The Brink’s Company — Q3 2018 Form 10-Q Summary
Business context and reporting period
The Brink’s Company provides cash-in-transit, ATM, cash-management, global logistics, payment, guarding and other security services in more than 100 countries through North America, South America and Rest of World segments. This unaudited filing covers the quarter and nine months ended September 30, 2018, compared with the corresponding 2017 periods.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $852.4 million | $849.5 million | $2,581.2 million | $2,443.8 million |
| Operating profit | $67.0 million | $66.4 million | $193.5 million | $185.6 million |
| GAAP operating margin | 7.9% | 7.8% | 7.5% | 7.6% |
| Net income attributable to Brink’s | $17.4 million | $19.9 million | $(68.2) million | $68.8 million |
| Diluted EPS from continuing operations | $0.34 | $0.38 | $(1.34) | $1.33 |
| Non-GAAP operating profit | $95.3 million | $76.4 million | $243.0 million | $190.7 million |
| Non-GAAP diluted EPS | $0.91 | $0.84 | $2.30 | $2.09 |
Q3 organic revenue growth was 5%, while non-GAAP operating margin increased to 11.2% from 9.2%. Nine-month organic revenue growth was 7%, and non-GAAP operating margin was 9.6% versus 8.2%.
- Operating cash flow was $148.6 million for the first nine months, up from $137.0 million.
- Capital expenditures were $104.0 million; acquisitions used $521.0 million, primarily for Dunbar.
- Cash, cash equivalents and restricted cash declined to $406.9 million from $726.9 million at December 31, 2017. Unrestricted cash and cash equivalents were $314.2 million.
- Total debt was $1.519 billion, up from $1.237 billion at year-end. Net debt increased to $1.205 billion from $611.5 million.
- $694 million was available under the revolving credit facility. The company reported compliance with all financial covenants.
- Shareholders’ equity declined to $244.8 million from $338.2 million, primarily reflecting the year-to-date loss and foreign-currency effects.
Material changes versus the prior comparable period
- Revenue increased 6% for the first nine months, driven by organic growth and acquisitions, but reported results were significantly affected by currency devaluation and the deconsolidation of Venezuela.
- Brink’s acquired Dunbar Armored on August 13, 2018, for approximately $547 million. Dunbar contributed $51.3 million of Q3 revenue and $0.5 million of attributable net income after acquisition.
- Effective June 30, 2018, Brink’s deconsolidated its Venezuelan operations after determining it no longer controlled them. The company recorded a pretax loss of $126.7 million, including approximately $106 million of accumulated foreign-currency translation and benefit-plan adjustments. Venezuela contributed $51.4 million of revenue in the first nine months before deconsolidation, compared with $115.2 million in the prior-year period.
- Argentina was designated highly inflationary effective July 1, 2018. Brink’s recorded an $8.1 million pretax currency-remeasurement loss in Q3 and additional related expense.
- Interest expense increased to $47.8 million for the first nine months from $18.5 million, primarily because of higher borrowings used for acquisitions.
- The 2016 restructuring program was substantially completed in Q3. Cumulative pretax charges were approximately $46.7 million, with estimated annualized savings of approximately $20 million. Additional restructuring actions are expected to reduce the workforce by 400 to 500 positions and produce approximately $6 million of annualized savings, with $2 million to $4 million of additional costs expected.
- The company repurchased 336,829 shares for $25.1 million during Q3 and had approximately $175 million remaining under its repurchase authorization.
Outlook, commentary, risks and unusual items
- Management expects North America’s operating margin to improve through productivity initiatives targeting vehicle and labor costs and through growth in higher-value services, although it does not expect North America to reach South America’s margin levels.
- Management expects the U.S. dollar’s strength to continue reducing reported foreign-currency revenue and operating profit for the remainder of 2018.
- The pending acquisition of Rodoban in Brazil, announced at an expected price of approximately $145 million, was subject to customary closing conditions and regulatory approval and was expected to close by year-end 2018. Management expected to fund it largely with borrowings.
- Venezuela remains exposed to political, inflationary, currency-control and financing risks, although future losses are limited to discretionary funding or investment decisions after deconsolidation.
- Key international risks include currency devaluations, inflation, restrictions on repatriating cash, political and regulatory changes, labor conditions and integration of acquisitions.
- The company has material weaknesses in internal control over financial reporting. Management concluded that disclosure controls and procedures were not effective as of September 30, 2018, although it concluded that the financial statements fairly present the reported periods.
- Legal claims are pending in the ordinary course; the company stated that it could not estimate losses for some matters but did not believe current litigation would have a material adverse effect on liquidity, financial position or results of operations.
- Brink’s provides services to financial institutions serving state-legal cannabis businesses. Federal enforcement or regulatory changes could expose Brink’s or its customers to legal action and adverse financial effects.
- Adoption of the new lease standard on January 1, 2019 was expected to significantly increase reported assets and liabilities; the filing did not quantify the impact.
Investor verification points
- Reconcile GAAP results with non-GAAP results, particularly the $126.7 million Venezuela deconsolidation charge and other excluded items.
- Assess Dunbar’s integration, provisional purchase-price allocation, goodwill and intangible-asset valuations, and the resulting leverage.
- Monitor debt maturities, interest costs, covenant headroom and available revolving-credit capacity after the Dunbar and potential Rodoban acquisitions.
- Evaluate exposure to Argentina, Venezuela and other foreign currencies, including highly inflationary accounting and cash-repatriation restrictions.
- Review remediation plans and future reporting implications associated with the disclosed material weaknesses.
- Verify restructuring savings, remaining charges and execution of North American productivity initiatives.
- Review pension, UMWA and black-lung obligations, including projected payments and assumptions.
- Confirm the final effects of the Tax Reform Act, realization of deferred tax assets and the company’s eventual GILTI accounting policy.