The Brink’s Company: FY2018 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2018, with quarterly data for the fourth quarter. Brink’s provides cash-in-transit, ATM, cash management, global valuables transportation, payment, guarding and commercial security services in more than 100 countries. The company had approximately 62,400 employees, 1,200 facilities and 13,500 vehicles at year-end.
Revenue mix in 2018 was approximately 49% core services, 45% high-value services and 6% other security services. Reportable segments were North America, South America and Rest of World.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $3,488.9 million | $3,347.0 million | 4% increase |
| Operating profit | $274.7 million | $273.9 million | Approximately flat |
| Operating margin | 7.9% | 8.2% | Lower |
| Income from continuing operations attributable to Brink’s | $(33.3) million | $16.9 million | Decline |
| Diluted EPS from continuing operations | $(0.65) | $0.33 | Decline |
| Non-GAAP operating profit | $346.9 million | $281.4 million | 23% increase |
| Non-GAAP diluted EPS | $3.46 | $3.03 | 14% increase |
| Cash flow from operations | $364.1 million | $296.4 million | $67.7 million increase |
| Capital expenditures | $155.1 million | $174.5 million | $19.4 million decrease |
GAAP operating profit was approximately 7.9% of revenue, while management’s non-GAAP operating margin was 10.1%, compared with 8.8% in 2017. Non-GAAP measures exclude items such as Venezuela operations, restructuring, acquisition-related costs, Argentina’s highly inflationary accounting effects and reporting-compliance costs.
Year-end cash and cash equivalents were $343.4 million, compared with $614.3 million in 2017. Cash available for general corporate purposes was $329.3 million after excluding cash held by cash-management operations. Total debt was $1,554.0 million, up from $1,236.7 million, and reported net debt was $1,214.2 million, up $602.7 million. Debt represented approximately 90% of capitalization, compared with 79% in 2017. The company reported $660 million available under its revolving credit facility and stated that current liquidity should meet needs for more than the next twelve months.
Brink’s paid $30.4 million of dividends and repurchased $93.5 million of common stock in 2018. The May 2017 $200 million repurchase authorization had approximately $106 million remaining at year-end.
Material changes versus the prior comparable period
- Revenue increased 4%, driven by acquisitions and organic growth, partly offset by currency effects. Non-GAAP revenue increased 8%, with 7% organic growth.
- North America revenue increased 17% and operating profit increased to $129.8 million, primarily reflecting the Dunbar acquisition and organic growth.
- South America revenue was approximately flat in reported dollars because organic growth and acquisitions were offset by currency depreciation; operating profit increased 9%.
- Rest of World operating profit declined 1%, primarily because of weakness in France.
- GAAP earnings were significantly affected by the $126.7 million pretax loss recognized when Brink’s deconsolidated its Venezuelan subsidiaries effective June 30, 2018.
- Interest expense increased to $66.7 million from $32.2 million, primarily because of higher borrowings used to finance the Dunbar acquisition.
- Brink’s acquired Dunbar Armored for approximately $547 million, acquired a 60% interest in Worldbridge Secure Logistics in Cambodia, and purchased the remaining 42% noncontrolling interest in Brink’s de Colombia.
- The company completed its 2016 restructuring program in 2018 after cumulative pretax charges of approximately $48 million. Additional targeted restructuring charges of $7.6 million were recorded in 2018, with $5 million to $7 million of further costs expected.
Outlook, commentary, risks and unusual items
Management’s strategy is to accelerate profitable growth, improve operational excellence and introduce differentiated services. Focus areas include higher-margin cash-management services, CompuSafe, recyclers, global services, smaller financial institutions, underserved retail markets, technology-enabled offerings and acquisitions. The filing does not provide a clear quantitative revenue or earnings guidance range.
- Argentina was designated highly inflationary for accounting purposes beginning July 1, 2018, resulting in $8.0 million of pretax charges in 2018, including $6.2 million of currency remeasurement losses.
- Foreign currency remains a major exposure. A hypothetical 10% appreciation of the U.S. dollar was estimated to reduce earnings by $28.5 million and reduce the translation value of foreign net assets by $86.5 million.
- Brink’s faces competitive pricing pressure, a potential long-term decline in cash usage, international political and economic risks, currency devaluations, inflation, labor issues, regulatory requirements, cybersecurity threats, insurance availability and acquisition-integration risks.
- The company has substantial retirement and former-coal-operation obligations. Year-end funded status was approximately 87% for the primary U.S. pension plan; accumulated actuarial losses were approximately $702 million. UMWA, black-lung and other retirement obligations also remain material.
- A Chilean antitrust investigation was identified in the fourth quarter of 2018. No legal proceedings had been initiated against Brink’s Chile, and the company could not estimate the probability or range of any potential loss.
- Adoption of the new lease standard on January 1, 2019 was expected to add approximately $260 million to $360 million of lease assets and liabilities, without a material effect on earnings or cash flows.
- In January 2019, Brink’s acquired Rodoban in Brazil for approximately $130 million. In February 2019, it amended its credit facility, increased the term loan to approximately $800 million, extended the revolving facility maturity to February 2024 and entered into $400 million of interest-rate swaps.
- Management and Deloitte concluded that internal control over financial reporting was effective at December 31, 2018. Previously reported 2017 material weaknesses were considered remediated, although Dunbar was excluded from the 2018 control assessment.
Most important facts for investors to verify
- Reconcile the large difference between GAAP results, including the $33.3 million attributable loss, and non-GAAP earnings of $179.4 million.
- Assess leverage, debt maturities, covenant compliance and the effect of the February 2019 refinancing on interest expense and liquidity.
- Evaluate whether Dunbar and subsequent acquisitions generate the expected revenue, cost synergies and returns while integration costs decline.
- Monitor Argentina’s inflation and currency conditions and the continuing financial exposure to Venezuela after deconsolidation.
- Review pension, UMWA, black-lung and other legacy obligations, including the timing and assumptions for future funding.
- Track the Chilean antitrust investigation and other legal, regulatory, insurance and cybersecurity contingencies.
- Verify the expected impact of the 2019 lease-accounting adoption and the company’s continued effectiveness of internal controls.