The Brink’s Company: Q3 2020 Form 10-Q Summary
Business context and reporting period
The filing covers the three and nine months ended September 30, 2020. Brink’s provides cash-in-transit, ATM, cash management, global logistics, payment, guarding and other security services through North America, South America and Rest of World segments. Results were materially affected by COVID-19-related reductions in commerce, customer volumes and service demand, as well as the acquisition of substantially all targeted G4S cash-management operations.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $970.5 million | $928.4 million | $2,669.3 million | $2,747.4 million |
| Operating profit | $76.4 million | $52.5 million | $101.6 million | $163.5 million |
| GAAP operating margin | 7.9% | 5.7% | 3.8% | 6.0% |
| Net income attributable to Brink’s | $(23.9) million | $5.4 million | $(9.2) million | $31.6 million |
| Diluted EPS | $(0.48) | $0.10 | $(0.18) | $0.62 |
| Continuing-operations diluted EPS | $(0.47) | $0.11 | $(0.17) | $0.63 |
| Non-GAAP operating profit | $99.9 million | $102.4 million | $236.2 million | $276.0 million |
| Non-GAAP diluted EPS from continuing operations | $0.86 | $1.05 | $2.05 | $2.72 |
Q3 revenue increased 5%, but organic revenue declined 9% after excluding acquisitions, dispositions and currency effects. Nine-month revenue declined 3% on a reported basis and 8% organically. Q3 operating profit rose 46%, while nine-month operating profit fell 38%. The Q3 GAAP loss included a $58.9 million income-tax provision on $36.5 million of pretax income, producing a 161.4% effective tax rate. The nine-month pretax result was approximately breakeven and the effective tax rate was not meaningful.
For the first nine months, operating cash flow was $87.4 million, compared with $151.8 million in 2019. Cash used in investing activities was $513.5 million, including $427.1 million for acquisitions and $79.1 million of capital expenditures. Financing activities provided $749.2 million, principally through additional debt borrowings. Cash, cash equivalents and restricted cash totaled $795.4 million at September 30, 2020, including $592.4 million of unrestricted cash and cash equivalents.
Balance sheet, debt and liquidity
- Total debt was $2.5276 billion at September 30, 2020, compared with $1.6436 billion at December 31, 2019.
- Net debt was $1.9579 billion, up from $1.3486 billion, primarily reflecting acquisition funding and other working-capital needs.
- Long-term debt included $1.3094 billion of term loans, $986.9 million of senior unsecured notes, $62.1 million drawn on the revolving facility and $146.2 million of financing leases.
- The revolving credit facility had $938 million available. Brink’s was in compliance with all debt covenants at September 30, 2020.
- Management stated that existing cash, operating cash flow and available credit should meet liquidity needs for the next 12 months, but this assessment excludes a potential material worsening of COVID-19 or other economic conditions.
- The company paid $0.45 per share in dividends during the first nine months and declared another $0.15 quarterly dividend payable December 1, 2020. It also repurchased $50 million of stock through an accelerated share repurchase arrangement, with $200 million remaining under the authorized program.
Material changes versus the prior comparable period
- G4S acquisitions contributed $156.1 million of Q3 revenue and $5.2 million of attributable net income; aggregate purchase consideration for 2020 G4S acquisitions was $719.7 million through September 30.
- Rest of World Q3 revenue rose 58% to $394.4 million and operating profit rose 69% to $54.3 million, primarily due to acquisitions. Organic revenue nevertheless declined 12%.
- North America Q3 revenue declined 10% and South America revenue declined 25%, primarily from lower COVID-19-related volumes and unfavorable currency effects.
- Nine-month restructuring costs increased to $49.7 million from $20.5 million. Management expects an additional $9 million to $11 million of costs for incomplete restructuring actions and expects eventual annualized savings of $20 million to $25 million.
- Interest expense increased to $70.3 million from $68.6 million for the first nine months because of higher borrowing levels.
- Goodwill increased to $1.1844 billion from $784.6 million and other intangibles increased to $419.8 million from $272.5 million, principally reflecting acquisitions. The June 2020 impairment test found no impairment, but the France reporting unit had only an 8% fair-value cushion over carrying value.
Guidance, outlook, risks and unusual items
Management did not provide a specific full-year revenue or earnings guidance figure in the filing. It expects COVID-19 to continue negatively affecting volumes, revenue and operating results while the pandemic persists. Cost actions included headcount reductions, furloughs, overtime and benefit reductions, lower discretionary spending, reduced capital expenditures and working-capital management.
- Argentina remains highly inflationary and subject to currency controls. Brink’s recognized a $10.4 million Q3 loss from converting Argentine pesos through less favorable market mechanisms and $5.3 million of pretax currency-remeasurement loss for the first nine months.
- An internal embezzlement and related accounts-receivable subledger issues resulted in an additional $9.6 million allowance in the first nine months. At September 30, 2020, $18.2 million was reserved against $18.8 million of affected receivables.
- COVID-19 creates risks to customer demand, employee availability, collections, acquisitions and integration, capital-market access, liquidity and asset valuations, including goodwill and deferred tax assets.
- Other risks include foreign-exchange volatility, restrictions on repatriating foreign cash, Venezuela sanctions, declining use of cash, labor and regulatory matters, pension and black-lung obligations, litigation and the Chilean antitrust investigation. The filing does not provide a loss estimate for the Chile matter.
- Brink’s reported no material change in market-risk exposures and concluded that disclosure controls were effective as of September 30, 2020.
Investor verification points
- Verify the durability of organic revenue and operating-profit trends after separating G4S acquisition benefits, currency effects and COVID-19 assistance.
- Monitor leverage, debt maturities, covenant headroom, revolving-credit availability and the effect of continued acquisition spending on liquidity.
- Assess whether restructuring savings offset ongoing pandemic-related volume pressure and whether the remaining $9 million to $11 million of restructuring costs are realized as expected.
- Review goodwill impairment sensitivity, particularly for the France reporting unit, if pandemic-related forecasts deteriorate.
- Track Argentina currency controls, conversion losses and the ability to repatriate cash.
- Evaluate collectability of receivables associated with the internal loss and any future allowance changes.
- Confirm the timing and funding requirements of pension, UMWA and black-lung obligations, as well as outcomes of pending legal and regulatory matters.