The Brink’s Company — Q2 2014 Form 10-Q Summary
Business context and reporting period
The Brink’s Company provides transportation and logistics management services for cash and valuables, including cash-in-transit, ATM, global, cash-management, payment, security and guarding services. Operations are reported across Latin America, Europe/Middle East/Africa (EMEA), North America and Asia Pacific. This unaudited Form 10-Q covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $901.5 million | $969.9 million | $1,893.1 million | $1,920.4 million |
| Operating profit (loss) | $10.7 million | $32.8 million | $(61.8) million | $50.1 million |
| Income (loss) from continuing operations attributable to Brink’s | $2.3 million | $13.2 million | $(56.1) million | $16.1 million |
| Diluted EPS from continuing operations | $0.05 | $0.27 | $(1.15) | $0.33 |
| Net income (loss) attributable to Brink’s | $1.6 million | $8.7 million | $(56.9) million | $(7.9) million |
| Cash flow from operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $47.6 million | $41.1 million |
| Capital expenditures | Not separately provided for the quarter | Not separately provided for the quarter | $56.9 million | $78.2 million |
Q2 segment operating profit was $26.1 million, or a 2.9% segment margin, versus $54.4 million and 5.6% in Q2 2013. First-half segment operating loss was $28.4 million, versus $88.7 million of profit in the prior-year period.
At June 30, 2014, cash and cash equivalents were $224.7 million, down from $255.5 million at December 31, 2013. Total debt was $528.1 million, compared with $436.0 million at year-end, and reported net debt was $342.6 million versus $211.8 million. Cash available for general corporate purposes was $185.5 million after excluding cash held in Cash Management Services operations.
The company had $255 million available under its $480 million unsecured revolving credit facility, which matures in January 2017. Management stated that the company was in compliance with its financial covenants and expected available cash, credit facilities and operating cash flow to meet liquidity needs for more than the next twelve months.
Material changes versus prior comparable periods
- Q2 revenue declined 7%, primarily because of unfavorable currency movements, particularly the Venezuelan bolivar devaluation. Organic revenue increased 11% overall, including 26% organic growth in Latin America.
- First-half revenue declined 1%, while operating profit deteriorated by $111.9 million. The principal driver was a $122.2 million Venezuelan net monetary-asset remeasurement loss in 2014, compared with $13.4 million in 2013.
- Latin America reported a first-half operating loss of $76.3 million versus $47.8 million of profit in 2013. EMEA operating profit increased to $32.1 million from $27.3 million, and North America increased to $6.8 million from $4.3 million.
- Q2 2014 included a $4.2 million share-based compensation expense, or $3.4 million after tax, arising from a cumulative accounting adjustment related to the company’s compensation recoupment policy. Prior periods were not materially affected.
- First-half 2014 discontinued-operations loss was $0.8 million, versus $24.0 million in 2013, which included substantial severance costs and results from businesses sold or shut down in 2013.
- Operating cash flow increased $6.5 million year over year, while investing cash use decreased $29.3 million, mainly because there were no comparable acquisitions and capital expenditures were lower. Financing activities provided $74.6 million, primarily through borrowings.
Guidance, outlook, commentary and risks
Management maintained a 2014 GAAP outlook for approximately $3.7 billion of revenue, 8% to 10% organic revenue growth, negative currency impact of 14% to 16%, and an operating segment margin of approximately 2.5%. Non-GAAP segment margin was expected to be approximately 6.5%.
- GAAP Latin America segment margin was expected at negative 1.0% to negative 3.0%; the Non-GAAP range, excluding Venezuela devaluation effects, was 7.0% to 9.0%.
- EMEA margin was expected at 6.0% to 8.0%, North America at 1.5% to 2.5%, and Asia Pacific at 10.5% to 12.5%.
- GAAP effective tax rate was expected to exceed 100% because of nondeductible Venezuelan remeasurement losses; the Non-GAAP rate was expected at 35% to 38%.
- Expected 2014 capital expenditures were $160 million to $170 million, capital leases approximately $15 million, and depreciation and amortization $175 million to $180 million.
Venezuela is the principal unusual item and risk. Beginning March 24, 2014, the company used the SICAD II rate, approximately 50 bolivars per U.S. dollar, instead of the 6.3 official rate. Brink’s stated that it could not consistently obtain U.S. dollars through prior exchange mechanisms and might not have reliable future access to SICAD II. Venezuelan revenue and operating profit were not expected to remain significant components of consolidated results during the last nine months of 2014.
The company contributed $26.2 million to its primary U.S. pension plan in the first half and expected to contribute an additional $61.0 million in the second half. Management was considering settling part of the pension obligation, which could create a significant fourth-quarter 2014 GAAP settlement charge.
Other risks include foreign-exchange volatility, restrictions on cash repatriation, political and economic conditions in foreign markets, labor and regulatory matters, security losses, pricing pressure and lower U.S. cash-in-transit demand, pension and former-coal-operation liabilities, litigation, access to credit markets, information-security risks and the execution of cost and technology initiatives.
In a Mexican legal matter, the company had accrued $3.1 million and estimated that additional reasonably possible losses could be up to $10 million. The ultimate resolution remained uncertain.
Most important facts for investors to verify
- Whether Venezuelan exchange controls, SICAD II access and future bolivar rates produce additional remeasurement losses or restrict operating cash.
- Actual 2014 revenue, segment-margin and cash-flow performance relative to the stated GAAP and Non-GAAP outlook.
- The timing and size of the expected additional $61 million pension contribution and any potential fourth-quarter settlement charge.
- Debt growth, revolving-facility availability, covenant compliance and the company’s ability to fund operations while maintaining dividends.
- The effect of the $4.2 million share-based compensation accounting adjustment and whether further adjustments arise.
- Developments in the Mexican lawsuit, other contingencies and liabilities associated with former coal operations and retirement benefits.
- The company’s ability to improve North American margins amid pricing pressure and lower CIT demand.