The Brink’s Company: FY2012 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2012, with comparative information for 2011 and 2010. Brink’s provides cash-in-transit, ATM servicing, global valuables logistics, cash-management, payment-processing, guarding and other security services in more than 100 countries. International operations generated 75% of revenue and 88% of segment operating profit. The company employed approximately 70,000 people and operated approximately 1,100 facilities and 13,300 vehicles.
The filing also provides unaudited quarterly data. Fourth-quarter 2012 revenue was $1,006.5 million, segment operating profit was $72.0 million, operating profit was $50.7 million and net income attributable to Brink’s was $27.9 million.
Financial performance and key metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $3,842.1 million | $3,766.3 million | Up 2% |
| Segment operating profit | $260.1 million | $259.3 million | Flat |
| Segment operating margin | 6.8% | 6.9% | Down 0.1 point |
| Operating profit | $171.2 million | $199.5 million | Down 14% |
| Income from continuing operations attributable to Brink’s | $106.8 million | $96.5 million | Up 11% |
| Net income attributable to Brink’s | $88.9 million | $74.5 million | Up 19% |
| Diluted EPS from continuing operations | $2.20 | $2.01 | Up 9% |
| Diluted net EPS | $1.83 | $1.55 | Up 18% |
| Cash flow from operating activities | $250.5 million | $247.0 million | Up $3.5 million |
| Capital expenditures | $184.5 million | $192.0 million | Down $7.5 million |
Revenue growth was driven by 7% organic growth, primarily from higher prices and inflation-related increases in Latin America, but was substantially offset by $195.6 million of unfavorable currency effects and a $23.6 million organic decline in North America revenue.
- International: Revenue was $2,896.7 million and segment operating profit was $227.6 million. Latin America revenue increased 8%; EMEA revenue decreased 2% on a reported basis but grew 6% organically; Asia-Pacific revenue increased 3%.
- North America: Revenue decreased 3% to $945.4 million, primarily due to U.S. cash-in-transit volume and pricing pressure. Segment operating profit increased to $32.5 million, supported by cost reductions.
- Taxes: The continuing-operations effective tax rate declined to 17.4% from 34.7%, largely because of a $21.1 million non-cash tax benefit related to a retiree healthcare funding strategy and a $7.5 million benefit related to Mexican tax positions.
- Non-GAAP results: Adjusted diluted EPS from continuing operations was $2.31 versus $2.32 in 2011. Adjusted operating profit was $225.6 million versus $226.6 million.
Liquidity, debt and capital resources
- Cash and cash equivalents were $201.7 million at December 31, 2012, compared with $182.9 million at year-end 2011.
- Total debt was $389.3 million, substantially unchanged from $389.4 million. Net debt, after excluding cash held for customers, was $231.6 million, also unchanged.
- Cash available for general corporate purposes was $157.7 million after excluding $44.0 million held temporarily in Cash Management Services operations.
- The company had $373 million available under its $480 million unsecured revolving facility, which matures in January 2017.
- Total equity increased to $576.8 million from $482.4 million. Debt represented 40% of capitalization, compared with 45% in 2011.
- Financing activities used $68.0 million, including $22.9 million of net debt repayments, $19.0 million of shareholder dividends and $13.0 million of dividends to noncontrolling interests.
- Quarterly dividends remained $0.10 per share; the annual dividend was $0.40 per share.
Management stated that available cash, credit capacity and projected operating cash flow should meet liquidity needs for more than the next twelve months. The company was in compliance with all financial covenants at December 31, 2012.
Material changes versus the prior comparable period
- Revenue increased modestly despite significant foreign-exchange headwinds; organic revenue growth was strong internationally but North America declined.
- GAAP operating profit declined because of $28.2 million of higher U.S. retirement-plan expense, $14.9 million of unfavorable currency impact and the absence of a $6.7 million 2011 gain on the sale of the U.S. Document Destruction business.
- International organic operating improvement and a $7.2 million gain on Venezuelan real estate partly offset these pressures.
- Income and EPS increased primarily because of lower tax expense, despite lower operating profit.
- The company acquired French logistics-software provider Kheops for approximately $17 million in January 2012.
- Brink’s completed the divestiture of guarding operations in Morocco and agreed to sell cash-in-transit operations in Germany and Poland and event-security operations in France. The France transaction closed in January 2013; Germany and Poland were expected to close in the first half of 2013.
- Brink’s contributed $9.0 million of newly issued common stock to its primary U.S. pension plan and paid $13.4 million in cash contributions during 2012.
Guidance, outlook, risks and unusual items
For 2013, management forecast organic revenue growth of 5% to 8%, with foreign-exchange effects reducing reported revenue by approximately 1% to 3%. GAAP segment margin was expected at 5.0% to 5.5%, compared with 6.8% in 2012. Non-GAAP segment margin was expected at 6.0% to 6.5%. Management expected International organic growth of 7% to 9%, North America organic growth of 0% to 2%, North America margins to be flat to down and European margins to decline.
- Management expected 2013 GAAP effective tax rate of 44% to 47%, versus 17.4% in 2012, mainly because of an anticipated nondeductible Venezuelan remeasurement loss. Non-GAAP tax rate guidance was 36% to 39%.
- 2013 interest expense was expected at $27 million to $29 million, compared with $23.8 million in 2012.
- Following Venezuela’s February 2013 currency devaluation and elimination of the SITME exchange process, management estimated a first-quarter 2013 pretax remeasurement loss of approximately $10 million to $11 million. Venezuela represented 9% of 2012 revenue, and $47.9 million of Venezuelan cash was denominated in bolivars and not expected to be available for general corporate purposes.
- The primary U.S. pension plan was approximately 74% funded at year-end 2012. Required contributions were estimated at $239 million over 2013 through 2021, including $13 million in 2013.
- Retirement liabilities remained significant, including $397.8 million of accrued pension costs, $304.6 million of other retirement-benefit liabilities and $854 million of actuarial losses in accumulated other comprehensive income.
- U.S. deferred tax assets totaled $363 million and depend on projected improvement in U.S. operating margins. Failure to achieve those projections could require additional valuation allowances.
- Key risks include foreign-exchange and political risk, currency restrictions, inflation, reduced use of cash, competitive pricing pressure, losses of customer valuables, cybersecurity and IT disruption, regulatory and labor matters, insurance availability, pension funding, legacy coal obligations and debt-covenant compliance.
- Discontinued operations generated a $17.9 million net loss in 2012, including losses from European operations being exited and liabilities related to former operations.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective as of December 31, 2012.
Investor verification checklist
- Verify the sustainability of organic international growth after adjusting for inflation-driven pricing and foreign-currency effects.
- Reconcile GAAP and non-GAAP earnings, particularly the effects of U.S. retirement costs, tax benefits, Venezuelan items and European operations being exited.
- Assess the impact of the 2013 Venezuelan devaluation on revenue, earnings, cash accessibility and potential additional losses.
- Review pension, UMWA healthcare and other legacy obligations, including the estimated $239 million of primary U.S. pension contributions.
- Confirm liquidity after considering restricted or permanently reinvested foreign cash, customer-held cash, debt maturities, leases, letters of credit and pension funding.
- Monitor North American pricing and cash-in-transit volumes, European restructuring and the completion of planned divestitures.
- Evaluate whether the company can realize its $363 million of U.S. deferred tax assets and maintain compliance with debt covenants.