The Brink’s Company: Q3 2017 Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and nine months ended September 30, 2017. Brink’s provides cash-in-transit, ATM, global logistics, cash-management, payment, commercial-security and guarding services in more than 100 countries. Beginning in February 2017, management reported three operating segments: North America, South America and Rest of World. Venezuela is excluded from segment results because currency restrictions prevent effective repatriation of funds.
Financial performance and key metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $849.5 million | $755.8 million | $2,443.8 million | $2,217.1 million |
| Operating profit | $66.4 million | $59.7 million | $185.6 million | $115.4 million |
| Operating margin | 7.8% | 7.9% | 7.6% | 5.2% |
| Income attributable to Brink’s | $19.9 million | $24.5 million | $68.8 million | $21.7 million |
| Diluted EPS from continuing operations | $0.38 | $0.48 | $1.33 | $0.43 |
| Non-GAAP diluted EPS | $0.83 | $0.68 | $2.06 | $1.40 |
- Q3 GAAP revenue increased 12%; nine-month revenue increased 10%. Organic revenue growth was 16% in Q3 and 19% for the nine-month period, but reported results were affected by currency movements, particularly the Venezuelan bolivar.
- Q3 operating profit increased 11%, while nine-month operating profit increased 61%. Nine-month operating margin expanded substantially, reflecting stronger segment performance and lower prior-year acquisition and disposition charges.
- Q3 income attributable to Brink’s declined 19%, primarily because interest and other expense increased by $12.0 million. The nine-month amount increased 217% from the unusually low 2016 comparison.
- The nine-month effective tax rate was 39.0%, versus 60.1% in 2016. Venezuelan earnings and nondeductible currency-devaluation expenses continued to increase the rate above the 35% U.S. statutory rate.
- Segment Q3 operating profit was $16.9 million in North America, $47.7 million in South America and $33.3 million in Rest of World. South America revenue benefited from acquisitions and inflation-related price increases.
Cash flow, balance sheet, debt and liquidity
- Cash flow from operating activities was $116.2 million for the first nine months, compared with $57.0 million in 2016. Management’s non-GAAP operating cash flow, excluding Venezuela and certain customer cash flows, was $88.2 million versus $57.9 million.
- Investing cash outflow was $276.4 million, including $147.7 million for acquisitions and $117.4 million of capital expenditures. Financing cash inflow was $225.4 million.
- Cash and cash equivalents were $241.8 million at September 30, 2017, compared with $183.5 million at December 31, 2016. Restricted cash was $85.7 million and is generally unavailable for corporate purposes.
- Total debt increased to $750.0 million from $443.2 million at year-end 2016. Net debt, as defined by management and adjusted for restricted cash borrowings, acquisition-related amounts and unavailable cash, was $570.4 million versus $247.2 million.
- The $525 million revolving facility had $79 million available at September 30, 2017. The company was in compliance with all financial covenants.
- Management stated that cash on hand, available borrowing capacity and projected operating cash flow should satisfy liquidity needs for more than the next twelve months. However, $210.8 million of cash and cash equivalents was held by subsidiaries considered permanently invested, and repatriation could create additional taxes.
Material changes versus the prior comparable period
- Operating performance improved significantly on stronger organic growth, productivity initiatives, pricing and acquisitions. North America and South America generated the largest profit increases.
- Reported revenue and profit remained exposed to Venezuelan currency devaluation. The nine-month Venezuelan remeasurement loss was $9.1 million pretax, compared with $4.7 million in 2016.
- Brink’s completed or announced multiple acquisitions, including Maco Transportadora in Argentina for approximately $205 million and four other acquisitions with aggregate consideration of approximately $93 million. Purchase-price allocations remained provisional.
- Corporate expenses increased by $20.2 million for the nine months, primarily because of higher incentive compensation.
- Restructuring charges were $13.5 million for the nine months under the 2016 program and $16.1 million including other restructuring activity. Management expects $8 million to $12 million of 2017 savings from the 2016 program and additional future restructuring costs of $10 million to $14 million.
- The company paid off $86 million of private placement notes in September, including a $6.5 million prepayment penalty, contributing to higher interest and other expense.
- The quarterly dividend increased to $0.15 per share from $0.10. A $200 million share-repurchase authorization remained unused at September 30, 2017.
Guidance, outlook, commentary and risks
- Management did not provide a conventional consolidated revenue or EPS outlook in the filing. It projected restructuring savings, expected future restructuring costs, pension funding requirements and acquisition-related cash needs.
- Cash used for investing activities was expected to increase in Q4 2017 for additional acquisitions in Argentina and France, funded largely with debt and, to a lesser extent, cash and short-term investments.
- In October 2017, after quarter-end, Brink’s entered into a $1.0 billion revolving credit facility and a $500 million term loan facility, and issued $600 million of 4.625% senior notes due October 2027. Proceeds were intended partly to refinance existing debt and fund working capital, capital expenditures and acquisitions.
- Venezuela remains a significant contingency: the company cannot reliably obtain U.S. dollars or repatriate funds, and further devaluation or loss of access to official exchange mechanisms could materially affect results and asset values.
- Other risks include foreign-exchange volatility, inflation, political and regulatory restrictions, acquisition integration, leverage and covenant compliance, pension and legacy coal-related obligations, deferred tax-asset realization, litigation and the COFECE antitrust investigation involving the Mexican subsidiary SERPAPROSA. The filing does not provide a clear estimate of potential loss for the COFECE matter.
- The company expects no additional contributions to its primary U.S. pension plan until 2021 under current assumptions, but actual funding requirements may differ materially.
Important facts for investors to verify
- Reconcile reported growth with organic growth, acquisitions, inflation and currency effects, especially the substantial contribution from Venezuela.
- Assess leverage after the October refinancing and subsequent issuance of $600 million of senior notes, including secured debt, interest costs and covenant headroom.
- Review the provisional purchase-price allocations, contingent consideration and integration performance for Maco Transportadora and other acquisitions.
- Evaluate whether operating cash flow can support acquisitions, elevated capital expenditures, restructuring payments, dividends and retirement obligations.
- Monitor the COFECE investigation, other litigation and the company’s inability to estimate potential losses for certain matters.
- Review the reconciliation of non-GAAP results to GAAP, including adjustments for Venezuela, restructuring, acquisition costs, retirement plans, the debt prepayment penalty and the Brazil tax claim.