The Brink’s Company: 2019 Q3 Form 10-Q Summary
Business context and reporting period
The Brink’s Company provides cash-in-transit, ATM, cash-management, global logistics, payment, guarding and other security services in more than 100 countries. Reportable segments are North America, South America and Rest of World. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $928.4 million | $852.4 million | $2,747.4 million | $2,581.2 million |
| Operating profit | $52.5 million | $67.0 million | $163.5 million | $193.5 million |
| GAAP operating margin | 5.7% | 7.9% | 6.0% | 7.5% |
| Income from continuing operations attributable to Brink’s | $5.8 million | $17.5 million | $32.1 million | $(68.2) million |
| Diluted EPS from continuing operations | $0.11 | $0.34 | $0.63 | $(1.34) |
| Non-GAAP operating profit | $102.4 million | $95.3 million | $276.0 million | $243.0 million |
| Non-GAAP diluted EPS | $1.05 | $0.95 | $2.71 | $2.41 |
GAAP net income attributable to Brink’s was $5.4 million in Q3 and $31.6 million for the first nine months. Operating cash flow was $151.8 million for the first nine months, compared with $148.6 million in the prior-year period. Capital expenditures were $116.0 million and acquisitions used $183.9 million.
At September 30, 2019, cash and cash equivalents were $337.0 million, restricted cash was $89.2 million, total debt was $1.75 billion and net debt, as defined by management, was $1.43 billion. The company reported $782 million of availability under its revolving credit facility and compliance with all financial covenants.
Material changes versus the prior comparable period
- Q3 revenue increased 9%, driven by acquisitions and 7% organic growth, partly offset by $49.3 million of unfavorable currency effects.
- Nine-month revenue increased 6%; acquisitions contributed $263.3 million, while currency effects reduced revenue by $220.1 million.
- GAAP operating profit declined 22% in Q3 and 16% year to date. The decline reflected currency headwinds, higher acquisition-related costs, increased corporate expenses and $11.3 million of net charges related to an internal loss.
- Non-GAAP operating profit increased 7% in Q3 and 14% year to date, indicating improved underlying segment performance despite reported GAAP pressures.
- North America benefited from the Dunbar acquisition and productivity improvements. South America produced strong organic growth but was materially affected by Argentine peso depreciation. Rest of World revenue declined because of currency and prior dispositions, while operating profit was broadly stable.
- Total debt increased from $1.55 billion at December 31, 2018 to $1.75 billion, primarily reflecting acquisition funding and other working-capital needs.
- The company adopted the new lease standard on January 1, 2019, recognizing $269.3 million of operating right-of-use assets and $217.9 million of operating lease liabilities at September 30, 2019. Management stated that adoption did not affect debt-covenant compliance.
Guidance, outlook, risks and unusual items
- Management expects North America’s operating margin to improve through productivity initiatives, lower vehicle and labor costs and greater sales of higher-value services. It expects the margin to become comparable to Rest of World, but not reach South America’s level.
- Restructuring actions are expected to reduce the workforce by 200 to 300 positions and generate approximately $10 million of annualized savings. Additional restructuring costs of $1 million to $3 million are expected.
- An October 2019 pension annuity buy-out is expected to settle approximately $54 million of primary U.S. pension obligations and produce an estimated $20 million settlement charge in the fourth quarter of 2019.
- Argentina remained highly inflationary, with a 35% peso decline during the first nine months and $10.4 million of pretax currency remeasurement losses. Currency controls may restrict dividend repatriation and could continue beyond December 31, 2019.
- Venezuela has been deconsolidated since June 30, 2018 because Brink’s no longer controlled the operations. The company ceased support following U.S. sanctions and does not expect future funding while current sanctions remain in effect.
- A former employee’s embezzlement caused prior-period accounts-receivable records to be reconstructed. Brink’s recorded $13.7 million of bad-debt expense, $3.9 million of reconstruction costs and $4.0 million of previously unrecorded revenue in Q3. Management characterized the net $10.0 million accounting error as immaterial to current and prior periods, but the receivable allowance may change as collection assumptions develop.
- Contingent consideration of up to $15.1 million related to an acquisition was recorded at fair value and was expected to be paid in the fourth quarter of 2019, subject to customer-retention performance.
- Brink’s faces potential claims related to a Chilean antitrust investigation; the filing states that the probability and range of any loss cannot currently be estimated.
- Principal ongoing risks include foreign-exchange volatility, inflation and currency controls, acquisition integration, leverage and interest costs, pension and legacy coal liabilities, litigation, sanctions, labor conditions, cybersecurity and access to capital.
Most important facts for investors to verify
- Whether non-GAAP operating improvement converts into sustained GAAP margin and earnings growth after acquisition, restructuring and internal-loss charges.
- The pace of debt reduction and the effect of higher interest expense on cash flow and covenant headroom.
- Realized synergies and integration costs from Dunbar, Rodoban and other acquisitions.
- The collectability of the reconstructed accounts receivable and any future adjustments to the $13.7 million allowance.
- Currency, inflation and repatriation developments in Argentina and the continuing effect of Venezuela sanctions.
- The actual fourth-quarter pension settlement charge compared with the estimated $20 million.
- The outcome and potential financial exposure of the Chilean antitrust matter and other contingencies.
- Whether the restructuring program achieves the stated 200-to-300 position reduction and approximately $10 million of annual savings.