The Brink’s Company: Q2 2015 Form 10-Q Summary
Business context and reporting period
The Brink’s Company provides cash-in-transit, ATM, global logistics, cash-management, payment, and guarding services in more than 100 countries. This unaudited Form 10-Q covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. Management reports nine operating segments and excludes Venezuela from segment results beginning January 1, 2015 because of currency restrictions, inflation, devaluations, and limited ability to repatriate cash.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $760.3 million | $859.0 million | $1,536.4 million | $1,808.6 million |
| Operating profit (loss) | $(14.6) million | $8.7 million | $(1.7) million | $(65.0) million |
| Operating margin | (1.9%) | 1.0% | (0.1%) | (3.6%) |
| Loss from continuing operations attributable to Brink’s | $(13.0) million | $0.9 million | $(13.6) million | $(58.1) million |
| Diluted EPS from continuing operations | $(0.26) | $0.02 | $(0.28) | $(1.19) |
| Non-GAAP operating profit | $30.6 million | $24.0 million | $71.2 million | $44.8 million |
| Non-GAAP operating margin | 4.1% | 2.9% | 4.7% | 2.7% |
- GAAP revenue declined 11% in the quarter and 15% year to date, primarily because of unfavorable foreign-exchange effects of $154.4 million and $483.4 million, respectively.
- Organic revenue increased 6% in the quarter and 11% year to date on a GAAP basis, driven mainly by pricing and inflation-related increases in Latin America and Venezuela and volume growth in the U.S.
- Q2 GAAP operating loss included a $34.5 million impairment charge for Venezuelan property and equipment. Six-month operating results also included $18.2 million of Venezuelan currency-remeasurement losses, compared with $122.2 million in the prior-year period.
- Cash flow from operating activities was $42.6 million for the first half, compared with $47.6 million in 2014. Capital expenditures were $35.2 million, down from $56.1 million, and investing cash outflow was $32.8 million versus $58.8 million.
- Cash and cash equivalents were $181.1 million at June 30, 2015, compared with $176.2 million at December 31, 2014. Approximately $160.3 million was held by subsidiaries considered permanently invested outside the U.S.
- Total debt was $490.1 million, compared with $466.8 million at year-end 2014. Reported net debt was $343.3 million, up $24.7 million, primarily due to borrowings used to fund working-capital needs.
- The company had $313 million available under its $525 million unsecured revolving facility, which matures in March 2020, and stated that it was in compliance with all financial covenants.
- Shareholders received $9.7 million of dividends, or $0.20 per share, during the first half.
Material changes versus the prior comparable period
- Non-GAAP operating profit increased 28% in Q2 and 59% in the first half, reflecting improvement in Latin America, Mexico, France, the U.S., and lower first-half corporate expenses.
- Largest 5 Markets revenue fell 12% in Q2 and 10% year to date, largely from currency translation. U.S. revenue increased 2% in Q2 and 3% year to date, while Brazil and France experienced significant reported declines.
- Global Markets revenue declined 9% in Q2 and 7% year to date, but operating profit increased 20% and 23%, respectively, on a non-GAAP segment basis. Latin America was the principal contributor.
- Payment Services revenue declined 7% in Q2 and 2% year to date due to currency effects, while organic revenue increased 23% in both comparisons. Operating losses widened because of marketing expenditures to increase U.S. cardholders.
- The 2014 restructuring targeted approximately 1,700 position reductions and expected annual direct cost savings of $45 million to $50 million in 2015. The company incurred net restructuring-related charges of $0.3 million in the first half and had a remaining accrual of $7.0 million at June 30.
- Discontinued operations produced income of $0.1 million in Q2 and a loss of $2.3 million for the first half, compared with income of $0.7 million and $1.2 million, respectively, in 2014.
Guidance, outlook, risks, and unusual items
- For 2015, management expects approximately 2% organic revenue growth, a 13% negative currency impact on revenue, and total revenue of approximately $3.0 billion on a non-GAAP basis.
- 2015 non-GAAP operating profit guidance is $165 million to $180 million, with an operating margin of 5.5% to 6.0%, non-GAAP income from continuing operations attributable to Brink’s of $77 million to $86 million, and non-GAAP EPS of $1.55 to $1.75.
- Management expects 2015 capital expenditures of $120 million to $130 million, capital leases of approximately $20 million, and depreciation and amortization of approximately $145 million.
- Management’s 2016 non-GAAP outlook includes EPS of $2.00 to $2.40, a 6% U.S. operating margin, and a 10% Mexico operating margin.
- Venezuela remains a significant uncertainty. The SIMADI exchange rate was 197 bolivars per U.S. dollar at June 30, 2015; the company held $3.7 million of Venezuelan cash, had not repatriated U.S. dollars from Venezuela in 2014 or 2015, and was evaluating strategic options for the business. Further impairment or currency losses are possible.
- Foreign-exchange volatility, inability to repatriate cash, political and economic instability, labor costs, security losses, customer pricing, pension and retiree liabilities, access to credit, and litigation are key risks.
- A Mexican legal matter has an accrued liability of approximately $2 million; additional reasonably possible losses could be up to $10 million, based on June 30 exchange rates. Other claims may not be reasonably estimable.
- The company states that its 2015 GAAP effective tax rate may exceed 100% because Venezuelan remeasurement and impairment charges are substantially nondeductible. The non-GAAP tax-rate expectation is approximately 42%.
- The company believes current cash, credit availability, and projected operating cash flow will satisfy liquidity needs for more than the next twelve months, although covenant breaches could accelerate debt repayment and withdraw commitments.
Investor verification points
- Verify the sustainability of non-GAAP operating improvement after excluding Venezuela, currency effects, restructuring, pension, and other unallocated items.
- Track Venezuelan exchange rates, cash accessibility, strategic alternatives, impairment exposure, and the treatment of accumulated other comprehensive losses.
- Reconcile reported debt, cash held outside the U.S., available revolver capacity, covenant compliance, and future debt maturities.
- Assess whether restructuring savings and cost reductions offset wage inflation, pension costs, Payment Services marketing costs, and weaker Brazil and EMEA performance.
- Compare actual 2015 revenue, currency impacts, margins, EPS, capital spending, and tax rates with management’s non-GAAP guidance.
- Review the Mexican litigation exposure, pension and UMWA obligations, black-lung liabilities, deferred-tax asset realizability, and other contingencies.
- Consider that non-GAAP outlook amounts are not fully reconciled to GAAP because certain adjustments cannot be quantified without unreasonable effort.