The Brink’s Company: Q1 2017 Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended March 31, 2017. Brink’s provides transportation and logistics management services for cash and valuables, including cash-in-transit, ATM, global logistics, cash management, payment, and guarding services in more than 100 countries.
Effective February 2017, management reorganized reporting into three operating segments: North America, South America, and Rest of World. Prior-period segment information was revised accordingly. Venezuela results remain excluded from segment results because of currency restrictions, hyperinflation, and limited ability to repatriate or redeploy cash.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $788.4 million | $721.8 million | Up 9% |
| Operating profit | $70.9 million | $23.5 million | Up $47.4 million |
| Income attributable to Brink’s | $34.7 million | $(3.1) million | Improved $37.8 million |
| Diluted EPS from continuing operations | $0.67 | $(0.06) | Improved $0.73 |
| Non-GAAP operating profit | $52.9 million | $32.7 million | Up 62% |
| Non-GAAP diluted EPS | $0.57 | $0.31 | Up 84% |
| Operating cash flow | $26.9 million | $(37.8) million | Improved $64.7 million |
| Capital expenditures | $27.8 million | $20.8 million | Up $7.0 million |
| Net debt | $300.8 million | $247.2 million at Dec. 31, 2016 | Up $53.6 million |
GAAP operating margin was approximately 9.0%, compared with approximately 3.3% in the prior-year quarter. Non-GAAP operating margin was 7.1%, compared with 4.7%.
Cash and cash equivalents were $218.7 million at March 31, 2017, including $70.2 million of restricted cash. Total debt was $528.4 million, consisting of $156.4 million of short-term borrowings and $372.0 million of long-term debt. The company had $369 million available under its $525 million revolving facility and was in compliance with all financial covenants.
Cash flows from investing activities were $(49.2) million, including $27.8 million of capital expenditures and $14.2 million for acquisitions. Financing activities provided $51.3 million, primarily through net borrowings under long-term revolving credit facilities. The quarterly dividend was $0.10 per common share.
Material changes versus the prior comparable period
- Revenue growth was driven by Venezuela, South America, and North America, partially offset by unfavorable currency effects of $103.9 million, including a $110.6 million impact from the Venezuelan bolivar.
- Organic revenue increased 24% on a GAAP basis, primarily from inflation-related price increases in Venezuela and Argentina and growth in U.S. onsite cash recycler sales.
- North America revenue increased 4% and operating profit increased $6.5 million, supported by U.S. productivity improvements, lower security losses and vehicle costs, price increases, and recycler sales.
- South America revenue increased 29% and operating profit increased 63%, primarily due to Argentina organic growth, higher pricing and volume in Brazil, and favorable Brazilian real currency effects.
- Rest of World revenue declined 2% because of dispositions and currency effects, while operating profit increased 38%, led by Asia.
- Venezuela generated $48.1 million of revenue and $21.1 million of operating profit, compared with $32.1 million and $2.7 million, respectively, in Q1 2016. The results benefited from inflation-based price increases but remain exposed to currency restrictions and devaluation.
- Operating profit also benefited from the absence of prior-year Ireland exit losses. Corporate expenses increased by $8.2 million, primarily due to higher bad-debt expense, foreign currency transaction losses, security losses, and share-based compensation.
- Operating cash flow improved substantially, but non-GAAP operating cash flow, excluding Venezuela and certain customer cash obligations, was $13.6 million versus $(31.0) million in Q1 2016.
- Total assets increased to $2.16 billion from $1.99 billion at December 31, 2016, while total equity increased to $421.2 million from $354.8 million, helped by net income and foreign currency translation gains.
Guidance, outlook, commentary, risks, and unusual items
- Management expects the 2016 restructuring program to generate $8 million to $12 million of cost savings in 2017, but expects additional future restructuring costs of $15 million to $20 million, primarily severance. The program is expected to reduce the global workforce by 800 to 900 positions.
- Management stated that current cash, available credit facilities, and projected operating cash flows should satisfy liquidity needs for more than the next twelve months.
- The filing does not provide clear full-year revenue or EPS guidance.
- In April 2017, Brink’s acquired Pag Facil, a Brazil-based payment-services business. Pag Facil generated approximately $30 million of revenue in 2016; purchase accounting impacts were not yet provided.
- Venezuela remains a significant unusual item and risk. Brink’s had $15.0 million of bolivar-denominated cash at March 31, 2017, had not repatriated U.S. dollars from Venezuela in 2016 or 2017 to date, and recognized a $0.3 million pretax currency-remeasurement loss in Q1 2017.
- Cash held outside the United States included $186.4 million considered permanently invested. Repatriation could result in material additional taxes.
- Material contingencies include a Mexican antitrust investigation involving SERPAPROSA and litigation concerning a former coal-related lease. The company could not estimate a probable loss or range for either matter.
- Retirement liabilities remain significant. Accrued pension costs were $210.3 million and other retirement benefits were $285.3 million at March 31, 2017. No contributions were made to the primary U.S. pension plan in Q1, and management did not expect additional contributions until 2021 under current assumptions.
- The company early adopted ASU 2017-07, which reclassified pension and postretirement cost components and changed certain prior-period expense classifications without affecting prior-year net income.
- Key ongoing risks include foreign currency volatility, Venezuela and other government restrictions, foreign-country political and economic conditions, labor and security risks, debt covenant compliance, deferred tax asset realization, retirement obligations, litigation, acquisitions, and cybersecurity.
Important facts for investors to verify
- Whether reported profit growth is sustainable after separating Venezuela inflation and currency effects, restructuring benefits, Ireland exit comparisons, and other non-GAAP adjustments.
- The composition and future availability of cash, particularly restricted cash and funds held by foreign subsidiaries.
- Debt repayment requirements, revolving-facility availability, leverage trends, and covenant headroom after the increase in net debt.
- The timing and total cost of the restructuring program and whether the projected $8 million to $12 million of 2017 savings is achieved.
- Venezuela’s ability to obtain foreign currency, repatriate cash, and maintain operations under continuing devaluation and government restrictions.
- The financial impact and integration progress of the Pag Facil acquisition.
- Potential exposure from the Mexican antitrust investigation, former coal-related litigation, black lung obligations, UMWA plans, and other retirement liabilities.
- The company’s future tax rate, including the effect of share-based compensation benefits, foreign earnings, deferred tax assets, and any future cash repatriation.