
Understanding (MOU) with Nova Scotia Power
Inc. (NSPI), the power generation and delivery
company in Nova Scotia that will provide it with a
wind turbine component manufacturing plant.
THE SECOND QUARTER
5. Wins an order for a new submersible drilling rig from KNOC
DSME won an order for a new submersible drilling
rig from a consortium led by the state-run Korea
National Oil Corporation. The vessel will be built
using a barge-type design and will be used for oil
exploration in the Zhambyl oil field in Kazakhstan.
This order was especially significant as it is a
tangible achievement complimenting DSME’s
overseas energy development plans, and will lead
to additional orders for the production facilities
and plants required in the Zhambyl Oil Field.
6. DSME CEO Wins Top CEO Award
On May 4th, DSME’s President & CEO Mr. Sang-
Tae Nam received the 42nd Korean Top CEO
Award for his contribution to the development
of Korean shipbuilding industry. The award, run
by the Korea Management Association (KMA),
gives recognition to executives who have made
significant contributions to their companies. The
award is one of the country’s top management
prizes and holds great prestige.
7. Establishs joint venture with Russia
DSME signed an agreement with Russian United
Shipbuilding Corporation (USC) to build a joint
shipyard in Zvezda, near Vlasvosto, Moscow.
The joint venture is an extension of an earlier
agreement the two companies signed in 2009 to
modernize the Zvezda Shipyard.
8. Wins USD one billion worth of new orders in June
DSME received shipbuilding orders worth USD
one billion in June. DSME signed a contract with
a client from South Asia to build three VLOCs
(Very Large Ore Carrier) valued at USD 350 million.
Scheduled for delivery by the beginning of 2013,
the vessels will measure 362 meters in length and
65 meters in width. With a payload capacity of
400,000 tons of ore, the loading and unloading
of cargo at port will be much easier due to an
innovative new ballast system.
THE THIRD QUARTER
9. Signs contract with Heerema Marine Contractors to build a pipe-laying vessel
On July 16th, DSME signed a contract with
Heerema Marine Contractors to build a pipe-
laying vessel. Scheduled for delivery by the end of
2012, the vessel will measure 215 meters in length
and 46 meters in width, and will be able to achieve
speeds of up to 14 knots. The vessel, which will
be fitted with 4,000 ton crane and pipe reels, is
able to lay pipes at an ocean depth of more than
3,000 meters. With the DPS (dynamic positioning
system) and the abandonment & recovery winch
system, the pipe-laying vessel can carry out
operations regardless of the environment.
2010 at a Glance
1 2 4 5 6
DSME ANNUAL REPORT 2010 08
10. Receives an order from COTUNAV to build a luxury ferry
On July 26th, DSME received an order from
CoTuNav (Compagnie Tunisienne de Navigation),
a Tunisian state-run shipping company, to
build a luxury ferry. This contract is valued at
approximately 310 billion won, with DSME
scheduled to make delivery by the beginning of
2012.
11. Emerges as a player in the South African shipping industry
DSME entered into the South African shipping
market. Mr. Sang-Tae Nam, CEO & President of
DSME, met with South African President Jacob
Zuma to discuss economic cooperation in the
shipping business, and agreed to strengthen
their mutual cooperation. At the meeting,
President Jacob Zuma asked DSME to share its
wealth of experience in various industries such as
shipbuilding, construction, energy and shipping
to promote the economic development of South
Africa.
12. Successfully signs contracts to build an FPSO from Total
On August 23rd, DSME successfully signed a
contract to build an FPSO (floating, production,
storage and offloading) unit worth USD $1.81
billion with Total, a leading European oil company.
The FPSO, named CLOV FPSO, will operate in
waters off the west coast of Angola and was
named after the oil fields where it will operate.
It will also have a storage capacity of close to
180,000 barrels of crude oil. It is noteworthy
that DSME received this major project due to
its competitiveness, experience, and executive
capabilities.
THE FOURTH QUARTER
13. Wins a new order to build the Korean Navy’s Type-214 submarine
DSME received an order from the South Korean
navy to construct its sixth Type-214 submarine.
The 1800-ton submarine, which can perform
anti-ship and submarine warfare and blockade
enemy bases, is expected to be a core aspect
of the Korean Navy’s military strength. DSME is
scheduled to deliver the Type-214 submarine by
2014.
14. DSME’s joint venture company in Russia wins its first contract
Zvezda-DSME, a joint venture between DSME and
Russia’s USC (United Shipbuilding Corporation),
successfully won its first shipbuilding contract.
On October 20th, Zvezda-DSME signed a contract
to build 12 crude and refined oil carriers with
Sovcomflot, a Russian state-owned shipping
company. Signed in the Kremlin, the contract
is worth approximately USD 800 million. The
contract is especially meaningful as it is the first
successful result of DSME’s localization strategy
for the Russian shipbuilding market.
15. Acquires stake in Angola-based PAENAL shipyard
DSME entered the African shipbuilding market by
acquiring a 30 percent stake in Angola’s Paenal
Shipyard in a deal signed with Sonangol Holdings
and SBM Offshore. Paenal Shipyard is located
near the city of Porto Amboim, 300 km south of
Luanda. The joint venture between Sonangol,
an Angolan state-owned oil company, and SBM
Offshore, a Netherlands-based marine technology
company, was established in August 2008. DSME
plans to participate directly in the management
of the Paenal Shipyard by providing expertise on
the operation and management of shipyards and
offering consulting services on the construction
techniques of marine structures.
16. Wins orders for a Drillship and Semi-submersible drilling rig
On December 8th, DSME successfully signed
a contract to build a drillship and a semi-
submersible drilling rig worth USD 1.08 billion
with an America-based offshore drilling company.
The two vessels will be constructed at the DSME
shipyard in Okpo, Geoje Island. The drillship is
scheduled to be delivered by March of 2013 and
the drilling rig by August of 2013. Measuring
243 meters in length and 42 meters in width, the
vessel will be a standard DSME drillship.
17. Joins the 10 Trillion Won Sales and 1 Trillion Won Operating Income Club
DSME posted record-high annual sales of around
12 trillion won in sales and approximately 1
trillion won in operating income in 2010, up 47.7
percent from the previous year. DSME was able to
post such high earnings as we concentrated on
building high value-added products such as LNG
ships, ultra large container ships, and drillships.
10 11 12 13 16
092010 AT A GLANCE
Operation ReviewShip Business 12 / Offshore Business 14 / New Growth Engines 16 Research & Development 18 / HSE 20 / Board of Directors 22
5.09 Offshore
4.59 Commercial Ships
0.65 Others
8.0
6.0
10.0
4.0
2.0
0
n e w o r d e r s
( U S D B i l l i o n )
DSME ANNUAL REPORT 2010 10
OPERATION REvIEw
DSME has been a pioneering force behind Korea’s shipbuilding industry, and has grown into a global leader in shipbuilding and offshore structures. Today, equipped with our expertise and spirit of innovation, we are charting a new course to transform ourselves into a global integrated heavy industries company.
To make our vision reality, we continue to work as true partners for our customers, bringing our experience, competency and commitment to the table. our innovation and dedication has brought high levels of sustainable growth for our company and significant returns for all our customers across the globe.
TowARD SuSTAinABlE GRowTh
11
Ship Business
With record shipbuilding contracts,
2010 was one of our most successful
years to date with 63 commercial ship
orders.
New orders:63(Ships)
KRW7,272 billion
60% of Sales
USD4.59 billion
44% of New orders
DSME ANNUAL REPORT 2010 12
OPERATION REvIEw
KRW7,272 billion
Ship Business Offshore Business New Growth Engines Research & Development HSE
DSME boasts world leading technology and competitiveness
in commercial shipbuilding ranging from LNG carriers, LNG-
RVs and supertankers to ultra-large containerships, cape-size
bulk carriers, LPG carriers, and pure car carriers.
Despite a slowdown in shipbuilding orders due to the
ongoing global economic downturn, DSME received 63
commercial ship orders in 2010.
While all projections were for a rapid drop in orders for
traditional major ships like bulk carriers and containerships
as a result of the economic slowdown in the international
markets, we acquired orders for 12 ultra-large containerships
in the latter half of 2010 and now lead the new containership
market. Our sales diversification strategies enabled us to
focus on highly-functional specialized ships, and we were
able to dominate the market by receiving orders for five
open hatch-type bulk carriers and one passenger ship.
We also received orders for eight very large crude carriers
(VLCCs) and five Suez tankers. This success can be attributed
to cost competitiveness achieved through our consistent
cost reduction efforts, product competitiveness through
our continuous facility investment, and our technology
development and intensive focuses on sales capacity.
Recognizing growing demand for green ships, we have
successfully developed a variety of green and energy-saving
technologies and now dominate this vital growing market.
Setting ourselves apart from our competitors, we have
actively developed and applied efficient and innovative new
green technologies to our vessels, such as pre-swirl stators
and LNG-fueled ships, thereby protecting the environment
while simultaneously guaranteeing financial benefits for our
customers.
Thanks to our dedication and effort, nine of our ships
delivered in 2010 received top scores and were ranked
among the world’s best by such renowned industry
publications as Naval Architect, Maritime Reporter, Marine
Log, and Fair Play. Furthermore, our technological prowess
and superior quality has been recognized the world over
with our ships receiving recognition for excellence for over
20 years.
Our naval vessel business includes destroyers, submarines
and patrol boats for the navy and maritime police of
various countries, as well as on-going maintenance. In the
special shipbuilding category, where we build and maintain
submarines and special private ships, we successfully built
the world’s most advanced 10,000-ton Aegis destroyer,
delivering it to the Korean navy in August 2010. We also built
and delivered eight medium-size maritime police patrol
boats, and began construction on a Type-214 submarine after
obtaining the relevant technologies and materials.
We also executed maintenance work for a Type-209
submarine delivered to the Korean navy, and performed
maintenance on an Indonesian navy submarine. We are
currently working on the basic design for a submarine that
meets local needs, and have completed the basic design
for a surface ship which is now moving onto the detailed
design and construction phase. We have also received orders
for training ships and auxiliary ships from Malaysia, and
have taken the No.1 position in Korea in terms of defense
contracts.
13
Offshore Business
2010 was one of our best years for
offshore business with orders in a range
of areas from semi-submersible drilling
rigs to the largest platform plant
installation vessels built to date.
49% of New orders
USD5.09 billion
New orders:10(Ships)
39% of Sales
KRW4,679 billion
DSME ANNUAL REPORT 2010 14
OPERATION REvIEw
Ship Business Offshore Business New Growth Engines Research & Development HSE
In 2010, DSME acquired orders for 10 offshore projects,
including five for world-renowned oil companies such
as ExxonMobil, Total and Chevron, paving the way for
sustainable growth in its offshore business. The value of
DSME’s contract with Total for FPSO vessels exceeds KRW
2.14 trillion and will be carried out as a turn-key project, with
construction based on our exclusive technologies and the
experience gained from successfully completing other large-
scale projects.
We also secured an order for the world’s largest platform
plant installation vessels from Allseas Group SA in
Switzerland. Measuring 382 meters in length, 117 meters in
width and 29 meters in height, they will be twice the size of
the largest existing platform installation vessels. Furthermore,
weighing 120,000 tons, they will be three times heavier than
existing VLCCs. With the demand for the disbanding of old
offshore structures expected to surge, we expect even more
opportunities in this field.
In the drillship field, we received an order for one drillship and
one semi-submersible drilling rig from a drilling company in
the U.S., where we have maintained competitive dominance,
acquiring orders for a total of nine semi-submersible drilling
rigs for the same model since 2005.
In 2010, the last in a five-ship order from Transocean was
delivered. With delivery beginning in 2006, we were able to
successfully deliver five drillships of the highest quality on
schedule, reflecting our excellence in the area of drillship
construction.
Our growth in the offshore business has been steady, and we
expect 2011 to be another flourishing year with new energy
development projects occurring across the world due to
ongoing rises in crude oil prices.
15
New Growth Engines
DSME is actively exploring and
developing new environmentally
sustainable technologies including
energy and plant to drive new
growth for decades to come.
WIND POWER BUSINESS
Wind power is one of the fastest-growing markets in the
energy sector. Today, after more than twenty years of
technological and organizational growth, wind energy is
breaking new ground. Numerous new players are appearing
in the international markets with the aim of promoting the
economic and ecological conversion of the energy industry
in their own countries. Expertise in wind energy technology
is in great demand internationally. Performance, experience,
reliability and innovative power are the main criteria being
brought to bear in the wind energy sector in the 21st century.
DSME’s acquisition of wind-turbine developer, DeWind Inc.
was a pivotal move for its advance into the wind energy
market. DeWind focuses on the design, R&D, marketing, and
servicing of wind turbines while components are procured
from third party suppliers. The establishment of DSME
Trenton, a manufacturer of wind energy equipment has
allowed DSME to expand its portfolio in a logical manner to
include a further important area of technological growth.
DSME will provide DSME Trenton with major raw materials
leveraging its strong bargaining power and utilizing its global
supplier network. DSME Trenton is a subsidiary company to
design & manufacture wind towers and blades. The products
will be sold through DeWind’s support in basic design,
outsourcing, operational back-up, etc. In addition, DeWind is
currently developing the larger megawatts on offshore wind
turbine.
DSME ANNUAL REPORT 2010 16
OPERATION REvIEw
VISION ROADMAP • Obtainleadingpositionsinbusinessdomains(Shipbuilding/Offshore/Plant/Newrenewableenergy)
• Establishaself-continuouscycleofsustainablegrowth
•No.1inshipbuilding&offshorebusiness
• Enterthetop-tierinenergyplantindustry
• Balancebusinessportfoliowithgrowthandrelevance
2020 World’s No.1 Integrated Heavy Industries Group
2013-2015 Entering the Top Tier
2011-2012 Preparing for Take-off
• Buildafoundationforreshaping
•Launchnewbusinessandproducts(Modularplants,F-LNG,WindPower,etc.)
•Morecreativeculture
Ship Business Offshore BusinessNew Growth Engines Research & Development HSE
( )Vision 2020 World’s No.1 Integrated
Heavy IndustriesGroup
SEASHORE/BARGE-MOUNTED MODULAR PLANTS & OTHERS
Based on our proven offshore integrated technologies, DSME
offers proper business solution near shore. DSME is taking the
leading in developing cutting–edge new building experience
closely related to the barge-mounted modular plant. More
specifically, we constructed BMPP (barge- mounted power
plant) as oil fired power plant at Khanom, Thailand as well as
barge mounted seawater treating plant at Alaska’s Prudhoe
Bay. Furthermore, DSME completed construction of the
Pazflor FPSO (floating production, storage and offloading) for
Total, the world’s largest offshore oil production facility, which
will be installed off of the shores of Angola by the second half
of 2011. Designing and building the equipment required to
develop Pazflor required DSME to marshal the know-how of
hundreds of people at dozens of industrial sites worldwide.
Having the necessary experience in conducting plant
business, DSME is able to provide various modularized
options; At-Shore Barge-mounted Modular Power Plant in
Harbor Area, Floating Barge-mounted Modular Power Plant,
and Onshore Skid-mounted (Truss-based) Modular Power
Plant. Compared to Conventional models, Barge Mounted
Power Plant have definite advantages: high efficiency and
productivity, ability to maintain the original integrity of the
components during transport and the shortest possible
delivery period. By using Barge-Mounted Modular plant
process, we expect to achieve cost reduction, especially in
indirect cost, temporary buildings/facilities cost, field labor
cost and field subcontracting cost. DSME is also looking
forward to developing green energy field such as Coal-
Fired Power Plant with CCS (Carbon Capture Storage). A
CO2 capture plant integrated with a power plant using
commercially-proven components such as carbon dioxide
absorption that use harmless inorganic chemicals, in a
capture technology widely employed in the petrochemical
industry.
17
Research & Development
Our commitment to research and
innovation has allowed us to create
a variety of new innovative green
technologies to ensure a better future.DSME operates research centers staffed with more
than 350 top-notch engineers devoted to fostering
new growth engines, developing products and
technologies, improving the performance of key
products, and enhancing productivity. The Future
Product Business Development Institute works
to develop products that are expected to create
new markets in the future, and conducts studies
on environment-friendly, human-focused business
areas and intelligent robotics. The Ship & Ocean
R&D Institute works to develop the fundamental
technologies and design governing fluid dynamics,
structures, vibration and noise, as well as ship
and plant automation. The Industrial Application
R&D Institute researches welding methods, weld
deformations, measurement technologies and
coating and anti-corrosion for ships and offshore
structures, as well as the early stabilization of new
businesses.
Expenditures in R&D(KRW Billion)
12.9
5.1
24.1
2010
2009
2008
DSME ANNUAL REPORT 2010 18
OPERATION REvIEw
In 2010, the Ship & Ocean R&D Institute developed:
environmentally friendly LNG-fueled ships for market
promotion; a standard model and component technology
for the DSME LNG FPSO, a storage system for DSME LNG; the
ducted PASS, a DSME fuel reduction device; a machine that
reduces the formations of air pockets; a VOC-reducing green
shipping system; and technology for evaluating CCS intensity,
while also domestically producing bulk handling system
and DP simulation technology. In the basic design area, the
Institute developed the 55K open hatch bulk carrier, the
DSME NEO Panamax a new RORO vessel, a standard model
for the WTI Vessel DSME, the 53,800GT cruise ship, and the
DSME Suezmax – a twin skeg shuttle tanker.
The Industrial Application R&D Institute conducted research
and development in the following areas to increase
productivity and the competitiveness of major products
while reducing any risk or waste factors: development
of plate coating automation devices; development of
flammable gas measuring devices for spraying; research on
the expanded application of pile welding devices on a fixed
horizontal position; research on high-competency welding
techniques for the overlapping joints of plate block butts;
improvement of large-scale roll devices used to process
curved plates for ships; development of measuring devices
to arrange shafts and pipes; technological developments
for optimal construction of stripe coats and their practical
application; and development of a coating to prevent the
corrosion of decorative goods for the LNGC Weather Deck
SUS and their application to ships.
The Future Product Business Development Institute is
responsible for research into future growth drivers. Its
main task is to support the company’s business objective
by developing products and solidifying the foundation for
modular plant products, discovering new and renewable
energy initiatives, creating offshore and ship products,
and developing intelligent robotic systems. The institute
is coming up with diverse forms of new products and
technologies and component technologies, as well as
identifying and pursuing new businesses. The Institute has
developed technologies in preparation for entering the
wind power generation business; process analysis models
for PFBC power plants that employ CO2 capture and storage
technology; new independent storage tank technology;
navigation and control technologies for unmanned offshore-
exploration submarines; and blade and offshore platform
concept design technologies for offshore wind power
generation systems.
Along with ongoing research into design technologies
to maximize productivity, quality and efficiency in our
core products, DSME is directing its focus toward project
engineering and basic technologies to build high value-
added offshore structures.
We are taking the lead in developing cutting-edge new
products such as LNG-fueled ships, LNG FPSOs, LNG FSRUs,
arctic ships (B/Cs, tankers), arctic drillships, and cruise ships
that will serve as future growth engines. We are also pursuing
new business oriented toward the environment and people
to lead the second phase of our F1 ongoing development
strategy and drive future growth. These drivers include new
energy facilities, equipment related to the environment and
climate, and innovative plants.
Ship Business Offshore Business New Growth EnginesResearch & Development HSE
19
HSEDSME is committed to protecting its
most important resource – its work-
force. Through our comprehensive
health and safety programs, we ensure
the wellbeing of all our employees. Recognizing the importance of health, safety and
the environment (HSE), DSME’s top priority is to
practice ‘HSE First Management’ as it strives to grow
into the world’s leading integrated heavy industries
group.
DSME conducts consolidated HSE management
through its safety and occupational health
management (OHSAS 18001) and environmental
management (ISO 14001) systems. In addition,
DSME acquired KOSHA 18001 (Safety & Health
Management System) cer t i f icates in 2010.
Implementation of our integrated HSE system is
evaluated through a quarterly monitoring system
and internal and external audits – the results of
which are reported to the CEO and analyzed for
areas of improvement.
GHG Emissions(Unit: CO2 Ton/Year)
384,425
426,097
365,959
2010
2009
2008
DSME ANNUAL REPORT 2010 20
OPERATION REvIEw
HEALTH
DSME conducts general, special and comprehensive
h e a l t h c a re fo r a l l i t s e m p l oye e s a n d m a n a g e s a
comprehensive health and safety management system.
We actively carry out preemptive health management
for employees and executives to ensure their wellbeing
and good health. In particular, we target high-incident
and prominent diseases such as cardiovascular conditions
for early discovery and prevention. Since 2009, DSME has
implemented health check-ups for all employees and their
spouses, helping employees manage their family’s healthcare
needs. DSME assists its employees’ health management by
promoting healthy lifestyles and habits through anti-smoking
and fat reduction programs. These and other endeavors
earned DSME an award from the Minister of Health and
Welfare in 2007 for its anti-smoking campaign in the
workplace. In addition, DSME’s workforce and management
conducted a blood donation campaign in 2009, receiving an
achievement award on World Blood Donor Day.
SAFETY
DSME conducts multifaceted and systematic programs
to provide the safest workplace possible and regards
safety as a top priority in corporate management. DSME
operates an HSE management performance system for each
division, which manages the system of safety checks, safety
education, prevention of accidents, implementation of the
HSE management program, and the ergonomics program.
By indexing each item in real time, DSME has strengthened
its programs to prevent accidents and quantify daily safety
management. Moreover, the HSE system has worked to boost
morale and prevent accidents through a safety mileage
system that award divisions and individuals that excel in safe
practices.
DSME operates a three-stage safety education program for
all new employees, with effective training also provided
through experience-based programs at the HSE experience
zone, and practical safety education for division-specific
areas.
ENVIRONMENT
Since declaring its intention to become the industry’s
first ‘green shipbuilder’, DSME has conducted strong
environmental management to become a global green
company and exert strong green management.
DSME operates an enterprise-wide campaign aimed to
reduce waste by 20% in order to respond to global warming
and reduce its carbon footprint, and to fulfill its climate
change commitments. Since signing a voluntary agreement
to lower volatile organic compounds (VOCs), the level of
VOC usage has dropped by 29.7% compared to 2006. DSME
voluntarily prepares for environmental regulations at home
and abroad by forming related task forces and organizations,
and has established a greenhouse gas inventory.
In 2010, DSME reduced wastes through water recycling and
the recycling of waste paints and resources, saving KRW 1,958
million.
DSME spent KRW 13.56billion in four environmental
categories including pollution prevention, pollution
treatment, environmental risk management and social
environment in 2010. DSME also dedicated a total of KRW
6.97billion toward the promotion of environmentally friendly
programs such as waste reduction and recycling.
Ship Business Offshore Business New Growth Engines Research & Development HSE
21
Board of Directors
The BOD is primarily responsible for protecting the interests of
shareholders and ensuring the overall soundness of the company’s
management. To effectively carry out its role, the BOD operates within
a governance framework that assures its complete independence and
transparency.
DSME ANNUAL REPORT 2010 22
BOARD OF DIRECTORS
Nam, Sang Tae DSME, President & CEO
Kim, You hun DSME, Senior Executive
Vice President & CFO
Lee, Young ManDSME, Senior Executive
Vice President & General Manager of Shipyard
Song, hee JoonProfessor of Public Administration at
Ewha Womans University
Kim, Ji hongProfessor of KDI School of
Public Policy & Management
Kim, Young ilThe Former Secretary General of
Global Korean Forum
23
Leading the way forward toward a better tomorrow, DSME is actively working to develop and refine cost-efficient, environmentally-friendly technologies. Though innovation and a meaningful commitment to environmentally sustainable development, we have become market leaders in a range of green-technologies.
our active commitment to green innovation has led DSME to create better, more efficient products that meet all of our clients’ future needs, while at the same time helping preserve our environment for the next generation. We will not only deliver a better future for our shareholders and workforce, but for our children and grandchildren to come.
FoR A BETTER ToMoRRow
Management’s Discussion & Analysis 26 / Independent Auditor’s Report 29 Non-Consolidated Financial Statements 30 / Notes to Non-Consolidated Financial Statements 37
Financial Review
DSME ANNUAL REPORT 2010 24
FINANCIAL REvIEw
401.7
780.1
577.5
201020092008
n e t i n c o m e
( K R w B i l l i o n )
25
Management Discussion & Analysis
1. Overview
2010 was another successful year for Daewoo Shipbuilding & Marine Engineering Co., Ltd.(DSME) in which we delivered an excellent profit result in challenging trading conditions. DSME posted sales of KRW 12,074,505 million in 2010, down 3% (KRW 368,014 million) year on year. However, our operating income reached KRW 1,011,077 million, with an income before tax of KRW 1,024,332 million and a net income of KRW 780,132 million. As such, we saw record levels profitability and financial stability. DSME’s record 2010 profit result was driven by strong performances from strengthening our leading position in the global shipbuilding & offshore products.
We achieved a profit rate of 8.4% despite declining volumes and other challenges including the downturn in global logistical volumes and the higher costs of imported raw materials amid the ongoing global financial crisis. Leading the shipbuilding industry with outstanding performance in commercial ships, offshore products, DSME now stands out as a top performance among the many competitors in the renewable energy field as well.
2. Performance Results
Sales
Sales for 2010 reached over KRW 12 trillion, with operating income reaching over KRW 1 trillion. This shows a year-on-year increase of 47.7% for operating income, 33.4% for income before taxes, and 35.1% for net income. DSME re-joined rejoined the ‘10-1 trillion club’ with over KRW 10 trillion in revenue and KRW 1 trillion in operating profit for the first time since 2008, reflecting the outstanding enhancements made to DSME’s corporate scale and profitability. Only 24 companies joined the ‘10-1 trillion club’ this year, and DSME’s inclusion can be attributed to our employees’ unsparing effort and devotion to cutting costs and increasing productivity, despite the numerous difficulties facing us – such as the downturn in the shipbuilding market and other negative externalities resulting from the financial crisis.
The number of orders settled in 2010 amounted to KRW 11,489,066 million – a sharp increase of 174% from the previous year. This strong increase in order volume was driven by a greater focus on our key competencies in shipbuilding and specialized vessels, and we expect this trend to remain in the years to come. In the shipbuilding business, sales focused on high-function, specialized vessels in line with our business diversification strategies. As such, DSME has paved the way to achieve stable future revenue by retaining a differentiated market position from our Chinese counterparts that mostly focuses on conventional bulk carriers and tankers. Our experiences and technical know-how accumulated through many successfully implemented large-scale projects have been recognized worldwide in terms of plant orders in the offshore sector. We are now planning to establish the groundwork to move into high value-added products, while also initiating new businesses based on our diversified portfolio and strong technological prowess.
Summary of Income Statements
2010 2009 2008
Sales 12,074.5 12,442.5 11,074.6
Gross Profit 1,397.0 978.7 1,324.8
Operating Income 1,011.1 684.5 1,031.6
Income before Taxes 1,024.3 768.1 579.7
Net Income 780.1 577.5 401.7
(KRW Billion)
DSME ANNUAL REPORT 2010 26
FINANCIAL REvIEW
Profitability
DSME showed strong improvements in our profitability, with gross profit rising from 7.87% in 2009 to 11.57% in 2010. This growth can be attributed to the aforementioned diversification in our product line, the production of value-added products through continued R&D activities and cost reduction on the production sites. This growth in profit is even more impressive considering the skyrocketing costs of raw material such as steel products in 2010, which resulted in many companies suffering from lower than projected profit margins.
Our operating income reached KRW 1,011,076 million, an increase of 47.7% from the previous year. As a result, DSME was able to once again rejoin the ‘10-1 trillion club.’ In addition, depreciation and other expenses were set due to the possibility of a recovery in SG&A expenses and manufacturing costs. Severance benefits and development costs also increased as we moved to improve employee welfare. These achievements reflect DSME’s unprecedented qualitative growth and contribute to our employees’ wellbeing. Furthermore, DSME’s goal of enhancing Korea’s national competitiveness was steadily implemented, with our higher profitability maximizing shareholder value.
For non-operating income, income gained from derivatives held to hedge volatile risks such as fluctuations in exchange and interest rates reached KRW 28,366 million, showing that DSME can achieve stable growth despite the changes in the external environment. Net income, in particular, reached a record-high of KRW 780,131 million. This excess in revenue will pave the way for DSME to become a global leader in the field as it will be reinvested back into various growth ventures and research activities to maximize value for the future.
Status of Orders The growth rate for new orders in shipbuilding increased by 157%, while offshore business achieved a growth rate of 239%. This dramatic growth is partially a result of the significant decline in sales orders in 2009, with sales in 2010 reaching numbers similar to 2008, marking a significant turnaround since the global economic crisis.
In the shipbuilding sector, 12 new orders came in for large-scale containerships – a high value-added product. In the offshore business, we signed order contracts with several different countries, and are projected to witness further increases in orders for such value-added products in 2011. At a time when the competition to secure natural resources is getting fiercer, we expect the business volume in offshore plants to increase. As such, our seasoned experience and superior technical know-how will enable us to secure the edge when competing with global players.
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial Statements Notes to Non-Consolidated Financial Statements
Status of Orders (Ships) (USD Billion)
250
200
150
100
50
02008 2008
22842.8
11.6
3.6
10.33
34.9 33.84
58
29
78
190200
2009 20092010 2010
50
40
30
20
10
0
Order Backlog
New Orders
27
3. Financial Structure
Assets & Liabilities DSME’s total assets amounted to KRW 14,176,729 million, down KRW 959,629 million (6.4%) from the 2009 level of KRW 15,136,358 million. This has been mostly driven by a KRW 534.3 billion reduction in raw materials and by increases in loan loss provisions worth KRW 845.5 billion. Excluding these factors, a similar pattern with the previous year can be found. Liabilities, meanwhile, amounted to KRW 10,133,496 million, down KRW 1,745,283 million (14.69%) from 2009’s figure of KRW 11,878,779. This can be attributed to a reduction in liabilities recognized in conjunction with a year on year increase of KRW 1,614,859 million in derivatives revenue.
Shareholders’ EquityShareholders’ equity amounted to KRW 4,043,234 million, up KRW 785,655 million compared to 2009’s figure of KRW 3,257,579 million, and was mostly driven by increases in net income. This improved profitability is reflected in DSME’s improved debt-to-equity ratio of 250.63%, down 364.65% from the previous year. Overall, DSME’s financial stability has strengthened dramatically.
4. Future Outlook Global economic growth in 2011 is projected to maintain the downward trend of the past two years as inflation continues to drive up the price of raw materials. The challenges ahead for DSME will become even more severe due such externalities as the challenge from Chinese shipyards and Singapore shipyards. However, despite these challenges, we will continue to bolster R&D to maintain competitiveness for our major key products. We aim to continue obtaining revenues of over KRW 10 trillion and operating income of KRW 1 trillion by improving our management fundamentals through business efficiency such as securing additional growth engines, optimizing the workforce, and enhancing our contribution to social causes and charities. We will also strive to reach an order volume of over USD 11 billion by bolstering our efforts to receive new orders. In particular, given that the offshore business is under the global spotlight amid high oil prices, our order volume is projected to flourish.
Summary of Statements of Financial Position
2010 2009 2008
Current Assets 7,297.4 9,020.0 9,382.4
Property, Plant and Equipment 4,054.0 4,008.5 2,638.5
Other Assets 2,825.3 2,107.9 3,932.7
Total Assets 14,176.7 15,136.4 15,953.6
Advances from Customers 4,272.6 4,909.4 5,702.9
Other Current Liabilities 3,851.9 4,483.5 4,163.8
Other Liabilities 2,009.0 2,485.9 4,019.0
Total Liabilities 10,133.5 11,878.8 13,885.7
Total Shareholders’ Equity 4,043.2 3,257.6 2,067.9
(KRW Billion)
Asset Soundness
(%)
100
80
60
40
20
02008
95.1
10.6
64.561.0
96.0 95.1
2009 2010
Current Ratio
Debt-to-equity Ratio (Borrowings / Equity)
DSME ANNUAL REPORT 2010 28
FINANCIAL REvIEW
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial Statements Notes to Non-Consolidated Financial Statements
Independent Accountants’ Review Report English Translation of a Report Originally Issued in Korean
To the Shareholders and Board of Directors of Daewoo Shipbuilding & Marine Engineering Co., Ltd.
We have audited the accompanying non-consolidated statement of financial position of Daewoo Shipbuilding & Marine Engineering Co., Ltd. (the “Company”) as of December 31, 2010, and the related statements of income, appropriation of retained earnings, changes in shareholders’ equity and cash flows for the year ended December 31, 2010, all expressed in Korean Won. These financial statements are the responsibility of the Company’s management. Our responsibility is to issue a report on these financial statements based on our audit. The nonconsolidated statements for the year ended December 31, 2009 were audited by KPMG Samjong Accounting Corp. whose report, dated February 5, 2010, expressed an unqualified opinion.
We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010, and the results of its operations, changes in its retained earnings and its shareholders’ equity and its cash flows for the year then ended in conformity with accounting principles generally accepted in the Republic of Korea.
Accounting principles and auditing standards and their application in practice vary among countries. The accompanying financial statements are not intended to present the financial position, results of operations, changes in shareholders’ equity and cash flows in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying financial statements are for use by those knowledgeable about Korean accounting procedures and auditing standards and their application in practice.
March 7, 2011
This report is effective as of March 7, 2011, the auditors’ report date. Certain subsequent events or circumstances may have occurred between the auditors’ report date and the time the auditors’ report is read. Such events or circumstances could significantly affect the accompanying financial statements and may result in modifications to the auditors’ report.
Notice to Readers
Asset Soundness
29
Non-Consolidated Statements of Financial PostionAs of December 31, 2010 and 2009
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Notes7and17) ₩ 478,177 ₩ 805,660
Short-term financial instruments (Notes3,7and12) 30,000 101,091
Short-term investment assets (Note4) 185 5,886
Trade notes and accounts receivable, less allowance for doubtful accounts of ₩12,794 million in 2010 and ₩4,339 million in 2009 (Notes7,12,17and28) 4,311,759 4,315,813
Short-term loans (Notes7and17) 82,054 31,407
Other receivables, net of allowance for doubtful accounts of ₩203,487 million in 2010 and ₩207,864 million in 2009 (Notes5,7and17) 61,505 150,805
Advanced payments 618,317 1,047,641
Prepaid construction costs 360,723 298,118
Current firm commitment assets (Note20) 711,599 1,111,184
Current portion of currency forward assets (Note20) 67,690 13,052
Current deferred income tax assets (Note26) 49,587 100,310
Inventories (Notes9and12) 454,824 989,217
Other current assets 70,944 49,774
Total current assets 7,297,363 9,019,958
NON-CURRENT ASSETS:
Long-term financial instruments(Note3) 35 35
Long-term investment securities(Notes4,7and12) 222,348 119,135
Investment securities using the equity method(Notes5and6) 575,390 509,749
Long-term loans net of allowance for doubtful accounts of ₩1,960 million in 2010 and nil in 2009(Notes5,7,17and19) 360,450 203,575
Property, plant and equipment , net of accumulated depreciation and government subsidies of ₩1,224,171 millionin 2010 and ₩1,080,692 million in 2009(Notes8,9,11,12,14,16and31) 4,054,020 4,008,492
Intangible assets(Notes10and31) 24,630 2,642
Long-term trade notes and accounts receivable, less present value discount of ₩102,904 million in 2010 and ₩14,186 million in 2009(Note17) 1,382,867 211,658
Firm commitment assets(Note20) 73,734 983,175
Currency forward assets(Note20) 119,549 18,691
Other non-current assets 66,343 59,248
Total non-current assets 6,879,366 6,116,400
Total Assets ₩ 14,176,729 ₩ 15,136,358
2010 2009(KRW million)
Seeaccompanyingnotestonon-consolidatedfinancialstatements.
DSME ANNUAL REPORT 2010 30
FINANCIAL REvIEW
2010 2009
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Trade payables(Notes7and17) ₩ 1,024,504 ₩ 931,642
Short-term borrowings(Notes7,12,14and17) 1,036,968 996,493
Accounts payable-other(Notes7and17) 418,064 416,495
Accrued expenses(Notes7and17) 146,097 88,086
Advances from customers(Notes12,20and30) 4,272,597 4,909,434
Current portion of long-term borrowings(Notes7,12,14and17) 176,665 163,735
Current portion of capital lease liabilities(Notes8,16and17) 5,792 83,031
Provision for construction loss(Notes18and30) 8,098 391
Current firm commitment liabilities(Note20) 67,366 27,874
Current portion of currency forward liabilities(Note20) 745,939 1,593,332
Other current liabilities 222,357 182,367
Total current liabilities 8,124,447 9,392,880
NON-CURRENT LIABILITIES:
Debenture, net (Notes13and17) 669,909 498,385
Long-term borrowings(Notes7,12,14and17) 582,460 442,909
Long-term accounts payable-other(Note17) 122,935 143,183
Accrued severance benefits, net of severance insurance deposits and others of₩231,463 million in 2010 and₩187,119 million in 2009(Note15) 74,833 77,884
Provision for construction warranty costs(Note18) 74,591 72,012
Firm commitment liabilities(Note20) 122,121 21,881
Currency forward liabilities(Note20) 78,607 985,806
Capital lease liabilities(Notes8,16and17) 3,029 9,044
Deferred income tax liabilities(Note26) 280,563 234,794
Total non-current liabilities 2,009,048 2,485,898
Total Liabilities 10,133,495 11,878,778
SHAREHOLDERS’ EQUITY:
Capital stock(Note21) 961,954 961,954
Capital surplus(Note21) 728 200
Capital adjustments(Notes5and22) (29,949) (31,643)
Accumulated other comprehensive income(Notes4,5,8,20,23and26) 965,021 865,684
Retained earnings(Note24) 2,145,480 1,461,385
Total Shareholders’ Equity 4,043,234 3,257,580
Total Liabilities and Shareholders’ Equity ₩ 14,176,729 ₩ 15,136,358
(KRW million)
Management’s Discussion & Analysis Independent Auditor’s ReportNon-Consolidated Financial Statements Notes to Non-Consolidated Financial Statements
Seeaccompanyingnotestonon-consolidatedfinancialstatements.
31
Non-Consolidated Statements of IncomeFor the years ended December 31, 2010 and 2009
SALES (Notes6,7,9,20,30and31) ₩ 12,074,505 ₩ 12,442,519
COST OF SALES (Notes7,20and30) 10,677,528 11,463,815
GROSS PROFIT 1,396,977 978,704
SELLING AND ADMINISTRATIVE EXPENSES (Notes25and31) 385,900 294,181
OPERATING INCOME(Note31) 1,011,077 684,523
NON-OPERATING INCOME (EXPENSES):
Interest income (expense), net(Note7) 3,209 (278)
Gain (Loss) on foreign currency transactions, net (8,521) 235,819
Loss on foreign currency translation, net (Note17) (26,449) (1,622)
Gain (Loss) on disposal of property, plant and equipment, net 974 (3,710)
Gain (Loss) on valuation of securities using the equity method, net(Note5) 20,526 (69,061)
Loss on valuation of firm commitment, net(Note20) (335,043) (691,376)
Gain on valuation of currency forward contracts, net 329,441 713,627
Gain (Loss) on currency forward transactions, net 33,966 (169,834)
Reversal of construction warranty costs 11,155 4,387
Others, net (16,003) 65,578
13,255 83,530
INCOME BEFORE INCOME TAX 1,024,332 768,053
INCOME TAX EXPENSE (Note26) 244,200 190,549
NET INCOME ₩ 780,132 ₩ 577,504
NET INCOME PER SHARE (Note27) ₩ 4,127 ₩ 3,055
2010 2009(KRW million, except per share amounts)
Seeaccompanyingnotestonon-consolidatedfinancialstatements.
DSME ANNUAL REPORT 2010 32
FINANCIAL REvIEW
For the years ended December 31, 2010 and 2009
Non-Consolidated Statements of Appropriations of Retained Earnings
2010 2009
UNAPPROPRIATED RETAINED EARNINGS:
Unappropriated retained earnings carried over from prior years ₩ 13,121 ₩ 3,465
Change in retained earnings using the equity method (1,513) (137,824)
Net Income 780,132 577,504
791,740 443,145
TRANSFER FROM VOLUNTARY RESERVES:
Reserve for research and human resource development - 10,000
Reserve for loss on disposal of treasury stock - 8,999
- 18,999
APPROPRIATION OF RETAINED EARNINGS
Legal reserve 9,500 9,500
Dividends :10% on par value at ₩500 per share in 2010 and 2009 94,523 94,523
Reserve for facility construction 630,000 230,000
Reserve for research and human resource development 50,000 115,000
784,023 449,023
UNAPPROPRIATED RETAINED EARNINGS TO BE CARRIED FORWARD TO SUBSEQUENT YEAR ₩ 7,717 ₩ 13,121
(KRW million)
Management’s Discussion & Analysis Independent Auditor’s ReportNon-Consolidated Financial Statements Notes to Non-Consolidated Financial Statements
Seeaccompanyingnotestonon-consolidatedfinancialstatements.
33
Non-Consolidated Statements of Changes in Shareholders’ Equity For the years ended December 31, 2010 and 2009
(KRW million)
Seeaccompanyingnotestonon-consolidatedfinancialstatements.
Accumulated other Capital Capital comprehensive Retained
Capital stock surplus adjustments income (loss) earnings Total
Balance at January 1, 2009 ₩ 961,954 ₩ 200 ₩ (30,843) ₩ 20,328 ₩ 1,116,228 ₩ 2,067,867
Dividend - - - - (94,523) (94,523)
Balance after appropriations 961,954 200 (30,843) 20,328 1,021,705 1,973,344
Changes in capital adjustments - (800) - - (800)
Gain on valuation of longterminvestment securities - - - (8,428) - (8,428)
Changes in valuation of equity method accounted investments - - - 55,254 - 55,254
Changes in retained earning using the equity method - - - - (137,824) (137,824)
Gain on revaluation of plant, property and equipment - - - 798,530 - 798,530
Net income - - - - 577,504 577,504
Balance at December 31, 2009 ₩ 961,954 ₩ 200 ₩ (31,643) ₩ 865,684 ₩ 1,461,385 ₩ 3,257,580
Balance at January 1, 2010 ₩ 961,954 ₩ 200 ₩ (31,643) ₩ 865,684 ₩ 1,461,385 ₩ 3,257,580
Dividend - - - - (94,523) (94,523)
Balance after appropriations 961,954 200 (31,643) 865,684 1,366,862 3,163,057
Changes in capital surplus - 528 - - - 528
Changes in capital adjustments - - 1,694 - - 1,694
Gain on valuation of longterm investment securities - - - 112,424 - 112,424
Loss on valuation of derivatives - - - (2,364) - (2,364)
Changes in valuation of equity method accounted investments - - - (9,959) - (9,959)
Changes in retained earning usingthe equity method - - - - (1,514) (1,514)
Loss on revaluation of plant, property and equipment - - - (764) - (764)
Net income - - - - 780,132 780,132
Balance at December 31, 2010 ₩ 961,954 ₩ 728 ₩ (29,949) ₩ 965,021 ₩ 2,145,480 ₩ 4,043,234
DSME ANNUAL REPORT 2010 34
FINANCIAL REvIEW
For the years ended December 31, 2010 and 2009
Non-Consolidated Statements of Cash Flows
2010 2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ₩ 780,132 ₩ 577,504
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation 160,926 152,622
Amortization of intangible assets 372 6,133
Other bad debt expenses 99,649 3,450
Loss on foreign currency translation, net 26,443 1,548
Loss (Gain) on disposal of property, plant and equipment, net (974) 3,710
Loss on disposal of investment assets 13 26
Loss (Gain) on disposal of long-term investment securities, net (5,322) 1,349
Loss (Gain) on valuation of securities using the equity method, net (20,526) 69,061
Provision for severance benefits 74,792 61,871
Gain on valuation of currency forward contracts, net (329,441) (713,627)
Loss on valuation of firm commitment, net 335,043 691,376
Provision for (Reversal of) construction loss, net 7,707 (110,328)
Provision for construction warranty costs, net 12,791 20,246
Others, net 13,212 (2,399)
374,685 185,038
Changes in assets and liabilities resulting from operations:
Increase in trade notes and accounts receivable (1,322,991) (1,090,114)
Decrease (Increase) in other receivables 92,923 (328,853)
Decrease (Increase) in accrued income (32,814) 26,295
Decrease (Increase) in advanced payments 427,691 (78,494)
Decrease (Increase) in prepaid construction costs (62,605) 77,669
Decrease (Increase) in prepaid expenses 12,182 (2,435)
Decrease in inventories 534,393 656,303
Decrease in long-term trade notes and accounts receivable 16,566 -
Decrease in current deferred income tax assets 52,783 7,667
Decrease in non-current deferred income tax assets - 67,920
Decrease in firm commitment assets 1,113,714 2,014,481
Increase in currency forward contracts (1,583,765) (2,151,336)
Increase (Decrease) in trade payables 95,272 (11,553)
Increase (Decrease) in accounts payable-other 6,682 (305,225)
Increase in accrued expenses 58,390 30,300
Increase (Decrease) in income tax payable 26,830 (161,410)
Decrease in advances from customers (636,837) (793,434)
Increase in withholdings 15,383 10,529
(KRW million)
Management’s Discussion & Analysis Independent Auditor’s ReportNon-Consolidated Financial Statements Notes to Non-Consolidated Financial Statements
35
For the years ended December 31, 2010 and 2009
Non-Consolidated Statements of Cash Flows
2010 2009
Increase (Decrease) in long-term accounts payable-other ₩ (18,212) ₩ 128,872
Decrease (Increase) in severance insurance deposits (16,324) 29,840
Increase in retirement pension assets (28,181) (62,000)
Payment of severance benefits (33,500) (73,218)
Increase in non-current deferred income tax liabilities 14,276 2,464
Others, net (11,578) (36,400)
(1,279,722) (2,042,132)
Net cash used in operating activities (124,905) (1,279,590)
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in short-term loans 12,808 25,024
Decrease in short-term financial instruments, net 71,091 648,247
Decrease of long-term investment securities, net 19,771 2,472
Increase of investment securities using the equity method (53,930) (112,893)
Increase of guarantee deposits, net (9,361) (8,751)
Increase in long-term loan (223,644) (72,024)
Increase of property, plant and equipment, net (204,828) (483,207)
Increase of intangible assets (22,360) (620)
Others, net 5,142 (3,431)
Net cash used in investing activities (405,311) (5,183)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 50,752 1,012,201
Proceeds from debenture 167,835 497,898
Proceeds from long-term borrowings 368,294 632,712
Repayment of current portion of long-term borrowings (206,592) (224,572)
Payment of capital lease liabilities (83,033) (4,476)
Payment of dividends (94,523) (94,524)
Net cash provided by financing activities 202,733 1,819,239
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (327,483) 534,466
CASH AND CASH EQUIVALENTS, AT BEGINNIG OF THE PERIOD 805,660 271,194
CASH AND CASH EQUIVALENTS, AT END OF THE PERIOD ₩ 478,177 ₩ 805,660
(KRW million)
Seeaccompanyingnotestonon-consolidatedfinancialstatements.
DSME ANNUAL REPORT 2010 36
FINANCIAL REvIEW
1. THE COMPANY: Daewoo Shipbuilding & Marine Engineering Co., Ltd. (the “Company”) was established on October 1, 2000 as a spin-off of Daewoo
Heavy Industry Co., Ltd.. The Company’s major business is the building and sale of various ships, including special purpose ships and construction of plants. The Company’s shares have been listed on the Korea Exchange since February 2, 2001, and its global depositary receipts (GDR) have been listed on the Luxembourg Stock Exchange since June 10, 2003. As of December 31, 2010, the Company’s major stockholders consist of the Korea Development Bank (“KDB”) (31.26%) and Korea Asset Management Corporation (“KAMCO”) (19.11%).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Financial Statement Presentation
The Company maintains its official accounting records in Korean Won and prepares financial statements in the Korean language (Hangul) in conformity with financial accounting principles generally accepted in the Republic of Korea. Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these financial statements are intended for use by those who are informed about Korean accounting principles and practices. The accompanying financial statements have been condensed, restructured and translated into English (with certain expanded descriptions) from the Korean language financial statements. Certain information included in the Korean language financial statements, but not required for a fair presentation of the Company’s financial position, results of operations, changes in shareholders’ equity or cash flows, is not presented in the accompanying financial statements.
The financial statements included herein, to be submitted to the annual meeting of shareholders, were approved by the board of directors on February 28, 2011.
Implementation of the Statements of Korean Accounting Standards (“SKAS”)
The Company prepares its financial statements in accordance with the Statements of Korean Accounting Standards (SKAS). Among the SKAS that have been amended or newly enacted during 2010, there are no standards that have effects on the preparation of the Company’s financial statements. The Company applies the same, in all material respect, accounting policies that have been adopted in the previous year’s financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and in banks and short-term financial instruments with original maturities of less than ninety days, which can be converted into cash and whose risk of value fluctuation arising from changes of interest rates is not material.
Revenue Recognition
Revenues from construction contracts are recognized using the percentage-of-completion method, measured by the units of work performed. Revenues from other sales are recognized upon delivery of goods. Under the percentage-of-completion method, revenues are recognized based on the percentage of costs incurred over total estimated costs for each contract. The expenditures incurred before the construction contract is entered into are recognized as prepaid construction costs, if they are directly related to making a contract, separately identifiable and reliably measurable, and the possibility of construction contract is probable. The prepaid construction costs are transferred to construction cost at the commencement of the construction.
When the Company expects loss from construction contract, the loss is immediately recognized as provision for construction losses and charged to cost of sales or cost of construction in the same period. In addition, if the Company has an obligation for
Notes to Non-Consolidated Financial StatementFor the year ended December 31, 2010 and 2009
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial StatementsNotes to Non-Consolidated Financial Statements
37
construction warranty after the construction is completed, the estimated construction warranty expense is included in cost of
construction when the construction is completed, and recorded as provision for construction warranty.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts based on management’s estimate of collectability of individual accounts and prior year’s collection experience.
Inventories
Inventories are stated at cost which is determined by using the moving average method, except for materials-in-transit for which costs are determined using individual specific identification method. The Company maintains perpetual inventory, which is adjusted to physical inventory counts performed at year end. When the market value of inventories (net realizable value for finished goods or merchandise and current replacement cost for raw materials) is less than the carrying value, the carrying value is stated at the lower of cost or market.
The Company applies the lower of cost by group of inventories and loss on inventory valuation is presented as a deduction from inventories. Among the loss on inventory valuation, ordinary loss is charged to cost of sales and unusual loss is recognized in non-operating expenses. Meanwhile, when the circumstances that previously caused inventories to be written down below cost no longer exist and the new market value of inventories subsequently recovers, the valuation loss is reversed to the extent of the original valuation loss and the reversal is deducted from cost of sales.
Investments in Securities Other Than Those Accounted for Using the Equity Method
Classification of Securities
At acquisition, the Company classifies securities into one of the three categories; trading, held-to-maturity or available-for-sale. Trading securities are those that are acquired principally to generate profits from short-term fluctuations in prices. Held-to- maturity securities are those with fixed or determinable payments and fixed maturity that the Company has the positive intent and ability to hold to maturity. Available-for-sale securities are those not classified as either held-to-maturity or trading securities. Trading securities are classified as current assets, whereas available-for-sale and held-to-maturity securities are classified as non-current assets, except for those whose maturity dates or whose likelihood of being disposed of are within one year from the date of the statements of financial position, which are classified as current assets.
Valuation of Securities
Securities are recognized initially at cost, which includes the market price of the consideration given to acquire them and incidental expenses. If the market price of the consideration is not reliably determinable, the market prices of the securities purchased are used as the basis for measurement. If neither the market prices of the consideration given nor those of the acquired securities are available, the acquisition cost is measured at the best estimates of its fair value.
Meanwhile, in order to determine cost of securities for the calculation of realized gain or loss on disposal, the Company applies specific identification method for its debt securities and moving average method for its equity securities.
After initial recognition, trading securities are valued at fair value, with unrealized gains or losses included in current operations. Held-to-maturity securities are stated at amortized cost. The difference between acquisition cost and face value of held-to- maturity securities is amortized over the remaining term of the securities by applying the effective interest method and added to or subtracted from the acquisition costs and interest income of the remaining period. Available-for-sales securities are also
Notes to Non-Consolidated Financial StatementFor the year ended December 31, 2010 and 2009
DSME ANNUAL REPORT 2010 38
FINANCIAL REvIEW
valued at fair value, with unrealized gains or losses included in accumulated other comprehensive income (loss), until the securities are sold or if the securities are determined to be impaired and the lump-sum cumulative amount of accumulated other comprehensive income (loss) is included in current operations. However, available-for-sales securities that are not traded in an active market and whose fair values cannot be reliably estimated are accounted for at their acquisition costs.
Securities are evaluated at each date of the statements of financial position to determine whether there is any objective evidence of impairment loss. When any such evidence exists, unless there is a clear counter-evidence that recognition of impairment is unnecessary, the Company estimates the recoverable amount of the impaired security and recognizes any impairment loss in current operations. The amount of impairment loss of the heldto-maturity security or non-marketable equity security is measured as the difference between the recoverable amount and the carrying amount. The recoverable amount of held-to maturity security is the present value of expected future cash flows discounted at the securities’ original effective interest rate.
For available-for-sale debt or equity security, the amount of impairment loss to be recognized in the current period is determined by subtracting the amount of impairment loss of debt or equity security already recognized in prior period from the amount of amortized cost in excess of the recoverable amount for debt security or the amount of the acquisition cost in excess of the fair value for equity security.
If the realizable value subsequently recovers, in case of a security stated at fair value, the increase in value is recorded in current operations, up to the amount of the previously recognized impairment loss; for a security stated at amortized cost or acquisition cost, the increase in value is recorded in current operation, however its recovered value shall not exceed the amortized cost assuming if no impairment had been previously recognized.
When transfers of securities between categories are needed because of changes in an entity’s intention and ability to hold those securities, such transfer is accounted for as follows: trading securities cannot be reclassified into available-for-sale and held-to- maturity securities, and vice versa, except when certain trading securities lose their marketability. Available-for-sale securities and held-to-maturity securities can be reclassified into each other after fair value recognition. When held-to-maturity security is reclassified into available-for-sale security, the difference between the book value and fair value is reported in an accumulated other comprehensive income (loss). Whereas, when an available-for-sale security is reclassified into held- to-maturity securities, the difference is reported in accumulated other comprehensive income (loss) and amortized over the remaining term of the securities using the effective interest method.
Investment Securities Accounted for Using the Equity Method
Investments in equity securities in companies in which the Company is able to exercise significant influence over the operating and financial policies of the investees are accounted for using the equity method.
1) Accounting for changes in the Company’s portion of an investee’s net equity
Changes in the investor’s share of equity interest in an associate are adjusted to the balance of investment in the associate and accounted for in accordance with the source of changes in the net assets of the associate. ① If changes in the net assets of an associate arise as a result of net income or net loss for the current period, changes in the Company’s share of equity interest in the associate are accounted for as an item of current earnings. ② If an associate’s beginning balance of retained earnings has been changed, changes in the Company’s share of equity interest in the associate are included in beginning balance of retained earnings. ③ If changes in the net assets of an associate arise as a result of an increase or decrease in equity, excluding the associate’s net income or net loss for the current period and changes in the associate’s beginning balance of retained earnings, the resulting change in the Company’s share of equity interest in the associate is included in the Company’s accumulated other comprehensive income (loss).
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial StatementsNotes to Non-Consolidated Financial Statements
39
If an associate’s beginning balance of retained earnings has been changed because of a material error correction and if the effect of such change on the financial statements of the investor is immaterial, the resulting change in the Company’s share of equity interest in the associate is included in the Company’s current earnings in accordance with SKAS for accounting changes and corrections of errors. If an associate’s beginning balance of retained earnings has been changed because of the investee’s accounting changes, the resulting change in the Company’s share of equity interest in the associate is reflected in the Company’s beginning balance of retained earnings in accordance with SKAS for accounting changes and corrections of errors.
At the date of an associate’s dividend declaration, the Company subtracts the amount of dividend receivable directly from the carrying amount of the investment in the associate. However, in the case of an associate’s stock-dividend declaration, no accounting treatment is made since there is no change in the net assets of the associate.
2) Investment difference
Investment difference arises on the date of acquisition of an investment in an associate because of factors such as the associate’s ability to earn future profits in excess of normal profits. Such difference is treated as goodwill and accounted for in accordance with Korea Accounting Standards on business combinations. When the Company is able to exercise significant influence through an in-stage acquisition of an associate’s shares, investment difference is calculated as if the shares were acquired in a lump-sum purchase on the same date significant influence became exercisable. The Company calculates the investment difference if its share of equity interest in an associate increases as a result of an increase (or decrease) in contributed capital with (or without) consideration. Such difference is treated as goodwill and accounted for in accordance with Korea Accounting Standards on business combinations.
3) Accounting for the difference between the fair value and book value of the net assets of the associate
At the date of acquisition of an investment in an associate, among the difference between the fair value and book value of the identifiable assets and liabilities of an associate, the amount relating to the Company’s share of equity interest in the associate is amortized or reinstated in accordance with the associate’s methods of accounting for assets and liabilities.
4) Elimination of unrealized gains or losses from intercompany transaction
The Company calculates its proportionate equity-share of the unrealized gains or losses from transactions with investees; and the amount reflected in the carrying amount of the Company’s investment, as of the statements of financial position end date, is recognized as unrealized intercompany gain or loss. Unrealized gains are accounted for as a reduction of the carrying amount of the investment in the associate, while unrealized losses are added to the carrying amount of the investment in the associate. However, when the investee is a subsidiary of the Company, unrealized gains and losses resulting from sale of assets to the investee (downstream transactions), are eliminated entirely.
5) Impairment losses
If the amount recoverable from an investment in an associate (hereinafter referred to as the recoverable amount) is less than its carrying amount, the Company considers recognition of an impairment loss. Pursuant to Korea Accounting Standards for investments in securities, the Company determines whether there is objective evidence that impairment loss has been incurred. The recoverable amount is determined as the higher of value in use or expected amount of net cash inflows from disposal of the investment in the associate. The amount of impairment loss is included in current earnings. If there is any amount of unamortized investment difference when the investor recognizes impairment loss on an investment in an associate, the remaining balance of the investment difference is reduced first. If the recoverable amount of an investment in an associate increases after recognizing an impairment loss, the amount of increase is recognized as current income to the extent of the impairment loss previously recognized. In such a case, the carrying amount of the investment shall not exceed the carrying amount that would have been determined, as of the date of the recovery, if no impairment loss were recognized in prior
Notes to Non-Consolidated Financial StatementFor the year ended December 31, 2010 and 2009
DSME ANNUAL REPORT 2010 40
FINANCIAL REvIEW
periods. However, since recovery of impairment loss recognized by reducing the balance of unamortized investment difference is not permitted, no accounting treatment is made for such recovery.
6) Translation of financial statements of overseas investees
For overseas investees whose financial statements are prepared in foreign currencies, the equity method of accounting is applied after assets and liabilities are translated in accordance with the accounting treatments for the translation of the financial statements of overseas’ subsidiaries for consolidated financial statements. The Company’s proportionate share of the difference between assets net of liabilities and shareholders’ equity after translation into Korean won is accounted for as “increase (decrease) in equity of associates” included in accumulated other comprehensive income (loss).
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, except for assets revalued in accordance with the Asset Revaluation Law of Korea and revaluation model of current amended SKAS No5. Routine maintenance and repairs are expensed as incurred. Expenditures that result in the enhancement of the value or extension of the useful lives of the facilities involved are capitalized as additions to property, plant and equipment. The interest incurred on borrowings in connection with the acquisition of property and plant and equipment are charged to current operation.
When the book value of an asset exceeds the recoverable value of the asset due to obsolescence, physical damage or a sharp decline in market value, and the amount is material, the impairment of assets is recognized and the asset is recognized at reduced value and the resulting impairment loss is charged to current operations.
If the recoverable amount of the impaired asset exceeds its carrying amount in subsequent reporting period, the amount equal to the excess is treated as reversal of the impairment loss; however, it cannot exceed the carrying amount that would have been determined had no impairment loss been recognized.
Depreciation is computed using the declining balance method except for buildings, structures and electric equipment that are depreciated by using the straight-line method, based on the following estimated economic useful lives.
An asset whose use is discontinued and held for disposal or retirement is no longer depreciated and the carrying amount of the asset upon discontinuance of its use is reclassified to an investment asset, which is tested for impairment at each year. An asset whose use is discontinued and held for future use is depreciated and the depreciation expense is recorded as a non- operating expense.
Intangible Assets
Intangible assets are stated at cost, net of amortization computed using the straight-line method over the estimated economic useful lives (2~10 years) of related assets. Development costs are amortized over the estimated economic useful life from the usable date of the related productions. Ordinary development and research expenses are charged to current operations. If the recoverable amount of an intangible asset becomes less than its carrying amount as a result of obsolescence, sharp decline in market value or other causes of impairment, the carrying amount of an intangible asset is adjusted to its recoverable amount and the reduced amount is recognized as impairment loss.
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial StatementsNotes to Non-Consolidated Financial Statements
Useful lives (years)
Buildings and buildings on capital lease 25 ~ 50
Structures 12 ~ 50
Machinery 12
Vessels and aircrafts 15
Others 6
41
If the recoverable amount of a previously impaired intangible asset exceeds its carrying amount in subsequent periods, the amount equal to the excess is recorded as reversal of impairment loss. However, the reversal amount cannot exceed the previously recognized loss amount.
Government Subsidies and Others
If the Company acquires an item of property, plant, and equipment free of charge or for a price less than its fair value, such as through government subsidies, the asset is accounted for at its fair value at the date of acquisition. The amount of government subsidy and any other form of similar non-reciprocal transfer of assets are presented as a contra-asset of the asset’s acquisition cost and are reversed over the useful life of the asset equivalent to respective depreciation amount each period. When the asset is disposed of, the remaining balances of government subsidy or non-reciprocal transfer is reflected in calculating the gain or loss on disposal.
In addition, government subsidies and any other form of similar non-reciprocal transfers which do not have a repayment obligation, is recognized as deduction of the related expenses. If there is no matching expense; the Company recognizes it as revenue or non-operating income. Government subsidies and any other forms of similar non-reciprocal transfers which have repayment obligations are recorded as liabilities.
Foreign Currency Transactions and Translation
The Company maintains its accounts in Korean Won. Transactions in foreign currencies are recorded in Korean Won based on the prevailing rates of exchange on the transaction date. Accounts with balances denominated in foreign currencies are recorded and reported in the accompanying financial statements at the exchange rates prevailing at the date of the statements of financial position. The balances have been translated using the Basic Rate announced by Seoul Money Brokerage Services, Ltd., which is ₩1,138.9 and ₩1,167.6 to US$1.00 at December 31, 2010 and 2009, respectively. Foreign currency assets and liabilities of overseas business branches or offices are translated at the exchange rate at the date of the statements of financial position and income and expenses at the weighted average rate of the reporting period. Translation gains and losses arising from the translation procedures are offset against each other and the net amounts are recognized as an overseas operations translation debit and credit in accumulated other comprehensive income (loss).
Accrued Severance Indemnities
Under Korean labor regulations, all employees with more than one year service are entitled to receive severance indemnities, based on the length of service and the rate of pay, upon termination of their employment. The Company has subscribed to severance insurance and defined benefit pension plan in accordance with the Labor Standard Law, which restricts severance payment directly to the eligible employees and directors, and the severance insurance payments and the assets managed under the defined benefit pension plan are recognized as severance insurance deposits and pension plan assets, respectively, and presented as deductions from accrued severance indemnities
Actual severance payments made in 2010 and 2009 are ₩33,500 million and ₩73,218 million for the years ended December 31, 2010 and 2009, respectively.
Derivatives
All derivative instruments are accounted for at fair value with the valuation gain or loss recorded as an asset or liability. If the derivative instrument is not part of a transaction qualifying as a hedge, the adjustment to fair value is reflected in current operations. The accounting for derivative transactions that are part of a qualified hedge based both on the purpose of the
transaction and specific criteria is accounted for as either a fair value hedge or a cash flow hedge. Fair value hedge accounting is applied to a derivative instrument designated as hedging the exposure to changes in the fair value of an asset or liability or a
Notes to Non-Consolidated Financial StatementFor the year ended December 31, 2010 and 2009
DSME ANNUAL REPORT 2010 42
FINANCIAL REvIEW
firm commitment (hedged item) that is attributable to a particular risk. The gain or loss both on the hedging derivative instruments and on the hedged item attributable to the hedged risk is reflected in current operations. Cash flow hedge accounting is applied to a derivative instrument designated as hedging the exposure in expected future cash flows of an asset or liability or a forecasted transaction that is attributable to a particular risk. The effective portion of gain or loss on a derivative instrument designated as a cash flow hedge is recorded as an accumulated other comprehensive income (loss) and the ineffective portion is recorded in current operations. The effective portion of gain or loss recorded as an accumulated other comprehensive income (loss) is reclassified to current earnings in the same period during which the hedged forecasted transaction affects earnings. If the hedged transaction results in the acquisition of an asset or the incurrence of a liability, the gain or loss in accumulated other comprehensive income (loss) is added to or deducted from the asset or the liability.
Leases
The Company classifies and accounts for leases as either operating or capital leases, depending on the terms of the lease. Leases where the Company assumes substantially all the risks and rewards of ownership are classified as capital leases. All other leases are classified as operating leases.
The assumption of substantially all the risks and rewards of ownership is evidenced when one or more of the criteria listed below are met:
- Ownership of the leased property will be transferred to the lessee at the end of the lease term
- The lessee has a bargain purchase option, and it is reasonably certain at the inception of the lease that the option will be exercised.
- The lease term is equal to 75% or more of the estimated economic useful life of the leased property.
- The present value at the beginning of the lease term of the minimum lease payments equals or exceeds 90% of the fair value of the leased property.
- In addition, if the leased property is specialized to the extent that only the lessee can use it without any major modification, it would be considered a capital lease.
Where the Company is a lessee under a capital lease, the present value of future minimum lease payments is capitalized and a corresponding liability is recognized. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease.
Income Tax Expense
The Company recognizes deferred income tax assets or liabilities for the temporary differences between the carrying amount of an asset and liability and tax base. A deferred income tax liability for taxable temporary difference is fully recognized except to the extent in accordance with related SKAS, while a deferred tax asset for deductible temporary difference is recognized to the extent that it is almost certain that future taxable profit will be available against which the deductible temporary difference can be utilized.
Deferred income tax asset (liability) is classified as current or non-current asset (liability) depending on the classification of related asset (liability) in the balance sheet. Deferred income tax asset (liability), which does not relate to specific asset (liability) account in the balance sheet such as deferred income tax asset recognized for tax loss carry-forwards, is classified as current or non-current asset (liability) depending on the expected reversal period. Deferred income tax assets and liabilities in the same tax jurisdiction and in the same current or noncurrent classification are presented on a net basis.
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial StatementsNotes to Non-Consolidated Financial Statements
43
Current and deferred income tax expense are included in income tax expense in the statement of income and additional income tax or tax refunds for the prior periods are included in income tax expense for the current period when recognized. However, income tax resulting from transactions or events, which was directly recognized in shareholders’ equity in current or prior periods, or business combinations, is directly adjusted to equity account or goodwill (or negative goodwill).
valuation of Receivables and Payables at Present value
Receivables and payables arising from long-term cash loans, borrowings and other similar transactions are stated at present value. The difference between the nominal value and present value of these receivables or payables is amortized using the effective interest rate method. The amount amortized is included in interest expense or interest income.
Earnings per Share
Basic earnings per share is net income per share of common stock and is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share is net income per share of common stock and dilutive securities and is calculated by dividing diluted net income by the sum of the numbers of shares of common stock outstanding and dilutive securities.
Notes to Non-Consolidated Financial StatementFor the year ended December 31, 2010 and 2009
3. RESTRICTED FINANCIAL INSTRUMENTS: Deposits with withdrawal restrictions as of December 31, 2010 and 2009 are summarized as follows (KRW million):
4. SECURITIES: (1) Short-term investment securities Short-term investment securities as of December 31, 2010 and 2009 are summarized as follows (KRW million):
Account 2010 2009 Description
Short-term financial instruments ₩ 30,000 ₩ 30,091 Deposits for contract performance
″ CD, Deposits for deferment of corporate income tax payment - 51,000 and others
Long-term financial instruments Guarantee deposits for checking 35 35 accounts
₩ 30,035 ₩ 81,126
Book value
Description 2010 2009
Held-to-maturity-securities:
Government and public bonds ₩ 185 ₩ 686
Other debt securities - 5,200
₩ 185 ₩ 5,886
DSME ANNUAL REPORT 2010 44
FINANCIAL REvIEW
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial StatementsNotes to Non-Consolidated Financial Statements
(2) Long-term investment securities Long-term investments securities as of December 31, 2010 and 2009 are summarized as follows (KRW million):
(i) Available-for-sales securities as of December 31, 2010 and 2009 consist of the following (KRW million):
(*1) As the respective fair values cannot be reliably estimated, the book values of ₩15,082 million and ₩39,314 million as of December 31, 2010 and 2009, respectively, of
unlisted securities are stated as their acquisition costs
(*2) Equity-Linked Securities (ELS) are stated at fair value with realized gain on valuation of available-for-sale securities in accordance with the Financial Supervisory Service’s
response letter.
(*3) Impairment loss of ₩26,287 million is recognized for the year ended December 31, 2010, and a reversal of impairment loss of ₩10 million is recognized for the year
ended December 31, 2009.
Description 2010 2009
Available-for-sales securities:
Equity securities ₩ 201,273 ₩ 102,525
Debt securities 15,000 15,000
216,273 117,525
Held-to-maturity securities:
Government and public bonds 6,075 1,610
₩ 222,348 ₩ 119,135
2010
Acquisition Unrealized gain Accumulated Description cost (*1) impairment (*3) Book value
Equity securities ₩ 79,119 ₩ 149,186 ₩ (27,032) ₩ 201,273
Debt securities 15,000 - - 15,000
₩ 94,119 ₩ 149,186 ₩ (27,032) ₩ 216,273
Deferred tax effect ₩ (32,821)
2009
Acquisition Unrealized gain Gain Accumulated Description cost (*1) (*2) impairment (*3) Book value
Equity securities ₩ 95,439 ₩ 5,052 ₩ 2,778 ₩ (744) ₩ 102,525
Debt securities 15,000 - - - 15,000
₩ 110,439 ₩ 5,052 ₩ 2,778 ₩ (744) ₩ 117,525
Deferred tax effect ₩ (1,111)
45
(ii) The changes in valuation of available-for-sale securities included in accumulated other comprehensive income (loss) for the years ended December 31, 2010 and 2009 are as follows (KRW million):
(iii) The carrying value and fair value of the Company’s available-for-sale debt securities and held-to-maturity securities as of December 31, 2010 and 2009 by contractual maturity are as follows (KRW million):
Notes to Non-Consolidated Financial StatementFor the year ended December 31, 2010 and 2009
2010
Beginning Changes Realization from Ending Description balance in valuation disposal and others balance
Equity securities ₩ 5,052 ₩ 148,644 ₩ (4,510) ₩ 149,186
Debt securities - - - -
₩ 5,052 ₩ 148,644 ₩ (4,510) ₩ 149,186
Deferred tax effect ₩ (1,111) ₩ (32,702) ₩ 992 ₩ (32,821)
2010
Available-for-sales debt securities Held-to-maturity securities
Maturity Book value Fair value Book value Fair value
Within 1 year ₩ - ₩ - ₩ 185 ₩ 185
After 1 year through 5 years 15,000 15,000 6,075 6,075
₩ 15,000 ₩ 15,000 ₩ 6,260 ₩ 6,260
2009
Available-for-sales debt securities Held-to-maturity securities
Maturity Book value Fair value Book value Fair value
Within 1 year ₩ - ₩ - ₩ 5,886 ₩ 5,886
After 1 year through 5 years 15,000 15,000 1,610 1,610
₩ 15,000 ₩ 15,000 ₩ 7,496 ₩ 7,496
2009
Beginning Changes Realization from Ending Description balance in valuation disposal and others balance
Equity securities ₩ 15,858 ₩ (12,417) ₩ 1,611 ₩ 5,052
Debt securities - - - -
₩ 15,858 ₩ (12,417) ₩ 1,611 ₩ 5,052
Deferred tax effect ₩ (3,489) ₩ 2,732 ₩ (354) ₩ (1,111)
DSME ANNUAL REPORT 2010 46
FINANCIAL REvIEW
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial StatementsNotes to Non-Consolidated Financial Statements
5. INVESTMENT SECURITIES USING THE EQUITY METHOD: (1) Investment securities using the equity method as of December 31, 2010 and 2009 are as follows (KRW million):
2010
% of Acquisition Net asset Company ownership cost value Book value
DW Mangalia Heavy Industries S.A. (*1) 51.00 ₩ 44,805 ₩ (206,125) ₩ -
DSEC Co., Ltd. (*2) 70.07 14,117 78,295 76,108
Welliv Corp. 100.00 23,617 66,250 59,957
DSME Construction Co., Ltd. 95.06 81,434 84,873 26,961
DSME Shandong Co., Ltd. 100.00 76,154 170,598 126,475
Shinhan Machinery Co., Ltd. 89.22 62,981 65,429 89,874
DSME E&R Co., Ltd. 100.00 35,973 32,965 32,965
DeWind Co. 100.00 49,956 16,286 16,286
Samwoo Heavy Industry Co., Ltd.(*3) 76.57 30,296 28,089 27,019
DSME CANADA Holding Ltd.(*4) 100.00 23,624 22,154 22,154
NIDAS Marine Ltd. 46.00 1,285 697 697
KLDS Maritime S.A. 50.00 20,666 25,820 25,820
DK Maritime S.A. 50.00 62,643 66,030 66,030
Korea Marine Fund Corp. 23.53 2,000 2,799 2,799
D&H Solutions AS (*4) 50.00 10 (1,960) -
PT. Syabas Usaha Migas (*5) 40.00 3,592 12 2,245
₩ 533,153 ₩ 452,212 ₩ 575,390
(*1) Due to the accumulation loss of DW Mangalia Heavy Industries S.A. has a book value of zero, as such, the Company discontinued applying the equity method. The
Company accounts for the unrecognized loss on valuation of equity method investment as an allowance for doubtful accounts recorded for the respective equity
method investee. The accumulated allowance as of December 31, 2010 is ₩201,363 million, which includes a reversal amount of ₩3,155 million due to a decrease in the
unrealized loss.
(*2) Due to DSEC Co., Ltd.’s IPO process, it held all of the Company’s shares in safe custody for the year ended December 31, 2010.
(*3) As of June 30, 2010, the Company acquired equity securities of Samwoo Heavy Industry Co., Ltd. and Samwoo Propeller Co., Ltd. for ₩17,163 million and ₩13,133 million,
respectively, and on July 1, 2010, Samwoo Propeller Co., Ltd. merged with Samwoo Heavy Industry Co., Ltd..
(*4) The Company acquired 100% and 50% of the shares of DSME CANADA Holding Ltd. and D&H Solutions AS, respectively, in 2010 and recognized them as investment
securities accounted for using the equity method. Meanwhile, in relation to the loss accumulation of D&H Solutions AS, the unrecognized loss on valuation of ₩1,960
million, is recognized against allowance for doubtful accounts recorded for the respective equity method investee.
(*5) The Company reclassified the investment in equity securities of PT. Syabas Usaha Migas, into investment securities accounted for using the equity method, which were
acquired in June, 2009 and previously accounted for as other investment.
47
2009
% of Acquisition Net asset Company ownership cost value Book value
DW Mangalia Heavy Industries S.A. (*1) 51.00 ₩ 44,805 ₩ (205,499) ₩ -
DSEC Co., Ltd. 70.07 14,117 60,785 57,421
Welliv Corp. 100.00 23,617 61,471 55,178
DSME Construction Co., Ltd. (*2) 95.06 81,434 80,426 50,055
DSME Shandong Co., Ltd. 100.00 76,154 137,691 89,017
Shinhan Machinery Co., Ltd. 89.22 62,981 44,407 81,076
DSME E&R Co., Ltd. 100.00 35,973 34,000 33,993
DeWind Co. (*3) 100.00 49,956 42,790 42,791
NIDAS Marine Ltd. 46.00 1,285 214 214
KLDS Maritime S.A. 50.00 20,666 27,361 27,361
DK Maritime S.A. 50.00 62,643 69,795 69,795
Korea Marine Fund Corp. 23.53 2,000 2,848 2,848
₩ 475,631 ₩ 356,289 ₩ 509,749
(*1) Due to the accumulation loss of DW Mangalia Heavy Industries S.A. has a book value of zero, as such, the Company discontinued applying the equity method. The
Company recognized ₩205,282 million as an extended investment, ₩139,717 million as unrecognized loss on valuation of securities using the equity method prior to
2009, ₩99,472 million as loss on valuation of securities using the equity method for 2009, ₩5,629 million as negative adjustment to equity in equity method investees
prior to 2009 and ₩39,533 million as adjustment to equity in equity method investees for 2009.
(*2) The Company additionally acquired 42.21% newly issued shares of DSME Construction Co., Ltd. and paid ₩62,937 million for the shares.
(*3) In 2009, the Company acquired 100% of equity securities of DeWind Co. for ₩49,956 million and recognized as investment securities using the equity method.
Notes to Non-Consolidated Financial Statement
(2) The changes in the investment securities using the equity method for the years ended December 31, 2010 and 2009 are as follows (KRW million):
2010
Beginning Acquisition Gain Other net Ending Company balance (Disposal) (Loss) changes (*1) balance
DW Mangalia Heavy Industries S.A. (*1) ₩ - ₩ - ₩ 6,389 ₩ (6,389) ₩ -
DSEC Co., Ltd. 57,421 - 19,185 (498) 76,108
Welliv Corp. 55,178 - 4,779 - 59,957
DSME Construction Co., Ltd. 50,055 - (24,089) 995 26,961
DSME Shandong Co., Ltd. 89,017 - 41,273 (3,815) 126,475
Shinhan Machinery Co., Ltd. 81,076 - 8,811 (13) 89,874
DSME E&R Co., Ltd. 33,994 - 140 (1,169) 32,965
DeWind Co. 42,790 - (25,704) (800) 16,286
Samwoo Heavy Industry Co., Ltd. - 30,296 (3,827) 550 27,019
DSME CANADA Holding Ltd. - 23,624 (1,067) (403) 22,154
NIDAS Marine Ltd. 214 - 943 (460) 697
DSME ANNUAL REPORT 2010 48
FINANCIAL REvIEW
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial StatementsNotes to Non-Consolidated Financial Statements
2010
Beginning Acquisition Gain Other net Ending Company balance (Disposal) (Loss) changes (*1) balance
KLDS Maritime S.A. 27,361 - (1,012) (529) 25,820
DK Maritime S.A. 69,795 - (2,093) (1,672) 66,030
Korea Marine Fund Corp. 2,848 - 105 (154) 2,799
D&H Solutions AS - 10 (1,936) 1,926 -
PT. Syabas Usaha Migas - - (1,370) 3,615 2,245
₩ 509,749 ₩ 53,930 ₩ 20,527 ₩ (8,816) ₩ 575,390
2009
Beginning Acquisition Gain Other net Ending Company balance (Disposal) (Loss) changes (*1) balance
DW Mangalia Heavy Industries S.A. ₩ - ₩ - ₩ (99,472) ₩ 99,472 ₩ -
DSEC Co., Ltd. 41,971 - 15,450 - 57,421
Welliv Corp. 29,489 - 4,944 20,745 55,178
DSME Construction Co., Ltd. 4,680 62,937 (19,072) 1,510 50,055
DSME Shandong Co., Ltd. 76,299 - 23,724 (11,006) 89,017
Shinhan Machinery Co., Ltd. 44,465 - 8,693 27,918 81,076
DSME E&R Co., Ltd. 33,960 - 34 - 33,994
DeWind Co. - 49,956 (4,199) (2,967) 42,790
NIDAS Marine Ltd. 1,303 - (1,187) 98 214
KLDS Maritime S.A. 27,792 - 1,701 (2,132) 27,361
DK Maritime S.A. 75,190 - (8) (5,387) 69,795
Korea Marine Fund Corp. 2,618 - 330 (100) 2,848
₩ 337,767 ₩ 112,893 ₩ (69,062) ₩ 128,151 ₩ 509,749
(*1) Other net changes consist of changes in additional paid-in capital and other capital, retained earnings arising from application of the equity method, capital variation
of equity method, negative capital variation of equity method and others. Among other changes, reversal of allowance for doubtful accounts on other accounts
receivable from DW Mangalia Heavy Industries S.A amounting to ₩3,155 million, dividends of ₩498 million and ₩160 million received from DSEC Co., Ltd. and Korea
Marine Fund Corp., respectively, allowance for doubtful accounts on a loan to D&H Solutions AS amounting to ₩1,960 million and the equity securities of PT. Syabas
Usaha Migas of ₩3,592 million which had been recognized as other investments and are reclassified as investment securities accounted for using the equity method.
(*1) Other net changes consist of changes in retained earnings arising from application of the equity method, positive and negative capital variation of equity method and
others. Other net changes include allowance for doubtful accounts on other accounts receivable from DW Mangalia Heavy Industries S.A amounting to ₩204,518
million and dividends received from Korea Marine Fund Corp. amounting to ₩100 million.
49
Notes to Non-Consolidated Financial Statement
(3) Unrealized profits (losses) that occurred in transactions with affiliates under the equity method that the Company eliminated for the years ended December 31, 2010 and 2009 are as follows (KRW million):
(4) The changes in the investment differences as of December 31, 2010 and 2009 are as follows (KRW million):
2010
Plant Company Current assets & intangible assets Total
DW Mangalia Heavy Industries S.A. ₩ (4,762) ₩ - ₩ (4,762)
DSEC Co., Ltd. 2,187 - 2,187
Welliv Corp. - 6,293 6,293
DSME Construction Co., Ltd. - 57,912 57,912
DSME Shandong Co., Ltd. (9,761) 53,884 44,123
₩ (12,336) ₩ 118,089 ₩ 105,753
2009
Plant Company Current assets & intangible assets Total
DW Mangalia Heavy Industries S.A. ₩ (214) ₩ - ₩ (214)
DSEC Co., Ltd. 3,364 - 3,364
Welliv Corp. - 6,293 6,293
DSME Construction Co., Ltd. - 30,593 30,593
DSME Shandong Co., Ltd. (7,471) 56,145 48,674
₩ (4,321) ₩ 93,031 ₩ 88,710
2010
Beginning Increase Amortization Ending Company balance (decrease) (Reversal) balance
DSME Construction Co., Ltd. ₩ 222 ₩ - ₩ 222 ₩ -
Shinhan Machinery Co., Ltd. 36,669 - 12,224 24,445
DSME E&R Co., Ltd. (6) - (6) -
Samwoo Heavy Industry Co.,Ltd. - (1,717) (172) (1,545)
PT. Syabas Usaha Migas - 2,791 558 2,233
₩ 36,885 ₩ 1,074 ₩ 12,826 ₩ 25,133
2009
Beginning Increase Amortization Ending Company balance (decrease) (Reversal) balance
DSME Construction Co., Ltd. ₩ 443 ₩ - ₩ 221 ₩ 222
Shinhan Machinery Co., Ltd. 48,893 - 12,224 36,669
DSME E&R Co., Ltd. (13) - (7) (6)
₩ 49,323 ₩ - ₩ 12,438 ₩ 36,885
DSME ANNUAL REPORT 2010 50
FINANCIAL REvIEW
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial StatementsNotes to Non-Consolidated Financial Statements
(5) The summarized financial information of affiliated companies as of and for the year ended December 31, 2010 is as follows (KRW million):
Investment securities accounted for using the equity method as of December 31, 2010 are valued based on the provisional financial statements of investees as of the same date of the statement of financial position of the Company, which have not been audited nor reviewed by an external auditor. In order to verify the reliability of such unaudited and unreviewed financial statements, the Company performed the following procedures and found no significant exceptions:
i) obtained the signature from the chief executive officer of the equity method investee asserting that the unaudited and unreviewed financial statements are accurate,
ii) examined whether the major transactions identified by the Company, including public disclosures, were appropriately reflected in the unaudited and unreviewed financial statements, and
iii) performed an analytical review on the unaudited and unreviewed financial statements.
2010
Net income Company Assets Liabilities Sales (loss)
DW Mangalia Heavy Industries S.A. ₩ 932,784 ₩ 1,336,951 ₩ 621,077 ₩ (51,797)
DSEC Co., Ltd. 272,279 160,540 331,541 25,701
Welliv Corp. 102,763 36,513 116,409 4,808
DSME Construction Co., Ltd. 174,164 84,881 334,227 2,694
DSME Shandong Co., Ltd. 580,226 414,857 309,632 31,492
Shinhan Machinery Co., Ltd. 236,691 163,356 240,583 20,536
DSME E&R Co., Ltd. 58,142 23,866 181,607 1,401
DeWind Co. 160,728 136,039 113 (18,164)
Samwoo Heavy Industry Co., Ltd. 312,898 276,215 41,926 (5,746)
DSME CANADA Holding Ltd. 22,154 - - (1,067)
NIDAS Marine Ltd. 16,122 14,257 7,061 665
KLDS Maritime S.A. 258,403 206,763 33,853 751
DK Maritime S.A. 417,279 285,220 14,349 (4,186)
Korea Marine Fund Corp. 12,224 330 2,782 428
D&H Solutions AS 1,579 5,498 2,362 (3,871)
PT. Syabas Usaha Migas 23,355 23,323 92 (2,029)
51
(6) Details of adjustments, for the purpose of applying the equity method of accounting, on the financial statements of investees are as follows (KRW million):
2010
Net asset value Net asset value Company before adjustment Adjustment after adjustment Reason
DSME Shandong Co., Ltd ₩ 165,369 ₩ 5,229 ₩ 170,598 Valuation of currency forwards
DSME E&R Co., Ltd. Application of the equity 34,276 (1,311) 32,965 method to certain investments
DeWind Co. Amortization of goodwill & Application of the equity 24,689 (8,403) 16,286 method to certain investments
NIDAS Marine Ltd. Application of the equity 1,865 (350) 1,515 method to certain investments
2010
% of Type Company ownership Cost Description
Jointly controlled entities KLDS Maritime S.A. (*1) Korea Line Corporation’s 50.00 USD 22,100 percentage of ownership: 50%
Jointly controlled entities DK Maritime S.A. (*2) Korea Line Corporation’s 50.00 USD 59,800 percentage of ownership: 50%
Jointly controlled entities D&H Solutions AS (*3) 50.00 NOK 3,500 Hemla II AS: 50%
Jointly controlled entities PT. Syabas Usaha Migas (*4) DSME E&R Co., Ltd.: 40%, GNG Holdings Inc.: 15%, 40.00 USD 2,500 Panco Energy: 5%
Relationship Company name
Ultimate parent company Korea Development Bank Subsidiaries DW Mangalia Heavy Industries S.A., DSEC Co., Ltd., Welliv Corp., DSME Construction Co., Ltd., DSME Shandong Co., Ltd., Shinhan Machinery Co., Ltd., DSME E&R Co., Ltd., DeWind Co., Samwoo Heavy Industry Co., Ltd., Busan International Distribution Center Co., Ltd., DSME CANADA Holding Ltd., DSME Trenton Ltd., DeWind Europe GmbH NIDAS Affiliates using the equity Marine Ltd., KLDS Maritime S.A., DK Maritime S.A, Korea Marine Fund method and others Corp., DSME Oman LLC, DSME SMC Co., Ltd., D&H Solutions AS, PT Syabas Usaha Migas, DSME FAR EAST LLC, DSME BRAZIL LLC, SBM Shipyards Ltd., ZVEZDA-DSME LLC and 21 other entities
Notes to Non-Consolidated Financial Statement
6. JOINT VENTURES: Details of joint venture investments as of December 31, 2010 are as follows (USD in thousands, NOK in thousands):
7. RELATED PARTY TRANSACTIONS: (1) The Company’s related parties as of December 31, 2010 are as follows:
(*1) The Company has received orders for two ships from KLDS Maritime S.A.
(*2) The Company has received orders for four ships from DK Maritime S.A.
(*3) The Company acquired shares of Hemla II AS for the purpose of utilization of its capabilities of manufacturing of marine products and operation of mining areas.
(*4) The Company has invested in overseas oil fields in Cheffe, Indonesia in the form of a consortium consisting of the Company, DSME E&R Co., Ltd., GNG Holdings Inc. and
Panco Energy(total ownership % of the Company and DSME E&R Co., Ltad. : 80%).
DSME ANNUAL REPORT 2010 52
FINANCIAL REvIEW
(2) Related party transactions of the Company for the years ended December 31, 2010 and 2009 are as follows (KRW million):
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial StatementsNotes to Non-Consolidated Financial Statements
Relationship Company Transaction 2010 2009
Parent company The Korea Interest income and others ₩ 10,007 ₩ 26,391
Development Bank(KDB) Interest expense and others 28,876 60,804
Subsidiaries DW Mangalia Sales 6,110 28,902
Heavy Industries Interest income and others 21,233 20,826
S.A(DMHI) Interest expense and others 367 -
DSEC Co., Ltd. (DSEC) Sales 2,425 70
Interest income and others 157 908
Purchases 76,518 79,844
Interest expense and others 3 -
Welliv Corp. (Welliv) Sales 2,178 -
Interest income and others 29 2,453
Purchases 10,585 43,806
Interest expense and others 36,782 -
DSME Construction Sales 7 -
Co., Ltd. (DSMEC) Interest income and others 102 183
Purchases 170,852 176,867
DSME Shandong Interest income and others 74 231
Co., Ltd. (DSSC) Purchases 435,976 495,659
Shinhan Machinery Co., Sales 4,744 3,178
Ltd.(SHMC) Interest income and others 1,006 960
Purchases 217,278 232,219
DSME E&R Co., Ltd. Sales 451 -
(DSME E&R) Interest income and others 243 733
Purchases 89,350 34,271
Interest expense and others 3,185 -
DeWind Co. (DeWind) Sales 1,476 -
Interest income and others 5,101 764
Samwoo Heavy Sales 1,116 -
Industry Co., Ltd.(SWHI) Interest income and others 227 -
Purchases 35,994 -
DSME CANADA
Holding Ltd. (DSMECH) Sales 140 -
Busan International Sales 1 -
Distribution Interest income and others 82 -
Center Co., Ltd. (BIDC) Purchases 27,417 -
53
Notes to Non-Consolidated Financial Statement
Relationship Company Transaction 2010 2009
Equity method NIDAS Marine Limited (NIDAS) Interest income and others 131 130
KLDS Maritime S.A.(KLDS) Sales - 203,775
Interest income and others 1,873 -
DK Maritime S.A.(DK) Sales 456,380 22,911
Interest income and others 2,545 -
D&H Solutions AS (D&H) Interest income and others 56 -
Others DSME Oman LLC (DSMEO) Interest income and others 223 73
Interest expense and others 987 -
DSME SMC Co., Ltd. Interest income and others 1 -
(DSME SMC) Interest expense and others 103 -
Total sales ₩ 475,028 ₩ 258,836
Total interest income and others 43,090 53,652
Total purchases 1,063,970 1,062,666
Total interest expense and others 70,303 60,804
(3) Intercompany receivables and payables as of December 31, 2010 and 2009 are as follows (KRW million):
2010
Receivables Payables
Financial Long-term Long & Accrued instruments Trade Other loans short-term expenses Relationship Company and others receivables receivables and others borrowings and others
Parent company KDB ₩ 240,879 ₩ - ₩ - ₩ 483 ₩ 557,998 ₩ 199,006
Subsidiaries DMHI - 37,662 212,331 193,107 - -
DSEC - 1,754 44 2,848 - 29,826
Welliv - - - 35 - 4,740
DSMEC - 1 13 13 - 49,407
DSSC - 8,053 2,118 30,106 - 4,972
SHMC - 427 190 10,800 - 58,804
DSME E&R - 14 381 29 - 14,967
DeWind - 1,476 - 135,483 - -
SWHI 15,000 631 531 30,764 - 23,833
DSMECH 140 - - - -
BIDC - - - 5,000 - 7,519
Equity method NIDAS - - 4,097 - -
KLDS - 22,778 - 1,931 - -
DK - 204,849 - 71 - 22,600
D&H - - - 4,709 - -
Others DSMEO - - - 9,578 - -
DSME SMC - - 1 - - -
₩ 255,879 ₩ 277,785 ₩ 215,609 ₩ 429,054 ₩ 557,998 ₩ 415,674
DSME ANNUAL REPORT 2010 54
FINANCIAL REvIEW
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial StatementsNotes to Non-Consolidated Financial Statements
The above transactions include the currency forward contract qualified for fair value hedging with KDB, and the unsettled contract balance is US$ 903 million as of December 31, 2010 and details of allowance for doubtful accounts, and collateral and guarantee in respect of account balances with related parties as of December 31, 2010 are as follows (KRW million):
2009
Receivables Payables
Financial Long-term Long & Accrued instruments Trade Other loans short-term expenses Relationship Company and others receivables receivables and others borrowings and others
Ultimate parent company KDB ₩ 281,429 ₩ - ₩ - ₩ 904 ₩ 347,470 ₩ 501,325
Subsidiaries DMHI - 27,767 212,644 152,657 - -
DSEC - 354 72 - - 25,438
Welliv - - - - - 1,956
DSMEC - - 18 14,891 - 3,135
DSSC - 8,395 3,966 198,267 - 3,541
SHMC - 448 738 13,281 - 53,642
DSME E&R - - 34 79 - 13,119
DeWind - - - 53,306 - -
Equity method NIDAS - - - 4,300 - -
KLDS - 25,112 - - - -
DK - - - - - 101,303
Others DSMEO - - - 1,318 - -
₩ 281,429 ₩ 62,076 ₩ 217,472 ₩ 439,003 ₩ 347,470 ₩ 703,459
Collateral Relationship Company Account balance & guarantee Allowance
Subsidiary DMHI Receivables ₩ 37,662 ₩ - ₩ 4,741
Other receivables 212,331 - 201,384
Long-term loans 114,640 162,863 -
DSSC Receivables 8,053 - 8,053
Other receivables 2,118 - 2,103
Equity KLDS Receivables 22,778 - 2,278
Method DK Receivables 204,849 - 1,549
D&H Long-term loans 4,556 - 1,960
The above transactions included the currency forward contract of fair value hedging with KDB, and the unsettled contract balance is US$ 1,986 million as of December 31, 2009.
55
Details of allowance for doubtful accounts, collateral and guarantee in respect of account balances with related parties as of December 31, 2010 are as follows (KRW million):
Notes to Non-Consolidated Financial Statement
Collateral Relationship Company Account Balance & Guarantee Allowance
Subsidiary DMHI Receivables ₩ 27,767 ₩ - ₩ 211
Other receivables 212,644 - 204,518
Long-term loans 130,771 166,967 -
Subsidiary DSEC Receivables 8,395 - 4,128
Other receivables 3,966 - 3,343
(4) Key management compensation for the years ended December 31, 2010 and 2009 are as follows (KRW million):
(5) The Company has provided guarantees or collateral for related parties as of December 31, 2010 and 2009 as follows (KRW in millions, USD in thousands):
Description 2010 2009
Salaries ₩ 2,139 ₩ 1,914
Severance benefits 452 245
Share-based payment - 239
₩ 2,591 ₩ 2,398
2010
Company Type of guarantee Guaranteed amount Lender
DSEC (*1) Performance of contracts $ 251,000 NASSCO
DeWind (*2) Performance of contracts $ 9,644 Willmar Municipal Utilities and others
DMHI (*3) Borrowing & others $ 67,500 Woori Bank Bahrain branch
Joint liability on guarantees Bank issued R/G for new project $ 300,000 order of DMHI
DSME ANNUAL REPORT 2010 56
FINANCIAL REvIEW
(*1) The Company has provided guarantees to DSEC Co., Ltd. in regard to the latter’s performance of contracts and warranties for material supply contracts amounting to
US$ 1 million and US$ 250 million, respectively.
However, the Company has indemnification rights related to warranty, as DSEC Co., Ltd. has similar guarantee contracts with its own suppliers.
(*2) As part of DeWind Co.’s acquisition, the Company has transferred DeWind Co.’s, a subsidiary, performance guarantee provided by CTC, a seller to DeWind Co., in
relation to the turbine supply contract,. Of the guaranteed amount, US$ 4.8 million is covered under the current machinery insurance program. In addition, the
Company has escrow deposits to fund any liability arising from the guarantee agreement.
(*3) The Company has provided guarantees in connection with DW Mangalia Heavy Industries S.A.’s short-term borrowings and Usance L/C for short-term liquidity up
to US$ 50 million and US$ 10 million, respectively. Additionally, accounts receivable in relation to ship building are pledged as collateral for borrowings. Also, for
reinforcement of credit, the Company has provided joint liability on guarantees to the bank issued R/G.
(6) Guarantees provided by related parties as of December 31, 2010 and 2009 are as follows (USD, EUR in thousands):
2009
Company Type of guarantee Guaranteed amount Lender
DSEC (*1) Performance of contracts $ 251,000 NASSCO
DSMEC Performance of contracts ₩ 49,200 PLDNC
DeWind (*2) Performance of contracts $ 9,644 Willmar Municipal Utilities and others
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial StatementsNotes to Non-Consolidated Financial Statements
2010
Provided guarantees Related liabilities
Type of Guaranteed Type of Liabilities Relationship Company guarantee amount liabilities amount
Parent company KDB Short-term Usance $ 380,000 borrowings $ 205,563
€ 15,797
Advanced payment bonds and others 993,455 - -
$ 205,563
$ 1,373,455 € 15,797
2009
Provided guarantees Related liabilities
Type of Guaranteed Type of Liabilities Relationship Company guarantee amount liabilities amount
Parent company KDB Usance $ 380,000 Usance $ 193,302
Advanced payment bonds and others 1,259,783 - -
$ 1,639,783 $ 193,302
57
2010
Number of % Fair value/ Relationship Company shares of ownership Net asset value Book value
Other DSME Oman LLC 350,000 70.00 ₩ 924 ₩ 924
Other DSME FAR EAST LLC - 100.00 - -
Other DSME BRAZIL LLC - 50.00 - -
Other SBM Shipyards Ltd. 6,000,000 33.33 7 7
Other ZVEZDA-DSME LLC - 19.00 8 8
2009
Number of % Fair value/ Relationship Company shares of ownership Net asset value Book value
Other DSME Oman LLC 350,000 70.00 ₩ 924 ₩ 924
(7) Securities and bonds invested to related parties, which are not included in Note 5 as of December 31, 2010 and 2009, are as follows (KRW million):
Notes to Non-Consolidated Financial Statement
8. PROPERTY, PLANT AND EQUIPMENT: (1) The changes in property, plant and equipment for the years ended December 31, 2010 and 2009 are as follows (KRW million):
2010
Beginning Ending balance Acquisition Disposal Depreciation Others (*2) balance
Land ₩ 1,516,563 ₩ 4,273 ₩ 1,449 ₩ - ₩ 104,678 ₩ 1,624,065
Land on capital lease 104,678 - - - (104,678) -
Buildings 606,447 2,440 - 26,205 63,160 645,842
Buildings on capital lease 56,271 - - - (56,271) -
Structures 762,901 71 - 29,752 2,304 735,524
Machinery 327,048 4,458 314 46,631 13,467 298,028
Vehicles 48,890 2,442 51 12,313 - 38,968
Ships and aircraft 138,096 322 - 12,719 8,302 134,001
Tools 64,314 2,811 36 20,634 11,427 57,882
Furniture and fixtures 21,656 5,995 232 8,201 144 19,362
Furniture and fixtures on capital lease 17,028 - - 4,471 - 12,557
Construction-in- progress 344,600 184,090 - - (40,899) 487,791
₩ 4,008,492 ₩ 206,902 ₩ 2,082 ₩ 160,926 ₩ 1,634 ₩ 4,054,020
DSME ANNUAL REPORT 2010 58
FINANCIAL REvIEW
(2) The details of the published price of the Company’s land announced by the National Tax Service are as follows (KRW million):
(3) Land and land on capital lease is stated at the revalued amounts as of October 1, 2009. The fair values of the assets are based on the results of an appraisal by Kaaram Appraisal Co., Ltd., an independent appraiser.
In 2009, the Company adopted the revaluation model for the first time and the land under the cost model would have been ₩602,225 million. For the year ended December 31, 2009, the Company recognized other comprehensive income of ₩798,530 million, net of tax and revaluation loss of ₩937 million.
(*1) The Company has entered into a sale-leaseback (capital lease) contract for its computer equipment and recognized the respective assets as furniture and fixtures on
capital lease.
(*2) As of December 31, 2010, others include capital lease land and capital lease building transferred to land and building and advanced payments transferred to
Construction-in-progress amounting to ₩1,634 million in total. As of December 31, 2009, others include government subsidies used for acquisition of tangible assets
amounting to ₩35 million, and acquisition of furniture and fixtures amounting to ₩20,381 million based on a sale and lease back transaction, accounted for as capital
lease.
2009
Beginning Gain on Ending balance Acquisition Disposal revaluation Depreciation Others (*2) balance
Land ₩ 512,722 ₩ 942 ₩ 256 ₩ 983,524 ₩ - ₩ 19,631 ₩ 1,516,563
Land on capital lease 65,184 - - 39,494 - - 104,678
Buildings 471,185 3,001 3,722 - 23,835 159,818 606,447
Buildings on capital lease 57,486 - - - 1,215 - 56,271
Structures 501,484 1,104 832 - 24,442 285,587 762,901
Machinery 252,380 33,015 964 - 43,588 86,205 327,048
Vehicles 30,549 22,471 - - 11,610 7,480 48,890
Ships and aircraft 96,024 4,633 - - 12,331 49,770 138,096
Tools 71,066 9,428 32 - 20,199 4,051 64,314
Furniture and fixtures 46,024 5,874 20,399 - 12,049 2,206 21,656
Furniture and fixtures on capital lease (*1) - - - - 3,353 20,381 17,028
Construction-in- progress 534,346 425,037 - - - (614,783) 344,600
₩ 2,638,450 ₩ 505,505 ₩ 26,205 ₩ 1,023,018 ₩ 152,622 ₩ 20,346 ₩ 4,008,492
Book value Published price
Location Area (1,000 m2) 2010 2009 2010 2009
Geoje, Kyungnam 4,664 ₩ 1,592,337 ₩ 1,589,513 ₩ 705,963 ₩ 693,430
Yongin, Kyunggi 117 31,728 31,728 14,113 14,910
4,781 ₩ 1,624,065 ₩ 1,621,241 ₩ 720,076 ₩ 708,340
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial StatementsNotes to Non-Consolidated Financial Statements
59
9. INSURED ASSETS: (1) Assets insured as of December 31, 2010 are as follows (KRW in millions, USD and EUR in thousands):
Additionally, the Company maintains comprehensive and liability coverage for vehicles, business interruption, employee indemnification, and industrial disaster and gas casualties as of December 31, 2010.
(2) The Company incurred ordinary research and development expenses of ₩65,398 million and ₩65,063 million for the years ended December 31, 2010 and 2009, respectively.
Type Properties Coverage Insurance company
Fire insurance Company house & others ₩ 243,156 Meritz Fire & Marine Insurance Co., Ltd. & others
General property Inventories & tangible Assets ₩ 1,327,475 Korean Fire Protection Association
Hull insurance Ships ₩ 152,876 Hanwha Non-Life Insurance Co., Ltd. & others
Aviation insurance Helicopter & others $ 30,500 Hanwha Non-Life Insurance Co., Ltd.
Ship building Insurance Shipbuilding $ 4,517,682 Hyundai Fire & Marine insurance Co., Ltd.
Protection and Indemnity insurance Ships $ 1,000,000 Ship-owners (MARSH Korea)
Liability insurance High-pressure gas ₩ 300 Meritz Fire & Marine Insurance Co., Ltd.
Directors & officers ₩ 30,000 Hanwha Non-Life Insurance Co., Ltd.
Others ₩ 1,155,665 Korean Fire Protection Association
$ 5,313,300 Hyundai Fire & Marine Insurance Co., Ltd. and others
€ 330 Hyundai Fire & Marine Insurance Co., Ltd.
€ 2,909,472
$ 10,861,482
€ 330
Notes to Non-Consolidated Financial Statement
10. INTANGIBLE ASSETS: (1) The changes in intangible assets for the years ended December 31, 2010 and 2009 are as follows (KRW million):
2010 2009
Development Industrial property Development Industrial property costs rights & others costs rights & others
Beginning balance ₩ - ₩ 2,642 ₩ 5,120 ₩ 3,035
Acquisition and transfer 21,619 741 - 620
Amortization - (372) (5,120) (1,013)
Ending balance ₩ 21,619 ₩ 3,011 ₩ - ₩ 2,642
DSME ANNUAL REPORT 2010 60
FINANCIAL REvIEW
11. GOVERNMENT SUBSIDIES: (1) The Company received government subsidies, totaling ₩7,023 million from the Ministry of Labor’s Tongyeong Office in relation to
the operation of a job training consortium for small and medium-sized enterprises. Of the ₩5,635 million received for purchasing property and equipment and others, ₩5,381 million and ₩38 million is recorded as a reduction of property and equipment, and education and training expenses, respectively; the remaining balance of ₩216 million has been returned to the government. Also, the Company received ₩1,388 million for defraying operating expenses, of which ₩1,351 million used and ₩7 million unused is recorded as non-operating profit and loss and unearned income, respectively; the remaining balance of ₩30 million has been returned to the government.
(2) The Company entered into an agreement with the Ministry of Knowledge and Economy for the development of certain equipment. Out of the total amount received amounting to ₩17,375 million, ₩964 million was recorded as unearned income and ₩2,551 million as withholdings for the year ended December 31, 2010.
12. PLEDGED ASSETS AND GUARANTEES: (1) As of December 31, 2010, certain portion of the Company’s assets pledged as collateral for borrowings are summarized as follows (KRW
in millions, USD and EUR in thousands):
Pledged Assets Book value amount Guarantee for Borrowings Lender
Short-term financial Performance Gyeongsangnam-do instruments ₩ 10,000 ₩ 10,000 of contracts ₩ - (Provincial government)
〃 Performance Masan Regional Maritime
10,000 10,000 of contracts - Affairs and Port office
Long-term investment securities 198 198 Borrowings 520 Korea Housing Guarantee Co., Ltd.
Borrowings Tangible assets 475,200 in Won 242,500 KDB
Borrowings in foreign $ 256,026 〃 ₩ 1,730,554 $ 880,000 currencies € 15,797 〃
₩ 243,020
₩ 495,398 $ 256,026
₩ 1,750,752 $ 880,000 € 15,797
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial StatementsNotes to Non-Consolidated Financial Statements
61
Provided for Lender 2010
Daewoo Corp. AKA ₩ 16,267
Korea Line Corp. KDB 355,576
KLDS Korea Finance Corp. & others 205,200
Blue Pearl Inc. Korea Finance Corp. & KDB 124,176
Blue Topaz Inc. Korea Finance Corp. & KDB 124,176
Daewoo-Mangalia Ltd. Samsung Fire & Marine Insurance Ltd. & others 52,000
₩ 877,395
(2) Guarantees provided to others except for affiliates as of December 31, 2010 are as follows (KRW million):
(3) As of December 31, 2010, the Export-Import Bank of Korea and others have provided performance guarantees amounting to ₩289,064 million, US$10,197 million, EUR 176 million to the Company in relation to exports of ships and other. In return, the Company has provided shipbuilding materials, ships under construction and certain receivables as collateral to aforementioned institutions.
13. DEBENTURES: Debentures as of December 31, 2010 and 2009 are as follows (KRW in millions, USD in thousands):
(1) Debentures in local currency
(2) Debentures in foreign currency
(*) ML: Month Libor
Notes to Non-Consolidated Financial Statement
Type Maturity date Annual interest rate (%) 2010 2009
Unsecured debenture 2012. 04. ,01 6.39 ₩ 500,000 ₩ 500,000
Less: Discount on debentures (926) (1,615)
Book value ₩ 499,074 ₩ 498,385
2010 2009
Annual interest Type rate (%) Foreign currency Won equivalent Foreign currency Won equivalent
Unsecured debenture 6ML(*)+3.10 US$ 150,000 ₩ 170,835 US$ - ₩ -
DSME ANNUAL REPORT 2010 62
FINANCIAL REvIEW
14. SHORT-TERM AND LONG-TERM BORROWINGS: (1) Short-term borrowings as of December 31, 2010 and 2009 are as follows (KRW million):
① Short-term borrowings in local currency
②Short-term borrowings in foreign currency (KRW in millions & USD, EUR, GBP and NOK in thousands):
(*1) EXIM: The Export-Import Bank of Korea
The long-term borrowings in Won will be paid in installments or on maturity. Additionally, tangible assets and others have been pledged as collateral for long-term borrowings.
(2) Long-term borrowings as of December 31, 2010 and 2009 are as follows (KRW million):
①Long-term borrowings in local currency
(*) ML: Month Libor
Lender Description Annual interest rate (%) 2010 2009
1.00, Industrial financial KDB Loans for facility & others debentures+1.90~3.22 ₩ 242,500 ₩ 3,300
Industrial financial Korea Finance Corp. Loans for facility debentures+1.90 40,000 -
Korea Housing Guarantee Co., Ltd. Loans for operation 1.00 520 520
Woori Bank Loans for facility 2.00 400 400
283,420 4,220
Less: current portion of long-term borrowings (652) (852)
Long-term borrowings, net ₩ 282,768 ₩ 3,368
Lender Annual interest rate (%) 2010 2009
EXIM (*1) - ₩ - ₩ 172,660
EXIM (*1) - - 156,359
Korea Exchange Bank - - 100,000
SC First Bank - 7,982 7,987
₩ 7,982 ₩ 437,006
2010 2009
Annual interest Foreign Foreign Lender rate (%) currencies Won equivalent currencies Won equivalent
Nong Hyup & others 6ML(*)+1.26 US$ 619,793 ₩ 705,883 US$ 479,177 ₩ 559,487
EUR 50,498 76,434 - -
GBP 147 259
NOK 5,633 1,090 - -
EXIM 3ML(*)+1.62 ~1.72 US$ 215,401 245,320 - -
₩ 1,028,986 ₩ 559,487
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial StatementsNotes to Non-Consolidated Financial Statements
63
Notes to Non-Consolidated Financial Statement
②Long-term borrowings in foreign currencies (KRW in millions, USD in thousands):
2010 2009
Annual interest Lender rate (%) Foreign currency Won equivalent Foreign currency Won equivalent
3ML+ KDB 0.76~2.19 $ 50,463 ₩ 57,472 $ 101,465 ₩ 118,471
Hana Bank 8.95 50,000 56,945 50,000 58,380
KNOC (*) 2.50 9,479 10,506 9,235 10,783
6ML+ EXIM 2.73~4.50 128,000 145,779 50,000 58,380
SC Singapore & others (ABL) - - - 125,250 146,242
Daewoo Yield-up 6ML+4.90 Co., Ltd. (SPC) ~5.00 180,000 205,003 180,000 210,168
417,942 475,705 515,950 602,424
Less: current portion of long-term borrowings (154,546) (176,013) (139,502) (162,883)
Long-term borrowings, net $ 263,396 ₩ 299,692 $ 376,448 ₩ 439,541
The above long-term borrowings in foreign currency will be repaid in installments, and certain tangible assets have been pledged as collateral in relation to such long-term borrowings.
(3) The annual maturity of long-term borrowings as of December 31, 2010 is as follows (KRW million):
(*) Korea National Oil Corporation
Foreign currency Period Local currency (Won equivalents ) Total
2012.1.1~2012.12.31 ₩ 61,072 ₩ 143,406 ₩ 204,478
2013.1.1~2013.12.31 120,932 28,473 149,405
2014.1.1~2014.12.31 80,232 72,890 153,122
Thereafter 20,532 54,923 75,455
₩ 282,768 ₩ 299,692 ₩ 582,460
DSME ANNUAL REPORT 2010 64
FINANCIAL REvIEW
15. ACCRUAL FOR RETIREMENT AND SEVERANCE BENEFITS: (1) Accrual for retirement and severance benefits as of December 31, 2010 and 2009 are as follows (KRW million):
(2) The financial instruments, which the pension plan assets consist of as of December 31, 2010 and 2009 are as follows (KRW million):
The Company has partially funded the accrual for retirement and severance benefits through severance insurance deposits amounting to 45.7% and 46.7% of the reserve balances of retirement and severance benefits as of December 31, 2010 and 2009, respectively, with Korea Development Bank and others. In accordance with the National Pension Law of Korea, a portion of its severance benefits, which has been transferred, in cash, to the National Pension Fund by March 1999, is presented as a deduction from accrual for retirement and severance benefits.
16. LEASES:
(1) The Company entered into a capital lease contract on March 1, 2006 with the 7th Cocrap in relation to the lease of its office premises, and recognized related land and building as capital lease assets and the present value of future minimum lease payments as capital lease liabilities. During 2010, upon the completion of the lease, the capital lease assets transferred to Company. In addition, the Company entered into a capital lease contract in a form of a sale-leaseback on April 21, 2009, with HP financial service in relation to the lease of its computer equipments, and recognized the equipments as capital lease assets and the present value of future minimum lease payments as capital lease liabilities.
(2) The gross amounts of land, building and related accumulated depreciation recorded under capital leases are as follows (KRW million):
Description 2010 2009
Beginning balance ₩ 265,003 ₩ 276,349
Accrued 74,792 61,871
Paid (33,499) (73,217)
Ending balance ₩ 306,296 ₩ 265,003
Description 2010 2009
KDB pension deposits ₩ 77,408 ₩ 50,000
Mirae Asset derivative-linked securities 12,773 12,000
₩ 90,181 ₩ 62,000
2010 2009
Furniture and Furniture and Land Building fixtures Land Building fixtures
Acquisition value ₩ - ₩ - ₩ 20,381 ₩ 65,184 ₩ 60,730 ₩ 20,381
Revaluation - - - 39,494 - -
Accumulated depreciation - - (7,824) - (4,459) (3,353)
Book value ₩ - ₩ - ₩ 12,557 ₩ 104,678 ₩ 56,271 ₩ 17,028
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial StatementsNotes to Non-Consolidated Financial Statements
65
Notes to Non-Consolidated Financial Statement
(3) Future minimum lease payments under the lease contracts as of December 31, 2010 are as follows (KRW million):
2010
Description Minimum Lease Payments
Due within a year ₩ 6,197
Due after one year through five years 3,099
Total minimum lease payments 9,296
Interest expense payable (474)
Present value of net minimum capital lease payments ₩ 8,822
17. ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES: Assets and liabilities denominated in foreign currencies as of December 31, 2010 and 2009 are as follows (KRW in millions, foreign
currencies in thousands):
2010 2009
Account Foreign currencies Won equivalent Foreign currencies Won equivalent
Assets:
Cash and cash equivalents US$ 50,476 ₩ 57,487 US$ 32,059 ₩ 37,432
〃 EUR 36 54 EUR - -
Accounts receivable US$ 3,776,690 4,301,261 US$ 3,634,396 4,243,521
Long-term accounts receivable US$ 1,304,567 1,485,771 US$ 181,276 211,658
Accounts receivable-other US$ 125,510 142,943 US$ 124,742 145,649
〃 EUR 47,948 72,574 EUR 43,500 72,831
Accrued income US$ 34,226 38,979 US$ 13,906 16,237
〃 EUR 5,378 8,141 EUR 2,503 4,190
Long-term accrued income US$ 9,434 10,745 US$ 10,033 11,714
Short-term loans US$ 72,047 82,054 US$ 19,957 23,302
Long-term loans US$ 318,210 362,409 US$ 174,353 203,575
Total US$ 5,691,160 US$ 4,190,722
EUR 53,362 ₩ 6,562,418 EUR 46,003 ₩ 4,970,109
Liabilities:
Short-term borrowings US$ 835,194 ₩ 951,203 US$ 479,177 ₩ 559,487
〃 EUR 50,498 76,434 EUR - -
GBP 147 258 GBP - -
〃 NOK 5,633 1,090 NOK - -
Trade payables EUR 21,693 32,834 EUR 28,265 47,323
〃 GBP 2,157 3,791 GBP 4,951 9,296
〃 JPY 1,096,660 15,321 JPY 113,143 1,429
〃 NOK 7,261 1,405 NOK 21,146 4,260
〃 SEK - - SEK 199 32
〃 US$ 141,705 161,387 US$ 102,403 119,566
DSME ANNUAL REPORT 2010 66
FINANCIAL REvIEW
The Company recognized gain on foreign currency translation amounting to ₩48,782 million and loss on foreign currency translation amounting to ₩75,230 million as non-operating income (loss) in relation to the above foreign currency translation.
Accounts payable-other CAD - - CAD 59 65
〃 SEK 1 - SEK 1 -
〃 EUR 2,557 3,871 EUR 5,308 8,888
〃 GBP 3,306 5,812 GBP 27 51
〃 NOK - - NOK 10 2
SGD 4,013 3,548 SGD - -
CNY 15 3 CNY - -
〃 US$ 261,684 298,032 US$ 228,809 267,158
Accrued expenses EUR 5,749 8,702 EUR 6,555 10,975
US$ 2,004 2,282 US$
Deposit received EUR 6,321 9,567 EUR 6,710 11,235
〃 CAD 149 169 CAD 149 165
〃 US$ 22,678 25,828 US$ 10,891 12,717
Long-term accounts payable-other US$ 107,942 122,935 US$ 122,630 143,183
Current portion of long-term borrowings US$ 154,546 176,013 US$ 139,502 162,883
Long-term borrowings US$ 263,396 299,692 US$ 376,448 439,541
Current portion of capital lease liabilities US$ 5,086 5,792 US$ 4,789 5,592
Capital lease liabilities US$ 2,660 3,030 US$ 7,746 9,044
Debentures US$ 150,000 170,835 US$ - -
Total CAD 149 CAD 208
EUR 86,818 EUR 46,838
GBP 5,610 GBP 4,978
JPY 1,096,660 JPY 113,143
NOK 12,894 NOK 21,156
SEK 1 SEK 200
SGD 4,013 SGD -
CNY 15 CNY -
US$ 1,946,895 ₩ 2,379,834 US$ 1,472,395 ₩ 1,812,892
2010 2009
Account Foreign currencies Won equivalent Foreign currencies Won equivalent
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial StatementsNotes to Non-Consolidated Financial Statements
67
Notes to Non-Consolidated Financial Statement
18. PROVISIONS: Changes in provisions for the years ended December 31, 2010 and 2009 are as follows (KRW million):
2010
Account name Beginning balance Increase Decrease Ending balance
Provision for construction loss ₩ 391 ₩ 20,703 ₩ (12,996) ₩ 8,098
Provision for construction warranty costs 72,012 23,946 (21,367) 74,591
₩ 72,403 ₩ 44,649 ₩ (34,363) ₩ 82,689
2009
Account name Beginning balance Increase Decrease Ending balance
Provision for construction loss ₩ 110,719 ₩ - ₩ (110,328) ₩ 391
Provision for construction warranty costs 65,941 24,634 (18,563) 72,012
Provision for contingent losses 17,910 - (17,910) -
₩ 194,570 ₩ 24,634 ₩ (146,801) ₩ 72,403
19. COMMITMENTS AND CONTINGENCIES:
(1) The Company pledged 15 blank notes and 7 notes with an aggregate face value of ₩3,731 million to financial institutions as collateral for certain borrowings as of December 31, 2010.
(2) As of December 31, 2010, the Company is a plaintiff in litigations with claims exposure of ₩3,781 million and the Company is a defendant in litigations with claims exposure of ₩11,158 million and US$ 46,892 thousand.
(3) The Company formed a consortium with Korea National Oil Corporation to invest in overseas oil fields and the Company has a 9.75% ownership in the consortium. The Consortium invested in the KNOC WEST 321 lot and the KNOC EAST 323 lot in Nigeria, with Equator Exploration Ltd. from England and a local enterprise in Nigeria. As a result of the investment, the Consortium owns 60% of total shares of those mining lots, with the Company’s interest equaling 5.85%. The Consortium acquired the right to develop the mining lots.
The Company recorded the amount of its investment as a component of other investments and has provided to the Nigerian government a contract performance guarantee in regard to the investment amounting to US$ 27,295 thousand and has been provided a guarantee in the same amount by Nonghyup.
(5) The Company formed a consortium with Korea National Oil Corporation to invest in overseas oil fields and the Company’s shareholding in the consortium is 5%. The Consortium, with Kazmunay Gas, invested in Zhambyl region’s mining lots in Kazakhstan, owning 27% of total shares with the Company’s interest equaling 1.35%. In July 2007, the Company had originally bought a 5% stake in a Dutch corporation of the consortium, KC.KAZAKH B.v, and executed an agreement with a Kazakhstan’s national oil company, Kazmunay Gas, for mining lot development in Kazakhstan.
The Company recorded the entire investment of ₩800 million as a component of other investments and ₩8,900 million as long-term loans.
DSME ANNUAL REPORT 2010 68
FINANCIAL REvIEW
(6) The Company formed a consortium with DSME E&R Corporation, its subsidiary, and two other parties, Panco Energy and GNG Holdings Inc. to invest in overseas oil fields in Cepu, Indonesia. The Company directly owns 40% of the consortium and 80% with an ownership of 40% through DSME E&R, a wholly owned subsidiary of the Company. Exxon Mobil is the operator of the consortium and a national oil company of Indonesia, Pertamina, and four other local public companies joined the consortium. During January 2009, the consortium entered into a conditional underwriting agreement for the purchase of the shares of PT. Syabas Usaha Migas which owns 49% of PT PJUC, one of those four local public companies owning 2.24% of total shares in the mining lot. The Company’s indirect ownership interest in the consortium is 0.44% and 0.88% together with the shares of DSME E&R.
The Company recorded the entire investment of ₩2,200 million in Syabas Usaha Migas as a component of investments accounted for using the equity method and ₩10,900 million as long-term loans.
(7) The Company entered into bank overdraft agreements with Nonghyup and others with aggregate limit amounting to ₩30,000 million and a credit facility arrangement with the Korea Development Bank and others regarding the opening of letter of credit with the limit set at US$1,254,000 thousand. In addition, the Company entered into payment guarantee agreements with the Korea Development Bank and others with the limit set at US$ 20,863,498 thousand.
20. DERIVATIVE INSTRUMENTS:
(1) The Company has outstanding currency forward contracts with the Korea Development Bank and others for hedging risks or trading purposes. Details of the outstanding forward contracts as of December 31, 2010 and 2009 are as follows (foreign currency in thousands):
Outstanding contract balance
Description 2010 2009
For fair value hedging US$ 9,875,338 US$ 12,637,100
〃 EUR 530,383 EUR 93,371
〃 NOK - NOK 443
〃 JPY - JPY 3,721,500
〃 GBP 42,395 GBP -
〃 SGD 27,639 SGD -
For cash flows hedging US$ 110,000 US$ -
For trading US$ 700,000 US$ 490,000
〃 EUR 1,697 EUR 14,610
Total US$ 10,685,338 US$ 13,127,100
EUR 532,080 EUR 107,981
NOK - NOK 443
JPY - JPY 3,721,500
GBP 42,395 GBP -
SGD 27,639 SGD -
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial StatementsNotes to Non-Consolidated Financial Statements
69
2010
Firm Firm Currency Adjustment Cost of Other income commitment commitment forwards asset to sales sales (expense) (*2) Others (*4) assets (*1) liabilities (*1) (liabilities)
For fair value hedging (*1) ₩ (1,183,378) ₩ 4 ₩ 1,019 ₩ - ₩ 785,333 ₩ 189,487 ₩ (628,817)
For cash flow hedging (*3) - - (1,880) (87,283) - - (3,119)
For trading - - 27,346 - - - (5,317)
₩ (1,183,378) ₩ 4 ₩ 26,485 ₩ (87,283) ₩ 785,333 ₩ 189,487 ₩ (637,307)
2009
Firm Firm Currency Adjustment Cost of Other income commitment commitment forwards asset to sales sales (expense) (*2) Others (*4) assets (*1) liabilities (*1) (liabilities)
For fair value hedging (*1) ₩ (1,923,067) ₩ 13,396 ₩ (88,151) ₩ (162,683) ₩ 2,094,358 ₩ 49,755 ₩ (2,541,752)
For trading - - (59,433) - - - (5,643)
₩ (1,923,067) ₩ 13,396 ₩ (147,584) ₩ (162,683) ₩ 2,094,358 ₩ 49,755 ₩ (2,547,395)
(2) Details of adjustment for and valuation of currency forward contracts for the years ended December 31, 2010 and 2009 are as follows (KRW million):
21. STOCKHOLDERS’ EQUITY: (1) The Company has retired 1,000,000 shares of treasury stock acquired for ₩15,416 million on August 23, 2004 by approval at the board
of directors’ meeting. Accordingly, the number of shares issued has decreased. However, the amount of paid-in capital has not been reduced. The Company has 400,000,000 authorized shares of common stock (₩5,000 par value), of which 191,390,758 shares are issued as of December 31, 2010.
(2) There are no changes in capital stock for the year ended December 31, 2010 and 2009.
(*1) The Company entered into foreign exchange forward contracts, qualifying firm commitments, for foreign exchange hedging purposes, of KRW against US$ and EUR,
and amounting to firm commitment assets of ₩785,333 million and ₩2,094,358 million as of December 31, 2010 and December 31, 2009, respectively, and ₩189,487
million and₩49,755 million as firm commitment liabilities as of December 31, 2010 and December 31, 2009, respectively.
(*2) The Company entered into certain knock-in contracts, which become contracted automatically in cases where the spot rates exceed designated levels in designated
periods, and the Company recorded ₩4,288 million of gain on valuation of such currency forward contracts as of December 31, 2009.
(*3) The Company has entered into an interest rate swap contract with Goldman Sachs to hedge the exposure to changes in interest rates adopting the cash flow hedge
accounting and recognized ₩2,364 million (after tax effect) as loss on exchange of derivatives (other comprehensive loss).
(*4) Others consist of ₩84,164 million of advances from customers and ₩3,119 million of accumulated other comprehensive income.
Notes to Non-Consolidated Financial Statement
DSME ANNUAL REPORT 2010 70
FINANCIAL REvIEW
22. CAPITAL ADJUSTMENTS: Details of capital adjustments as of December 31, 2010 and 2009 are as follows (KRW million):
23. ACCUMULATED OTHER COMPREHENSIVE INCOME: Details of other comprehensive income as of December 31, 2010 and 2009 are as follows (KRW million):
24. RETAINED EARNINGS: Retained earnings as of December 31, 2010 and 2009 are as follows (KRW million):
(*1) The Korean Commercial Code requires the Company to appropriate as legal reserve an amount equal to at least 10 percent of cash dividends paid for each
accounting period, until the reserve equals 50 percent of stated capital. The legal reserve may be used to reduce a deficit or transferred to capital stock.
(*2) Under the Tax Exemption and Reduction Control Law, the Company is allowed certain deductions from taxable income for research and manpower development by
appropriating retained earnings. The reserve is generally added back to taxable income after certain grace periods and may be used to pay dividends.
2010 2009
Treasury stock ₩ (30,000) ₩ (30,000)
Other capital adjustments 51 (1,643)
₩ (29,949) ₩ (31,643)
2010 2009
Gain on valuation of long-term investment securities ₩ 116,365 ₩ 3,941
Gain on valuation of equity method investments 59,338 66,891
Loss on valuation of equity method investments (6,084) (3,679)
Loss on valuation of derivatives (2,364) -
Gain on revaluation of assets 797,766 798,531
₩ 965,021 ₩ 865,684
2010 2009
Legal reserve (*1) ₩ 48,740 ₩ 39,240
Reserve for research and human resource development (*2) 115,000 10,000
Reserve for facility expansion 1,120,000 890,000
Reserve for dividend equalization 70,000 70,000
Reserve for loss on disposal of treasury stock - 9,000
Unappropriated retained earnings 791,740 443,145
₩ 2,145,480 ₩ 1,461,385
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial StatementsNotes to Non-Consolidated Financial Statements
71
25. SELLING AND ADMINISTRATIVE EXPENSES: Details of selling, general and administrative expenses for the years ended December 31, 2010 and 2009 are as follows (KRW million):
2010 2009
Salaries (Note 7) ₩ 69,055 ₩ 73,899
Provision for retirement and severance benefits (Notes 7 and 15) 5,926 5,998
Other employee benefits 22,168 17,295
Rent 4,416 6,981
Entertainment 989 834
Depreciation (Notes 8 and 31) 5,655 7,037
Amortization(Notes 10 and 31) - 940
Taxes and public dues 4,037 2,597
Advertising 2,990 3,009
Research and development (Notes 10 and 11) 61,931 59,678
Bad debt expense (Note 7) 99,649 3,450
Supplies 1,121 1,444
Printing 1,035 1,042
Communications 1,018 923
Water, light and heating 440 497
Repairs and maintenance 1,927 2,133
Insurance 1,912 1,295
Travel 9,050 7,950
Commissions 69,838 71,234
Training (Note 11) 4,539 4,941
Maintenance service fees 11,463 12,624
Warranty 3,631 4,934
Stock compensation - 523
Others 3,110 2,923
₩ 385,900 ₩ 294,181
Notes to Non-Consolidated Financial Statement
DSME ANNUAL REPORT 2010 72
FINANCIAL REvIEW
26. INCOME TAX EXPENSE: Income tax expense for the years ended December 31, 2010 and 2009 and deferred tax assets (liabilities) as of December 31, 2010 are as
follows:
(1) Components of income tax expense
Income tax expense for the years ended December 31, 2010 and 2009 consists of the following (KRW million):
(2) The reconciliation between income before income tax and income tax expense
The reconciliation between income before income tax and income tax expense for the years ended December 31, 2010 and 2009 are as follows (KRW million):
Description 2010 2009
Income tax payable ₩ 177,141 ₩ 112,498
Changes in deferred income tax from temporary differences 96,492 308,004
Total amount of income tax effect 273,633 420,502
Income tax directly reflected to shareholders’ equity (29,433) (229,953)
Income tax expense ₩ 244,200 ₩ 190,549
Deferred income tax assets (liabilities) from temporary differences, net at ending of the period ₩ (230,976) ₩ (134,484)
Deferred income tax assets (liabilities) from temporary differences, net at beginning of the period (134,484) 173,520
Changes in deferred income tax from temporary differences ₩ 96,492 ₩ 308,004
Description 2010 2009
Income before income tax ₩ 1,024,332 ₩ 768,053
Income tax expense by applying income tax rate 247,862 185,845
Adjustments:
Nondeductible expenses 5,719 4,999
Tax credits and others (12,132) (11,322)
Differences due to change of tax rate (1,544) (12,818)
Refund of prior years’ income tax 345 (44)
Temporary differences except for deferred income taxes and others 3,950 23,889
Income tax expense ₩ 244,200 ₩ 190,549
Effective tax rate 23.84% 24.81%
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial StatementsNotes to Non-Consolidated Financial Statements
73
(3) The changes in temporary differences and deferred income tax assets (liabilities) The changes in temporary differences and deferred income tax assets (liabilities) for the years ended December 31, 2010 2009 are
as follows (KRW million):
2010
Temporary differences Tax assets (Liabilities)
Beginning Increase Ending Beginning Ending Description balance (*1) (decrease) (*1) balance balance balance
Loss on revaluation of land ₩ 937 ₩ - ₩ 937 ₩ 206 ₩ 206
Reserve for research and manpower development (115,000) (50,000) (165,000) (25,300) (36,300)
Provision for construction warranty costs 72,013 2,578 74,591 15,843 16,410
Provision for construction loss 391 7,707 8,098 95 1,959
Loss on foreign currency translation, net 58,507 86,326 144,833 13,745 35,391
Gain (Loss) on valuation of foreign exchange forward contracts, net 340,108 (385,929) (45,821) 82,306 (9,950)
Loss on valuation of the equity method & others, net 249,964 (18,523) 231,441 7,327 (238)
Dividends income (equity method) 780 658 1,438 95 175
Other capital surplus (equity method) (228) (550) (778) (28) (50)
Changes in capital adjustments using the equity method 800 (1,947) (1,147) - (252)
Changes in AOCI using the equity method (80,917) 11,049 (69,868) (17,704) (16,615)
Gain on valuation of long-term investment securities, net (5,052) (144,134) (149,186) (1,111) (32,821)
Loss on valuation of derivatives, net - 3,119 3,119 - 755
Gain on revaluation of land (accumulated other comprehensive income), net (1,023,757) 980 (1,022,777) (225,227) (225,011)
Allowance for advanced depreciation (234,939) 141 (234,798) - -
Others 65,977 92,026 158,003 15,269 35,365
Total ₩ (670,416) ₩ (396,499) ₩ (1,066,915) ₩ (134,484) ₩ (230,976)
Notes to Non-Consolidated Financial Statement
DSME ANNUAL REPORT 2010 74
FINANCIAL REvIEW
(*1) The income tax rate used in computing deferred income tax asset (liabilities) is the expected corporate income tax rate, which is applicable to the period when the
temporary differences reverse.
(*2) Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be
utilized.
2009
Temporary differences Tax assets (Liabilities)
Beginning Increase Ending Beginning Ending Description balance (*1) (decrease) (*1) balance balance balance
Loss on revaluation of Land ₩ - ₩ 937 ₩ 937 ₩ - ₩ 206
Reserve for research and manpower development (10,000) (105,000) (115,000) (2,420) (25,300)
Provision for construction warranty costs 65,941 6,072 72,013 14,506 15,843
Provision for construction loss 110,719 (110,328) 391 26,794 95
Loss on foreign currency translation, net 43,182 15,325 58,507 8,547 13,745
Loss on valuation of foreign exchange forward contracts, net 503,414 (163,306) 340,108 119,133 82,306
Loss on valuation of the equity method & others, net 43,653 206,311 249,964 9,303 7,327
Dividends income (equity method) 680 100 780 80 95
Other capital surplus (equity method) (228) - (228) (28) (28)
Changes in capital adjustments using the equity method - 800 800 - -
Changes in AOCI using the equity method (19,134) (61,783) (80,917) (11,175) (17,704)
Gain on valuation of long-term investment securities, net (15,858) 10,806 (5,052) (3,489) (1,111)
Gain on revaluation of land (accumulated other comprehensive income), net - (1,023,757) (1,023,757) - (225,227)
Allowance for advanced depreciation (234,965) 26 (234,939) - -
Others 55,615 10,362 65,977 12,269 15,269
Total ₩ 543,019 ₩ (1,213,435) ₩ (670,416) ₩ 173,520 ₩ (134,484)
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial StatementsNotes to Non-Consolidated Financial Statements
75
Notes to Non-Consolidated Financial Statement
(4) Deductible temporary differences, not recognized due to uncertainty of its realization, are as follows (KRW million):
(*1) The Company did not recognize deferred income tax assets related to the deductible temporary differences caused by investment securities using the equity method
as the probability of its disposition in the near future is uncertain.
(*2) Allowance for advanced depreciation is excluded from the recognition of deferred tax due to uncertainty of its realization as of December 31, 2010 and 2009.
(5) Deferred income tax assets (liabilities) directly adjusted to capital as of December 31, 2010 and 2009 are summarized as follows (KRW million):
Description 2010 2009
Loss on valuation of equity method (*1) ₩ 232,522 ₩ 216,662
Investment securities using the equity method (capital surplus) (550) (100)
Investment securities using the equity method (capital adjustments) - 800
Investment securities using the equity method (accumulated other comprehensive income) 5,654 (442)
Dividend income (equity method) 643 346
Allowance for advanced depreciation (*2) (234,798) (234,939)
Total ₩ 3,471 ₩ (17,673)
2010 2009
Deferred Deferred income tax income tax assets assets Description Amount Tax effect (liabilities) Amount Tax effect (liabilities)
Investment securities using the equity method (capital surplus) ₩ 99 ₩ - ₩ (22) ₩ - ₩ - ₩ -
Changes in capital adjustments using the equity method 1,147 - (252) - - -
Gain (Loss) on valuation of long-term investment securities 144,134 - (31,710) (10,806) - 2,377
Loss on valuation of foreign exchange forward contracts (cash flow hedge) (3,119) - 755 - - -
(Negative) Changes in valuation of equity method accounted investments (other comprehensive income) (4,952) - 1,089 61,783 - (6,529)
Gain (Loss) on revaluation of plant, property and equipment (981) - 216 1,023,757 - (225,227)
Investment securities using the equity method (retained earnings) (2,229) - 491 (137,250) - (574)
Total ₩ 134,099 ₩ - ₩ (29,433) ₩ 937,484 ₩ - ₩ (229,953)
DSME ANNUAL REPORT 2010 76
FINANCIAL REvIEW
(6) Income tax refundable and income tax payable, and deferred tax assets and liabilities as of December 31, 2010 and 2009 are as follows (KRW million):
27. EARNINGS PER SHARE: (1) Basic earnings per share for the years ended December 31, 2010 and 2009 are as follows (KRW):
Diluted earnings per share for the years ended December 31, 2010 and 2009 is identical to basic earnings per share, since there are no dilutive potential common shares and dilutive effect.
(2) The weighted average number of common shares outstanding for the years ended December 31, 2010 and 2009 is calculated as follows:
Description 2010 2009
Deferred income tax assets ₩ 144,980 ₩ 191,626
Deferred income tax liabilities 375,956 326,110
Income tax payable 176,796 112,542
Income tax refundable (47,598) (10,174)
Description 2010 2009
Net income ₩ 780,131,505,575 ₩ 577,504,048,264
Net income applicable to common stock 780,131,505,575 577,504,048,264
Weighted average number of common shares outstanding 189,046,888 189,046,888
Earnings per share ₩ 4,127 ₩ 3,055
2010
Weighted Description Number of shares Days average shares
Common stock 191,390,758 365 191,390,758
Treasury stock (2,343,870) 365 (2,343,870)
189,046,888 189,046,888
2009
Weighted Description Number of shares Days average shares
Common stock 191,390,758 365 191,390,758
Treasury stock (2,343,870) 365 (2,343,870)
189,046,888 189,046,888
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial StatementsNotes to Non-Consolidated Financial Statements
77
28. STATEMENTS OF COMPREHENSIVE INCOME: Statements of comprehensive income for the years ended December 31, 2010 and 2009 are as follows (KRW million):
29. NON-CASH INVESTING AND FINANCING ACTIVITIES: Significant non-cash investing and financing activities for the years ended December 31, 2010 and 2009 are summarized as follows (KRW
million):
Statements of comprehensive income for the years ended December 31, 2010 and 2009 are as follows (KRW million):
Description 2010 2009
Net income ₩ 780,132 ₩ 577,504
Other comprehensive income (loss): Gain (Loss) on valuation of long-term investment securities, net of tax effect of ₩(31,710) and ₩2,377 in 2010 and 2009, respectively 112,424 (8,428)
Loss on valuation of cash flow hedging derivatives, net of tax effect of ₩755 and nil in 2010 and 2009, respectively (2,364) -
Adjustment of equity in equity method investees, net of tax effect of ₩1,089 and ₩(6,529) in 2010 and 2009, respectively (9,959) 55,254
Gain(Loss) on revaluation of plant, property and equipment, net of tax effect of ₩216 and ₩(225,227) in 2010 and 2009, respectively (765) 798,530
Comprehensive income ₩ 879,468 ₩ 1,422,860
2010 2009
Transfer of construction-in-progress to tangible assets ₩ 42,532 ₩ 615,130
Transfer of advanced payments to construction-in-progress 1,633 -
Transfer of capital lease land & buildings to land and buildings 160,949 -
Acquisition of furniture and fixtures on capital lease - 20,381
Revaluation of land and capital lease land - 1,023,018
Transfer to current portion of long-term debt 223,958 -
Transfer to current portion of long-term loan 64,971 -
Notes to Non-Consolidated Financial Statement
DSME ANNUAL REPORT 2010 78
FINANCIAL REvIEW
30. CONSTRUCTION CONTRACTS: (1) The changes in ongoing construction contracts for the year ended December 31, 2010 are as follows (KRW million):
(*1) Other items consist of increases or decreases due to fluctuation of foreign exchange rates.
(*2) Increase or decrease of sales related to firm commitment assets (liabilities) is excluded.
(2) Details of the significant profits and losses related to ongoing construction contracts as of December 31, 2010 are as follows (KRW million):
31. SEGMENT INFORMATION: (1) The Company has three reportable operating segments. General information on segments of the Company as of December 31, 2010
is as follows:
(3) The Company has recorded provision for losses on construction contracts of ₩8,098 million as of December 31, 2010.
2010
Beginning Revenue Ending balance New contracts Other (*1) recognized (*2) balance
Shipbuilding ₩ 19,175,969 ₩ 4,962,765 ₩ (268,765) ₩ (8,155,197) ₩ 15,714,772
Offshore plants 8,528,012 6,526,301 (16,716) (4,979,422) 10,058,175
Others 93,871 - 110,183 (123,264) 80,790
₩ 27,797,852 ₩ 11,489,066 ₩ (175,298) ₩ (13,257,883) ₩ 25,853,737
2010
Advances Accounts Accumulative revenues Accumulative cost from customers receivable-trade
Shipbuilding ₩ 4,790,657 ₩ 3,982,883 ₩ 3,553,701 ₩ 2,325,794
Offshore 7,813,691 6,982,874 802,056 1,932,133
Others 150,379 57,702 998 29,511
₩ 12,754,727 ₩ 11,023,459 ₩ 4,356,755 ₩ 4,287,438
Segment Items Major customer Proportion of sales
Liquefied natural gas (“LNG”) Shipbuilding containers and other Exmar N.V. and others 60.2%
Offshore plants Platforms and other Total E&P Angola and others 38.8%
Others Apartments, welding machines and other Various 1.0%
100.0%
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial StatementsNotes to Non-Consolidated Financial Statements
79
(2) Financial information on segments of the Company for the years ended December 31, 2010 and 2009 is as follows (KRW million):
2010
Shipbuilding Offshore plants Other Total
Sales ₩ 7,272,321 ₩ 4,678,921 ₩ 123,263 ₩ 12,074,505
Operating income 636,666 674,496 85,815 1,396,977
Plant and intangible assets 3,857,313 (*) 221,337 4,078,650
Depreciation and other expenses 161,299 (*) (*) 161,299
2009
Shipbuilding Offshore plants Other Total
Sales ₩ 7,811,604 ₩ 4,542,546 ₩ 88,369 ₩ 12,442,519
Operating income 474,890 433,153 70,661 978,704
Plant and intangible assets 3,793,228 (*) 217,906 4,011,134
Depreciation and other expenses 158,231 (*) (*) 158,231
Notes to Non-Consolidated Financial Statement
(*) Plant, intangible assets, depreciation and certain other expenses could not be segregated reasonably into the various segments. Accordingly, such amounts are all
included in the shipbuilding segment.
(3) Adjustments to operating income for the years ended December 31, 2010 and 2009 are as follows (KRW million):
2010 2009
Total operating income of segments ₩ 1,396,977 ₩ 978,704
Non allocated selling, general and administrative expenses (385,900) (294,181)
₩ 1,011,077 ₩ 684,523
DSME ANNUAL REPORT 2010 80
FINANCIAL REvIEW
33. SUBSEQUENT EVENTS: On January 4, 2011, Doosan Engine Co., Ltd. listed its stocks on Korea Exchange, the Company revalued the relevant investment
securities (acquisition price: ₩9,350 million) to the market value and recognized a gain on valuation amounting to ₩134,570 million (before tax effect) as a component of other comprehensive income.
34. PLANNING AND ADOPTION OF K-IFRS: In accordance with the road map for IFRS adoption announced in March 2007, the Company is required to present financial statements
prepared in accordance with K-IFRS beginning January 1, 2011. Since 2009, the Company has been preparing for the IFRS adoption and is currently processing, in phases, preliminary analysis of effects, establishment of accounting policies and financial reporting system, and parallel application of the financial reporting systems under the current accounting standards and K-IFRS.
The Company established an overall implementation plan for the preliminary analysis of its effect and preparation for IFRS adoption in 2009 and is currently in process of establishing accounting policies and an appropriate financial reporting system. In addition, the Company plans to stabilize its financial reporting system through parallel application of the current accounting standards and K-IFRS starting 2010 and disclose its financial statements in accordance with K-IFRS beginning January 1, 2011.
As a result of preliminary analysis of effects of the differences between current accounting standards and K-IFRS, the Company anticipates that the accounting treatments of items such as post-employment benefits, changes of consolidation scope, deferred taxes and others will have effects on its financial information.
32. RESULTS OF OPERATIONS FOR THE LAST INTERIM PERIOD: The unaudited financial performance for the three months ended December 31, 2010 and 2009 is summarized as follows (KRW million,
except per share amounts):
For the three months For the three months ended ended December 31, 2010 December 31, 2009
Sales ₩ 3,570,677 ₩ 3,176,315
Operating Income 303,854 200,321
Net income 233,110 82,893
Earnings per share 1,233 438
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial StatementsNotes to Non-Consolidated Financial Statements
81
English Translation of a Report Originally Issued in Korean
To the Representative Director of
Daewoo Shipping & Marine Engineering Co., Ltd.
We have reviewed the accompanying Report on the Management’s Assessment of IACS (the “Management’s
Report”) of Daewoo Shipping & Marine Engineering Co., Ltd. (the “Company”) as of December 31, 2010. The
Management’s Report, and the design and operation of IACS are the responsibility of the Company’s management.
Our responsibility is to review the Management’s Report and issue a review report based on our procedures. The
Company’s management stated in the accompanying Management’s Report that “based on the assessment of the
IACS as of December 31, 2010, the Company’s IACS has been appropriately designed and is operating effectively
as of December 31, 2010, in all material respects, in accordance with the IACS Framework established by the Korea
Listed Companies Association.”
We conducted our review in accordance with the IACS Review Standards established by the Korean Institute of
Certified Public Accountants. Those standards require that we plan and perform a review, objective of which is
to obtain a lower level of assurance than an audit, of the Management’s Report in all material respects. A review
includes obtaining an understanding of a Company’s IACS and making inquiries regarding the Management’s
Report and, when deemed necessary, performing a limited inspection of underlying documents and other limited
procedures.
The Company’s IACS represents internal accounting policies and a system to manage and operate such policies
to provide reasonable assurance regarding the reliability of financial statements prepared, in accordance with
accounting principles generally accepted in the Republic of Korea, for the purpose of preparing and disclosing
reliable accounting information. Because of its inherent limitations, IACS may not prevent or detect a material
misstatement of the financial statements. Also, projections of any evaluation of effectiveness of IACS to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Based on our review, nothing has come to our attention that causes us to believe that the Management’s Report
referred to above is not fairly stated, in all material respects, in accordance with the IACS Framework established by
the Korea Listed Companies Association.
Our review is based on the Company’s IACS as of December 31, 2010, and we did not review its IACS subsequent to
December 31, 2010. This report has been prepared pursuant to the Acts on External Audit for Stock Companies in
the Republic of Korea and may not be appropriate for other purposes or for other users.
March 7, 2011
Independent Accountants’ Review Report on Internal Accounting Control System (“IACS”)
DSME ANNUAL REPORT 2010 82
FINANCIAL REvIEW
English Translation of a Report Originally Issued in Korean
To the Board of Directors and Audit Committee of
Daewoo Shipping & Marine Engineering Co., Ltd.
I, as the Internal Accounting Control Officer (“IACO”) of Daewoo Shipping & Marine Engineering Co., Ltd. (“the
Company”), assessed the status of the design and operation of the Company’s IACS for the year ended December 31,
2010.
The Company’s management including IACO is responsible for designing and operating IACS. I, as the IACO, assessed
whether the IACS has been appropriately designed and is effectively operating to prevent and detect any error or
fraud which may cause any misstatement of the financial statements, for the purpose of preparing and disclosing
reliable financial statements. I, as the IACO, applied the IACS Framework established by the Korea Listed Companies
Association for the assessment of design and operation of the IACS.
Based on the assessment of the IACS, the Company’s IACS has been appropriately designed and is operating
effectively as of December 31, 2010, in all material respects, in accordance with the IACS Framework.
January 24, 2011
Report on the Assessment of Internal Accounting Control System (“IACS”)
Yoo Hoon Kim
Internal Accounting Control Officer
Sang Tae Nam
Chief Executive officer
Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial StatementsNotes to Non-Consolidated Financial Statements
83
Irvine
Houston
Corporate History
1973~1999Legacy Begins
2006~2010 Going Green, Surging Ahead
2000~2005 New Developments
1973 BeginsconstructionoftheOkpoShipyard
1978 DaewooShipbuilding&HeavyMachineryCo,Ltd(DSHM)takesownershiptheOkpoShipyard
1981 HoldstheOkpoShipyarddedicationceremony
1989 KoreangovernmentappointsDSHManindustrialrationalizationcompany
1994 DSHMmergesintoDaewooHeavyIndustriesLtd.(DHI)
1997 EstablishesDaewoo-MangaliaHeavyIndustriesLtd.inRomania
1999 AnnouncesDaewooConglomerate’srestructuringplan
BeginscorporateworkoutprogramforDHI
2006 EstablishesDSMEConstructionCo
2007 Wins$6billionExportTowerAwardatthe44thTradeDayCeremony
Hitsanewrecordnumberoforders,surpassing$20billion
2008 WinsKoreaITInnovationAward
Achievesasafetyresultof10millionman-hourswithIIFintheQatargasProject
ReceivesISO27001Certification
2009 WinsTOPExportAward
EstablishesDeWindCorporation
World’slargestfloatingdockmakesdebutsattheDSMEyard
2010 Rejoinsthe’KRW10trillioninrevenue–KRW1trillioninoperatingprofitclub’
SignsanagreementwithRussianUnitedShipbuildingCorporation(USC)tobuildajointshipyardinZvezda
2000 DHI’sShipbuildingandHeavyMachineryDivisionbecomesanindependentcompany,spunofffromtheformerDaewooConglomerate
2001 Concludescorporateworkoutprogram,stockslistedontheKoreaStockExchange
2002 ChangesofficialcorporatetitletoDSME
2003 IssuesGlobalDepositaryReceipts
2005 EstablishesDSMEShandongCo.,Ltd.(DSSC)inShandong,China
DSME ANNUAL REPORT 2010 84
Houston
London
Oslo
Greece
Luanda
Rio de Janerio
Oman
Dubai
Singapore
Sanghai
Shandong
SeoulOkpo
Tokyo
Nigeria
Mangalia
Global NetworkHead Office
SEOUL
85,Da-dong,Jung-gu,Seoul,Korea
Tel:+82-2-2129-0114
Fax:+82-2-756-4390
Ship Yards
OKPO
1Aju-dong,Geoje-si,Gyeongnam,Korea
Tel:+82-55-680-2114
Fax:+82-55-681-4030
MANGALIA
DMHI1,PortuluiStreet905500,
Mangalia,Romania
Tel: +40-241-70-6200
Fax: +40-241-75-6060
Affiliates
KOREA
•DSECCo.,Ltd.
•KoreaMarineFundCorp.
•WellivCorp.
•DSMEE&R
•DSMEConstructionCo.,Ltd.
•ShinhanMachineryCo.,Ltd.
•SamwooHeavyIND.CO.,LTD.
CHINA
DSMEShandongCo.,Ltd.
OMAN
DSMEOmanL.L.C
USA
DeWindCo.inCalifornia
NIGERIA
NDSInternationalEnterpriseLtd.
Overseas Offices
Dubai
Greece
Houston
London
Luanda
Oslo
Perth
Rio de Janeiro
Shanghai
Singapore
Tokyo
CORPORATE HISTORy ∙ GLOBAL NETwORK
Perth
85
Outstanding Vessels in 2010
CAP INES 4,600TEUCONTAINERSHIPOwner:B.SchulteDelivery:Jan.27,2010
DAR SALWA 318KVLCCOwner:KOTCDelivery:Oct.13,2010
BARCELONA KNUTSEN173.4CBMLNGCOwner:KuntsenDelivery:Apr.21,2010
ARCTURUS VOYAGER320KVLCCOwner:MaranTankerDelivery:Jul19,2010
MSC SAVONA14,000TEUCONTAINERSHIPOwner:CPOFFENDelivery:Mar.19,201
EXPEDIENT150.9KCBMLNG-RVOwner:EXMARNVDelivery:Apr.2,2010
VIRGO STAR317KVLCCOwner:VelaDelivery:Jun.23,2010
AGROS4,380TEUCONTAINERSHIPOwner:MARLOWNAVIGATIONDelivery:Jul.29,2010
CMA CGM CORTE REAL13,300TEUCONTAINERSHIPOwner:CMACGMDelivery:Aug.16,2010
85,Da-dong,Jung-gu,Seoul,Korea
Tel:+82-2-2129-0114/Fax:+82-2-756-4390
www.dsme.co.kr
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