The Brink’s Company: First-Quarter 2019 Form 10-Q Summary
Business context and reporting period
The Brink’s Company provides cash-in-transit, ATM, cash-management, payment, global logistics, guarding and other security services in more than 100 countries. Reportable segments are North America, South America and Rest of World. This filing covers the three months ended March 31, 2019, compared primarily with the three months ended March 31, 2018.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $905.0 million | $879.1 million | 3% |
| Operating profit | $58.4 million | $64.8 million | (10%) |
| GAAP operating margin | 6.5% | 7.4% | Down 90 bps |
| Income from continuing operations attributable to Brink’s | $13.7 million | $22.1 million | (38%) |
| Diluted EPS from continuing operations | $0.27 | $0.42 | (36%) |
| Non-GAAP operating profit | $84.8 million | $71.5 million | 19% |
| Non-GAAP diluted EPS from continuing operations | $0.79 | $0.68 | 16% |
| Cash flow from operating activities | $(38.0) million | $56.8 million | Down $94.8 million |
| Capital expenditures | $35.2 million | $36.7 million | Down $1.5 million |
| Cash used for acquisitions | $129.9 million | — | New in 2019 |
Net income was $14.5 million versus $25.5 million in the prior-year quarter. Interest expense increased to $23.0 million from $15.0 million, primarily due to higher borrowings associated with acquisitions. The effective tax rate increased to 40.1% from 31.1%.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $283.2 million at March 31, 2019, compared with $343.4 million at December 31, 2018. Total cash, cash equivalents and restricted cash were $380.3 million.
- Total debt was $1.689 billion, up from $1.554 billion at year-end 2018. Net debt, excluding restricted cash borrowings and cash unavailable for general corporate purposes, was $1.421 billion, up $207 million.
- Available capacity under the $1 billion revolving credit facility was $853 million. The company was in compliance with all financial covenants at March 31, 2019.
- Operating cash flow was negative, while financing activities provided $106.6 million, primarily through net debt borrowings. Investing cash flow used $164.2 million.
- The company paid a quarterly dividend of $0.15 per share, or $7.4 million. Approximately $106 million remained available under the share-repurchase program, which expires December 31, 2019.
Material changes versus the prior comparable period
- Revenue increased $25.9 million, reflecting $100.0 million from acquisitions and organic growth in North America and South America, partly offset by $96.7 million of unfavorable currency effects and the absence of $25.8 million of previously consolidated Venezuela revenue.
- North America revenue rose 36% to $434.5 million, primarily due to the Dunbar acquisition and 6% organic growth. Segment operating profit increased to $44.0 million from $20.6 million.
- South America revenue declined 10% to $230.3 million because of currency depreciation, despite 12% organic growth and the Rodoban acquisition. Segment operating profit declined 23% to $43.0 million.
- Rest of World revenue declined 14% to $240.2 million because of dispositions, currency effects and modest organic contraction. Segment operating profit declined 7% to $23.8 million.
- GAAP operating profit was reduced by $26.4 million of items not allocated to segments, including $17.2 million of acquisition and disposition costs, $4.3 million of Argentina highly inflationary accounting effects, $3.5 million of restructuring costs and $1.4 million of reporting-compliance costs.
- Non-GAAP results improved after excluding specified acquisition, restructuring, retirement-plan, Argentina, Venezuela and reporting-compliance items; management reported a 9.4% non-GAAP operating margin versus 8.4% in Q1 2018.
Guidance, outlook, commentary and risks
- Management expects North America’s operating profit margin to improve through productivity initiatives, lower vehicle and labor expenses, higher-value services and Dunbar synergies, although it does not expect the margin to reach South America’s level.
- Current restructuring actions are expected to reduce the workforce by 150 to 250 positions and generate approximately $8 million of annualized cost savings. Additional restructuring costs of $4 million to $6 million are expected.
- Management believes current cash and available credit capacity will meet liquidity needs for the foreseeable future, but liquidity is affected by acquisitions, working capital, debt service, dividends and share repurchases.
- Argentina remains highly inflationary for accounting purposes. The Argentine peso declined approximately 13% during Q1 2019, and Brink’s recognized a $3.9 million pretax currency-remeasurement loss.
- Venezuela was deconsolidated effective June 30, 2018. Brink’s continues to face restrictions on repatriating funds and operational limitations and may incur additional costs related to sanctions, regulatory compliance or financial support.
- Key risks include foreign exchange volatility, inflation, political and regulatory conditions, restrictions on cash repatriation, labor and operating costs, acquisition integration, leverage and interest rates, pension and legacy coal liabilities, litigation, insurance exposure and cybersecurity or IT risks.
- An antitrust investigation by Chile’s competition authority concerns potential anti-competitive practices in the cash-logistics industry. The company could not estimate the probability or range of any loss.
Accounting and unusual items
- Brink’s adopted lease accounting standard ASU 2016-02 on January 1, 2019, recognizing $310.1 million of right-of-use assets and $320.3 million of lease liabilities at adoption. The adoption did not affect reported operating results or cash flows and did not affect debt-covenant compliance.
- Brink’s acquired Rodoban in Brazil for approximately $131 million on January 4, 2019. Rodoban contributed $18.6 million of Q1 revenue and $0.6 million of attributable net income.
- Acquisition-related costs included $6.4 million of acquired-intangible amortization, $4.6 million of Dunbar integration costs, $2.5 million of acquisition-related restructuring costs and $1.7 million of Brazil prepaid-mobile-business exit costs.
Most important facts for investors to verify
- Whether North American productivity improvements and Dunbar synergies offset integration costs and sustain the reported organic growth.
- Whether operating cash flow normalizes after the unfavorable working-capital and restricted-cash movements in Q1.
- Debt reduction progress, interest expense sensitivity and compliance with leverage and interest-coverage covenants.
- The effect of further Argentine peso depreciation, inflation and other foreign-currency movements on revenue, margins and cash generation.
- The ultimate financial and regulatory consequences of the Venezuela situation and the Chilean antitrust investigation.
- Whether restructuring investments deliver the expected $8 million of annualized savings and whether additional costs remain within the projected $4 million to $6 million range.
- Actual acquisition performance and the final purchase-price allocation for Rodoban and other recent acquisitions.