The Brink’s Company — 2017 Second-Quarter Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited quarter and six months ended June 30, 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. Effective February 2017, reporting changed to three operating segments: North America, South America and Rest of World; prior-period segment information was revised accordingly.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $805.9 million, up 9% | $1,594.3 million, up 9% |
| Operating profit | $48.3 million, up 50% | $119.2 million, up from $55.7 million |
| Operating margin | 6.0%, versus 4.4% | 7.5%, versus 3.8% |
| Income from continuing operations attributable to Brink’s | $14.3 million, versus $0.3 million | $49.0 million, versus a $2.8 million loss |
| Diluted EPS from continuing operations | $0.28, versus $0.01 | $0.95, versus $(0.06) |
| Non-GAAP diluted EPS | $0.64, versus $0.39 | $1.21, versus $0.70 |
| Net cash provided by operating activities | Not separately provided in the filing summary | $101.3 million, versus $13.4 million |
GAAP revenue growth reflected strong organic growth, particularly in Venezuela and South America, partly offset by unfavorable foreign-exchange effects. Excluding Venezuela and other items not allocated to segments, non-GAAP revenue was $759.6 million for the quarter and $1,499.9 million for the first half, with non-GAAP operating margins of 7.9% and 7.5%, respectively.
- Segment performance: Second-quarter revenue increased 3% in North America, 20% in South America and decreased 1% in Rest of World. Segment operating profit increased to $16.7 million in North America and $35.7 million in South America, while Rest of World declined to $25.1 million.
- Cash flow and investment: First-half operating cash flow was $101.3 million. Investing cash outflow was $147.5 million, including $71.1 million of capital expenditures and $65.0 million for acquisitions in Brazil, Chile and the U.S. Financing activities provided $77.2 million.
- Liquidity: Cash and cash equivalents were $207.1 million, including $87.7 million of restricted cash. Cash available for general corporate purposes was $188.7 million. Management stated that current cash, available credit and projected operating cash flow should meet liquidity needs for more than the next 12 months.
- Debt: Total debt was $575.1 million, up from $443.2 million at December 31, 2016. Net debt was $360.3 million, up from $247.2 million. The $525 million revolving facility had $361 million available at June 30, 2017. Brink’s was in compliance with all financial covenants.
- Dividends and repurchases: The company paid $0.25 per share in dividends during the first half, versus $0.20 in the prior-year period. A $200 million share-repurchase authorization was approved in May 2017; the entire authorization remained available at quarter-end.
Material changes versus the prior comparable period
- Revenue and operating profit improved materially, driven by organic growth in South America and North America, productivity improvements, price increases and increased service volumes.
- Venezuela contributed significant reported revenue growth but also generated an $8.4 million pretax currency-remeasurement loss in the first half. The Venezuelan bolivar declined to approximately 2,640 per U.S. dollar at June 30, 2017, and the company had received only minimal U.S. dollars through the applicable exchange mechanism.
- Higher incentive compensation increased selling, general and administrative expense by 17% in the second quarter and corporate expenses by 33%.
- Debt increased primarily to fund acquisitions and working-capital needs. Capital expenditures rose $26.1 million year over year, and the company completed three acquisitions for approximately $65 million.
- The effective tax rate on continuing operations declined to 56.0% in the quarter and 36.9% for the first half, compared with 81.0% and 89.2%, respectively, in the prior-year periods. The 2017 first-half rate remained above the U.S. statutory rate largely because of Venezuela-related tax effects and nondeductible currency-devaluation expenses.
- The company early adopted ASU 2017-07 regarding pension-cost presentation and expects the 2018 revenue-recognition standard to have no material impact on consolidated operations or balance sheets, although disclosures will expand.
Guidance, outlook, commentary and risks
- The 2016 restructuring is expected to reduce the global workforce by 800 to 900 positions and produce $8 million to $12 million of cost savings in 2017. Additional restructuring costs of $14 million to $18 million are expected in future periods.
- Cash used for investing activities is expected to increase significantly in the second half of 2017 because of planned acquisitions in Argentina and France. Management expects to fund these payments primarily with additional debt and, to a lesser extent, available cash and short-term investments.
- In July 2017, Brink’s acquired Maco Transportadora de Caudales in Argentina for approximately $209 million. It also signed an exclusive agreement to negotiate the approximately $71 million purchase of the Temis group in France, expected to close in the fourth quarter of 2017 subject to customary conditions.
- Key risks include Venezuelan currency devaluation and restrictions on repatriating cash, foreign-exchange volatility, political and economic conditions in international markets, pricing pressure in France, acquisition integration, leverage and covenant compliance, pension and former coal-operation liabilities, deferred-tax-asset realization, litigation and regulatory matters.
- COFECE, Mexico’s antitrust agency, was investigating potential anti-competitive practices involving Brink’s Mexican subsidiary SERPAPROSA. No proceeding had been initiated, and the potential loss could not be estimated.
- Brink’s is also defending a West Virginia lawsuit involving a former coal-property lease; no loss accrual was recorded because the range of possible loss could not be estimated.
- U.S. retirement obligations remain material. The company expected no additional contributions to its primary U.S. pension plan until 2021 based on current assumptions, but future amounts depend on actuarial assumptions, investment returns and other factors.
Important facts for investors to verify
- Separate the effect of Venezuela’s inflation and currency accounting from underlying operating performance and assess the limited ability to repatriate Venezuelan cash.
- Reconcile GAAP results with management’s non-GAAP measures, particularly adjustments for Venezuela, retirement plans, restructuring and acquisitions.
- Monitor the increase in total and net debt, debt-funded acquisitions, available revolver capacity and compliance with financial covenants.
- Evaluate whether the announced Argentina and France acquisitions close as planned, their final purchase prices and their effect on leverage and cash flow.
- Assess the sustainability of revenue growth, especially inflation-driven price increases in Argentina and Venezuela and pricing pressure in France.
- Track restructuring costs, expected savings and whether incentive compensation continues to pressure corporate expenses.
- Review developments in the Mexican antitrust investigation, former coal-operation litigation and other contingent liabilities.