The Brink’s Company: FY 2016 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2016. Brink’s provides secure logistics and security solutions, including cash-in-transit, ATM services, cash management, global transportation of valuables, payment services, guarding and commercial security systems. The company operates in more than 100 countries, with approximately 60,700 employees, 1,000 facilities and 11,900 vehicles. Approximately 75% of 2016 revenue was generated outside the United States.
Operations are reported through nine segments: the United States, France, Mexico, Brazil, Canada, Latin America, EMEA, Asia and Payment Services. The company appointed Douglas A. Pertz as CEO in June 2016 and Ronald J. Domanico as CFO in July 2016.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| GAAP revenue | $3,020.6 million | $3,061.4 million | Down 1% |
| GAAP operating profit | $144.2 million | $56.6 million | Up $87.6 million |
| GAAP operating margin | 4.8% | 1.8% | Up approximately 3.0 points |
| Income from continuing operations attributable to Brink’s | $36.2 million | $(9.1) million | Improved $45.3 million |
| Diluted EPS from continuing operations | $0.72 | $(0.19) | Improved |
| Net income attributable to Brink’s | $34.5 million | $(11.9) million | Improved $46.4 million |
| Non-GAAP operating profit | $206.5 million | $156.8 million | Up 32% |
| Non-GAAP diluted EPS from continuing operations | $2.24 | $1.69 | Up 33% |
| Non-GAAP operating margin | 7.1% | 5.3% | Up 1.8 points |
| Cash flow from operating activities | $167.5 million | $195.9 million | Down $28.4 million |
| Capital expenditures | $112.2 million | $101.1 million | Up $11.1 million |
Revenue was pressured by approximately $399.6 million of unfavorable currency effects, including Venezuelan devaluation, and $34.3 million from dispositions. Organic growth in Venezuela, Latin America, Brazil, the United States and Mexico partially offset those effects. Cost of revenues declined 2% to $2,424.8 million, while selling, general and administrative expenses declined 7% to $431.5 million.
GAAP results included $20.1 million of other operating expense and a 62.8% effective tax rate. Excluding specified unusual items and related tax effects, the non-GAAP tax rate was 36.9%. Discontinued operations generated a $1.7 million after-tax loss in 2016.
Liquidity, debt and capital resources
- Cash and cash equivalents were $183.5 million at December 31, 2016, compared with $181.9 million at year-end 2015. Of approximately $184 million of cash, $159 million was held by subsidiaries considered permanently invested outside the United States.
- GAAP total debt was $443.2 million, compared with $430.5 million in 2015. Debt represented 56% of capitalization, versus 57% in 2015.
- Management’s non-GAAP net debt was $247.2 million, down from $269.3 million. Net debt excluding Venezuelan cash and debt was $255 million.
- Cash available for general corporate purposes was approximately $173.7 million after excluding customer-related cash.
- The company had a $525 million unsecured revolving facility maturing in March 2020, with $469 million available at year-end. It also had $162.8 million of short-term borrowings, including $108.3 million under uncommitted facilities.
- Management stated that cash on hand, available credit and projected operating cash flows should satisfy liquidity needs for more than twelve months. The company was in compliance with all debt covenants at December 31, 2016.
- Operating, capital lease, debt, purchase and other contractual obligations totaled approximately $1.246 billion, including $266.6 million of operating lease obligations, $425.6 million of UMWA obligations and $100.2 million of black lung and other obligations.
Material changes versus the prior comparable period
- GAAP operating profit more than doubled, primarily because the $35.3 million Venezuelan asset impairment recognized in 2015 did not recur, Venezuela and Latin America improved organically, corporate expenses declined and Brazil and Payment Services performed better.
- Reported revenue declined modestly despite 13% GAAP organic growth, because currency translation reduced revenue by $399.6 million. On a non-GAAP basis, organic revenue growth was 6%.
- Segment operating profit increased in Global Markets to $160.5 million from $140.7 million, led by Latin America, EMEA and Asia. Largest 5 Markets operating profit declined to $101.9 million from $108.5 million, largely because of lower U.S., Mexico and Canada results.
- U.S. revenue increased 3%, but U.S. operating profit fell to $6.3 million from $15.1 million because of higher fleet and insurance costs. Brazil revenue rose 6% and operating profit rose 26%. Payment Services became profitable, with $2.3 million of operating profit versus a $7.2 million loss.
- Operating cash flow declined because of higher income-tax payments, working-capital use and lower customer obligations. Capital expenditures increased and investing cash use rose to $108.9 million.
- Net debt declined $22.1 million, although year-end debt increased because higher short-term borrowings exceeded long-term debt repayments.
Guidance, outlook, commentary, risks and unusual items
- The company’s strategy is to accelerate profitable growth, improve operational efficiency and introduce differentiated technology-enabled services. Management identified growth opportunities in CompuSafe services, recyclers, money-processing outsourcing and Brink’s Global Services.
- The 2016 restructuring incurred $18.1 million of expense, including asset adjustments, severance and lease charges net of a benefit-program termination benefit. It is expected to eliminate 700 to 800 positions, produce $8 million to $12 million of 2017 savings and generate an additional $15 million to $20 million of 2017 costs, primarily severance.
- The prior 2015 restructuring produced approximately $20 million of 2016 savings. The 2014 restructuring had generated approximately $50 million of annual direct cost savings in 2015 compared with 2014.
- Brink’s exited its remaining Ireland and Northern Ireland domestic operations in 2016 and incurred approximately $16 million of exit losses, including severance and property impairment. International shipments involving Ireland continue through Brink’s Global Services.
- Venezuela remains a significant contingency. The company cannot presently repatriate U.S. dollars from Venezuela, held approximately $6.8 million of bolivar-denominated cash, and recognized a $4.8 million 2016 currency remeasurement loss. Future devaluations, restrictions or operating disruption could materially affect results and liquidity.
- Key risks include competitive pricing pressure, declining use of cash, foreign exchange and political risk, cybersecurity and IT failures, losses of customer valuables, insurance availability, labor disruptions, pension and retiree medical obligations, deferred-tax-asset realization and debt-covenant compliance.
- The U.S. primary pension plan was approximately 87% funded at year-end. The company reported $699 million of actuarial losses in accumulated other comprehensive income and does not expect contributions to the primary U.S. pension plan until 2021 based on current assumptions.
- The Mexican antitrust agency is investigating potential anti-competitive practices in the cash-logistics industry. No proceeding had been initiated against the company’s Mexican subsidiary, and no loss estimate or accrual was recorded.
- The company adopted new share-based-payment guidance in 2016, resulting in a $0.2 million cumulative retained-earnings adjustment. It expects future standards for leases, revenue recognition, credit losses and restricted cash to affect reporting, but does not expect a material preliminary impact from revenue recognition.
Important facts for investors to verify
- Reconcile GAAP earnings of $0.72 diluted EPS from continuing operations with non-GAAP EPS of $2.24, including all excluded Venezuela, restructuring, retirement, exit and tax items.
- Assess whether organic growth, particularly in Latin America, Brazil and the United States, can offset continued foreign-currency pressure and possible further Venezuelan devaluation.
- Verify the sustainability of the stated $8 million to $12 million of 2017 restructuring savings against the expected $15 million to $20 million of additional restructuring costs.
- Monitor short-term borrowing dependence, revolving-facility availability, covenant headroom and debt maturities.
- Evaluate the accessibility of foreign cash, particularly the $159 million considered permanently invested outside the United States and cash restricted in Venezuela.
- Review pension, UMWA, black lung and retiree medical obligations, including sensitivity to discount rates, investment returns and healthcare inflation.
- Follow the Mexican antitrust investigation, former coal-operation claims and other contingencies for potential future accruals.
- Confirm the effect of the 2017 operating-segment reorganization and any revised reporting metrics in subsequent filings.