Business Context and Reporting Period
The Brink’s Company provides cash-in-transit, ATM, global logistics, cash management, payment, security and guarding services in more than 100 countries. This unaudited Form 10-Q covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013. The company reports four geographic segments: Latin America, EMEA, North America and Asia Pacific.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $991.6 million | $950.5 million | +4% |
| Operating profit (loss) | $(72.5) million | $17.3 million | $(89.8) million |
| Operating margin | (7.3%) | 1.8% | Down 9.1 percentage points |
| Income (loss) from continuing operations attributable to Brink’s | $(58.4) million | $2.9 million | Unfavorable |
| Diluted EPS from continuing operations | $(1.19) | $0.06 | Unfavorable |
| Net income (loss) | $(87.7) million | $(12.9) million | Unfavorable |
| Cash flow from operating activities | $30.6 million | $3.3 million | +$27.3 million |
| Capital expenditures | $24.3 million | $33.4 million | $(9.1) million |
| Interest expense | $5.8 million | $5.9 million | Down 2% |
Cost of revenues was $795.6 million, compared with $792.6 million, while selling, general and administrative expense increased to $145.4 million from $131.9 million. The principal unusual item was a $121.9 million Venezuelan currency remeasurement loss, compared with $13.4 million in Q1 2013.
Segment Performance
| Segment | Q1 2014 Revenue | Q1 2014 Operating Profit (Loss) | Q1 2013 Operating Profit (Loss) |
|---|---|---|---|
| Latin America | $438.4 million | $(74.8) million | $23.4 million |
| EMEA | $298.0 million | $14.8 million | $8.6 million |
| North America | $220.1 million | $1.1 million | $(2.0) million |
| Asia Pacific | $35.1 million | $4.4 million | $4.3 million |
On a non-GAAP basis, excluding Venezuelan remeasurement losses, selected retirement costs and other items, operating profit was $56.3 million versus $43.3 million, and diluted EPS from continuing operations was $0.43 versus $0.38.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $201.5 million at March 31, 2014, down from $255.5 million at December 31, 2013. The decline included a $96.2 million unfavorable effect from exchange-rate changes.
- Total debt was $480.9 million, compared with $436.0 million at year-end 2013. Net debt was $316.2 million, compared with $211.8 million.
- Cash available for general corporate purposes was $164.7 million after excluding cash held for Cash Management Services operations.
- The $480 million unsecured revolving facility had $289 million available at March 31, 2014. The company also had $37 million available under three multi-currency facilities and $24 million available under another committed facility.
- The company stated that it was in compliance with all financial covenants and expected available cash, credit capacity and operating cash flow to satisfy liquidity needs for more than the next twelve months.
- Cash paid for dividends was $4.8 million, or $0.10 per common share, consistent with Q1 2013.
Material Changes Versus the Prior Comparable Period
- Revenue increased 4%, primarily from organic growth in Latin America and EMEA, partly offset by unfavorable currency translation.
- GAAP operating results deteriorated sharply because the Venezuelan remeasurement loss increased by $108.5 million year over year. Venezuela’s results were remeasured using the SICAD II rate beginning March 24, 2014.
- Latin America revenue rose 6%, but the segment moved from a $23.4 million operating profit to a $74.8 million operating loss. Excluding unusual currency effects, management reported stronger organic performance in Venezuela, Brazil and Argentina.
- EMEA operating profit increased 72%, helped by lower security costs and higher volumes in Global Services, Russia and Ireland.
- North America moved to a $1.1 million operating profit from a $2.0 million loss, reflecting lower security and pension costs and cost-efficiency actions, despite lower CIT demand and pricing pressure.
- Q1 2013 included an $18.7 million security loss related to a Brussels robbery; this did not recur in Q1 2014.
- Discontinued operations produced a $0.1 million loss in Q1 2014 versus a $19.5 million loss in Q1 2013.
- Operating cash flow improved to $30.6 million, while investing cash use fell to $28.6 million from $45.3 million, primarily because Q1 2013 included $19.0 million of acquisition spending.
Guidance, Outlook, Risks and Unusual Items
- Management projected 2014 revenue of approximately $3.7 billion, organic revenue growth of 8% to 10%, and a GAAP operating segment margin of approximately 3%.
- Full-year currency effects were expected to reduce revenue by 14% to 16%, including a 32% to 36% negative impact in Latin America.
- Non-GAAP operating segment margin was expected to be approximately 6.5%; non-GAAP diluted EPS and full-year net income attributable to Brink’s were not provided as explicit guidance.
- Management expected 2014 GAAP tax expense to exceed pretax continuing income, producing a tax rate above 100%, largely because the Venezuelan remeasurement loss is substantially nondeductible. The non-GAAP tax rate was expected to be 36% to 39%.
- Management did not expect Venezuela to be a significant contributor to consolidated revenue or operating profit during the last nine months of 2014. Venezuelan equity-method investment declined from $125.3 million to $66.6 million, and bolivar-denominated net monetary assets declined from $120.4 million to $23.5 million.
- The company expects to contribute an additional $22.5 million to its primary U.S. pension plan during the remainder of 2014. Estimated future contributions to that plan totaled $106.1 million based on year-end 2013 assumptions.
- Material risks include Venezuelan currency controls and devaluation, inability to obtain or repatriate U.S. dollars, foreign-exchange volatility, political and labor conditions, security losses, pricing pressure, pension funding requirements, access to credit, litigation and contingencies related to former operations.
- In a Mexican legal proceeding, the company accrued $3.1 million and stated that additional reasonably possible losses could be up to $10 million, based on March 31, 2014 exchange rates.
Important Facts for Investors to Verify
- Whether Venezuela’s SICAD II exchange process remains accessible and what exchange rate is used in subsequent reporting periods.
- The sustainability of reported non-GAAP operating improvement after excluding Venezuelan currency losses, retirement costs and other adjustments.
- Actual cash generation, debt levels and revolving-facility availability as Venezuelan cash balances and reported net debt remain volatile.
- Progress toward the 2014 revenue, segment-margin and capital-expenditure outlook.
- Required pension contributions, the funded status of U.S. retirement plans and related cash demands.
- The outcome and potential additional exposure from the Mexican legal proceeding and other contingencies.
- The extent to which foreign-exchange controls, repatriation restrictions and local-currency devaluations affect liquidity and reported results.