The Brink’s Company: Q3 2010 Form 10-Q Summary
Business context and reporting period
The Brink’s Company provides transportation and logistics services for cash and valuables, including armored transportation, ATM replenishment, cash processing, cash logistics, Global Services, Payment Services and guarding. The company operates in more than 50 countries and reports two segments: International and North America.
This filing covers the quarter and nine months ended September 30, 2010. The financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q3 2010 | Q3 2009 | Change | Nine months 2010 | Nine months 2009 | Change |
|---|---|---|---|---|---|---|
| Revenue | $776.1 million | $801.8 million | (3%) | $2,240.9 million | $2,286.2 million | (2%) |
| Operating profit | $44.1 million | $60.9 million | (28%) | $99.4 million | $129.3 million | (23%) |
| Income from continuing operations attributable to Brink’s | $21.7 million | $33.4 million | (35%) | $37.6 million | $71.6 million | (47%) |
| Diluted EPS from continuing operations | $0.45 | $0.70 | (36%) | $0.77 | $1.52 | (49%) |
| Net income attributable to Brink’s | $23.9 million | $34.4 million | (31%) | $37.2 million | $77.7 million | (52%) |
| Operating margin | 5.7% | 7.6% | Down 1.9 points | 4.4% | 5.7% | Down 1.3 points |
Q3 segment operating profit was $58.0 million, compared with $61.7 million in the prior-year quarter. The segment operating margin was 7.5%, compared with 7.7%. International segment operating profit increased to $52.6 million from $51.3 million, while North America declined to $5.4 million from $10.4 million.
The nine-month effective tax rate on continuing operations was 49.5%, compared with 29.4% in 2009. The 2010 rate included a $13.9 million reduction in deferred tax assets related to U.S. healthcare legislation and was partially offset by a $7.9 million non-cash tax benefit from a tax settlement.
Cash flow, liquidity and capital structure
- Cash provided by operating activities was $142.5 million for the first nine months, up from $130.3 million in 2009. Continuing-operations operating cash flow was $152.4 million; discontinued operations used $9.9 million.
- Capital expenditures were $102.5 million, compared with $112.5 million in 2009. Acquisitions used $13.9 million, compared with $74.6 million.
- Cash used in investing activities was $131.1 million. Cash flow before financing activities was positive $11.4 million, compared with negative $55.2 million in 2009.
- Cash used in financing activities was $6.9 million. The company borrowed $56.1 million under long-term revolving facilities and repurchased $33.7 million of common stock.
- Cash and cash equivalents were $148.5 million at September 30, 2010, compared with $143.0 million at December 31, 2009.
- Total debt was $283.9 million, compared with $195.6 million at year-end 2009. Reported net debt was $135.4 million, compared with $52.6 million at year-end 2009; management reported net debt of approximately $145 million excluding Venezuelan cash and debt.
- The $400 million revolving facility had $249.8 million available at September 30, 2010. The company was in compliance with its financial covenants and stated that available cash, credit facilities and projected operating cash flow should satisfy liquidity needs for more than the next 12 months.
- Dividends were $0.10 per common share in each of the first three quarters. The company exhausted its $100 million share-repurchase authorization after purchasing 1,682,845 shares for $33.7 million during the first nine months.
Material changes versus the prior comparable period
- GAAP revenue declined primarily because of unfavorable foreign currency translation, particularly the weaker Venezuelan exchange rate, despite 9% organic revenue growth in the third quarter and 6% growth for the first nine months.
- International GAAP revenue decreased 5% in Q3 and 4% for the first nine months, while North America revenue increased 3% in both comparisons.
- North America operating profit declined 48% in Q3 and 31% for the first nine months, reflecting lower U.S. cash-in-transit demand and pricing pressure.
- Non-segment expense increased materially in GAAP results because 2009 included a $13.9 million gain on acquiring control of an equity-method affiliate. Nine-month 2010 results also lacked approximately $22 million of prior-year gains on asset sales and acquisitions.
- Venezuela was designated highly inflationary effective January 1, 2010. The company recorded a $3.2 million net Venezuelan currency remeasurement loss for the first nine months, including a $4.9 million first-quarter loss and a $1.7 million second-quarter gain.
- The company acquired Est Valeurs S.A. in France and a majority stake in a Russian cash-processing business during 2010.
- The company amended and terminated its former home-security brand licensing agreement. No related royalty income was expected in the fourth quarter of 2010.
- U.S. black lung liabilities increased by $19.3 million after the 2010 healthcare legislation changed eligibility presumptions. The obligation increased from $42.3 million to $61.6 million.
Guidance, outlook, commentary and risks
- For full-year 2010, management expected low-to-mid single-digit organic revenue growth over 2009 non-GAAP revenue of $2.9 billion and a segment operating margin of 6.5% to 7.0%.
- For 2011, management expected low-to-mid single-digit organic revenue growth and a segment margin approximately 50 basis points above the 2010 margin.
- Full-year 2010 capital expenditures were expected to be approximately $145 million to $155 million, with depreciation and amortization of approximately $130 million to $140 million.
- The full-year 2010 effective tax rate was expected to be 47% to 50%; excluding the deferred tax charge associated with healthcare legislation, the expected rate was 36% to 39%.
- Management identified ongoing risks from foreign currency movements, Venezuela’s exchange controls and restricted cash repatriation, inflation, political and economic instability, labor negotiations in Belgium, pricing and volume pressure, fuel costs, security incidents, litigation, insurance recoveries, pension and other retirement obligations, and access to credit markets.
- Venezuelan entities held $6.0 million of U.S.-dollar cash and short-term investments and $15.0 million of bolivar-denominated cash. The exchange-control regime limited approved conversions to $350,000 per legal entity per month and was expected to restrict repatriation for the foreseeable future.
- The company had $41.9 million of residual-value guarantees related primarily to operating leases and was involved in ordinary-course litigation. Management stated that recorded probable and estimable losses were not expected to have a material adverse effect, although some loss ranges could not be estimated.
- Management stated that disclosure controls and procedures were effective and that no material change had occurred in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether organic revenue and segment-margin targets were achieved after excluding Venezuela currency effects and other non-GAAP adjustments.
- The sustainability of North American operating performance amid lower U.S. cash-in-transit volumes and pricing pressure.
- The effect of Venezuelan exchange rates, inflation, cash restrictions and repatriation limits on reported revenue, earnings and liquidity.
- Actual versus projected tax rates, including the healthcare-related deferred tax charge and the tax settlement benefit.
- Debt levels, borrowing costs, facility availability and compliance with financial covenants following the increase in net debt.
- Future pension, UMWA, black lung and other retirement-benefit payments, including changes in actuarial assumptions and legal requirements.
- The outcome of Belgium labor negotiations, pending litigation and the expected recovery of the BAX Global-related legal claim from insurers.