BRINKS CO quarterly report, Q1 FY2018

Business Context and Reporting Period

The Brink’s Company provides cash-in-transit, ATM, global logistics, cash management, payment, guarding and other security services in more than 100 countries. Reported segments are North America, South America and Rest of World; Venezuela is excluded from segment results because of restrictions on repatriating funds. This unaudited Form 10-Q covers the three months ended March 31, 2018, compared with the prior-year quarter.

Financial Performance and Position

Metric	Q1 2018	Q1 2017	Change
Revenue	$879.1 million	$788.4 million	12%
Operating profit	$64.8 million	$70.9 million	(9%)
GAAP operating margin	7.4%	9.0%	Down 160 bps
Income from continuing operations attributable to Brink’s	$22.1 million	$34.7 million	(36%)
Diluted EPS from continuing operations	$0.42	$0.67	(37%)
Net income attributable to Brink’s	$22.3 million	$34.7 million	(36%)
Net cash provided by operating activities	$56.8 million	$39.4 million	+$17.4 million

• Non-GAAP revenue was $853.3 million, up 15%, and non-GAAP operating profit was $71.5 million, up 34%. Non-GAAP operating margin improved to 8.4% from 7.2%.
• GAAP results included $3.7 million of restructuring charges, $6.5 million of acquisition and disposition items, and $3.5 million of Venezuela operating profit.
• Cash and cash equivalents were $562.2 million at March 31, 2018, compared with $614.3 million at December 31, 2017. Restricted cash increased to $159.4 million from $112.6 million, primarily reflecting customer cash-supply-chain activity.
• Total debt was $1.256 billion, versus $1.237 billion at year-end 2017. Net debt, excluding restricted cash borrowings and cash unavailable for general corporate purposes, was $681.2 million, up from $611.5 million.
• The company had $1.0 billion available under its revolving credit facility and stated that current cash, borrowing capacity and projected operating cash flow should meet liquidity needs for more than the next twelve months.
• Capital expenditures were $36.7 million, compared with $27.8 million in the prior-year quarter. Dividends increased to $0.15 per share from $0.10.

Material Changes Versus the Prior Comparable Period

• Reported revenue growth was driven by acquisitions and strong organic growth, particularly in South America, but was heavily affected by foreign-exchange movements. Venezuela revenue declined to $25.8 million from $48.1 million because of bolivar devaluation; excluding Venezuela, non-GAAP organic revenue grew 6%.
• Segment operating profit increased to $101.8 million from $74.8 million. North America and South America improved materially, while Rest of World was broadly flat because of weakness in France.
• Consolidated operating profit declined because of unfavorable currency effects, higher corporate expenses, lower Venezuela profit and acquisition-related costs.
• Interest expense increased to $15.0 million from $4.8 million, primarily due to higher borrowing levels following acquisitions and the 2017 refinancing.
• The effective tax rate on continuing operations increased to 31.1% from 26.2%, despite the reduction in the U.S. statutory rate to 21%, reflecting geographic earnings mix and other permanent and non-deductible items.
• Cash flow from operations benefited from a $44.0 million increase in restricted cash held for customers. Management’s non-GAAP operating cash flow, excluding Venezuela and customer-related restricted cash effects, was $13.7 million, essentially unchanged from $13.6 million.
• Effective January 1, 2018, the company adopted new revenue recognition, financial instruments, intra-entity tax-transfer and restricted-cash standards. The revenue standard increased first-quarter reported revenue by $3.0 million, operating profit by $1.0 million and Brink’s net income by $0.6 million relative to the prior accounting method.

Guidance, Outlook, Commentary, Risks and Unusual Items

• Management expects North America margins to improve through productivity initiatives, lower vehicle and labor costs, and increased sales of higher-value services, but does not expect North America to reach South America’s margin levels.
• The 2016 restructuring is expected to reduce the workforce by 800 to 900 positions and produce approximately $20 million of annualized savings when completed. Additional future costs are estimated at $7 million to $9 million. Other restructuring actions are expected to reduce headcount by 200 to 300 positions, generate approximately $4 million of annualized savings and require an additional $1 million to $3 million of costs.
• Cash used for investing activities is expected to increase in subsequent 2018 quarters because of payments for a recently announced Brazil acquisition, expected to be funded largely with available cash.
• Venezuela remains a significant risk: the bolivar declined approximately 93% against the dollar during the first quarter, cash repatriation remains restricted, and the company received no U.S. dollars from Venezuela in 2017 or through the filing date in 2018.
• Argentina contributed approximately 8% of consolidated revenue and faces peso devaluation, high inflation and potential designation as a highly inflationary economy.
• The company has material retirement and legacy-benefit obligations, including UMWA and black-lung liabilities. It projects $33.3 million of 2018 expense related to U.S. retirement liabilities and $7.1 million of payments from Brink’s to U.S. plans.
• The company was in compliance with all financial covenants at March 31, 2018. Contingent consideration related to the Maco Transportadora acquisition had a recognized liability of $29.3 million and potential undiscounted payments of up to approximately $30.3 million.
• The company disclosed lawsuits and claims in the ordinary course of business but stated that pending matters are not reasonably expected to have a material adverse effect on liquidity, financial position or results of operations.
• Management identified continuing material weaknesses in internal control over financial reporting. Accordingly, the CEO and CFO concluded that disclosure controls and procedures were not effective as of March 31, 2018, although management stated that the financial statements fairly present the company’s results.

Most Important Facts for Investors to Verify

• Whether restructuring and North American productivity initiatives deliver the projected cost savings and margin improvement.
• The sustainability of organic growth in Argentina, Brazil, Mexico and other markets after separating inflation and pricing effects from volume growth.
• The effect of further currency devaluation, inflation and possible accounting changes in Venezuela and Argentina.
• Debt reduction plans, interest-rate exposure and compliance with leverage and interest-coverage covenants.
• The amount and timing of cash required for the Brazil acquisition, contingent acquisition payments and other strategic investments.
• The remediation plan and progress for the disclosed material weaknesses in internal controls.
• Updated estimates for retirement, UMWA, black-lung, litigation, insurance and other legacy liabilities.
• The reconciliation between GAAP and non-GAAP results, particularly the treatment of Venezuela, restructuring and acquisition-related items.