The Brink’s Company: Q3 2016 Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and nine months ended September 30, 2016. Brink’s provides transportation and logistics management services for cash and valuables, including cash-in-transit, ATM, global logistics, cash management, guarding, and payment services in more than 100 countries. The company reports nine operating segments, including the United States, France, Mexico, Brazil, Canada, three Global Markets regions, and Payment Services.
Financial performance and key metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $755.8 million | $759.2 million | $2,217.1 million | $2,295.6 million |
| Operating profit | $50.0 million | $25.3 million | $85.9 million | $23.6 million |
| Income from continuing operations attributable to Brink’s | $24.5 million | $7.7 million | $21.7 million | $(5.9) million |
| Diluted EPS from continuing operations | $0.48 | $0.16 | $0.43 | $(0.12) |
| Operating margin | 6.6% | 3.3% | 3.9% | 1.0% |
| Net cash provided by operating activities | Not provided for the quarter | Not provided for the quarter | $57.0 million | $90.8 million |
Non-GAAP operating profit was $60.7 million in the third quarter and $129.7 million for the first nine months, compared with $37.0 million and $108.2 million, respectively, in the prior-year periods. Non-GAAP diluted EPS from continuing operations was $0.64 in Q3 and $1.32 year to date, compared with $0.40 and $1.14.
At September 30, 2016, cash and cash equivalents were $191.5 million, restricted cash was $46.8 million, and total assets were $2.02 billion. Total debt was $479.1 million, including $67.0 million of short-term debt and $412.1 million of long-term debt. Reported net debt was $296.3 million, compared with $272.8 million at December 31, 2015. The company had $331 million available under its $525 million revolving facility and was in compliance with all financial covenants.
Total equity was $392.0 million at September 30, 2016, compared with $330.6 million at December 31, 2015. The company paid $14.8 million of dividends to common shareholders during the first nine months, or $0.30 per share.
Material changes versus the prior comparable period
- Q3 revenue was essentially flat year over year, while nine-month revenue declined 3%, primarily because of unfavorable foreign currency movements and dispositions.
- Q3 operating profit nearly doubled, and nine-month operating profit increased substantially, helped by the absence of the $35.3 million Venezuela impairment charge recorded in 2015, lower Venezuela currency-remeasurement losses, organic growth in Latin America and Brazil, and lower corporate expenses.
- Foreign exchange remained a significant headwind. For the first nine months, currency changes reduced revenue by approximately $287.9 million and operating profit by approximately $47.1 million, excluding the effect of Venezuela devaluations.
- Nine-month operating cash flow declined $33.8 million, primarily because of increased working-capital usage, higher tax payments, and a $14.9 million decrease in customer obligations.
- Capital expenditures increased to $72.4 million from $61.2 million, while capital-lease additions increased to $18.9 million from $8.5 million.
- The U.S. generated a nine-month operating loss of $1.5 million, compared with $16.1 million of profit in 2015, due to higher fleet and insurance costs. Mexico operating profit declined 41%, while Brazil and Latin America delivered substantial operating-profit growth.
- Brink’s continued exiting the Republic of Ireland and Northern Ireland. Nine-month exit-related charges included $4.8 million of severance, $2.0 million of property impairments, $0.5 million of lease restructuring charges, and $5.3 million of operating and other exit costs.
Guidance, outlook, commentary, and risks
Management’s 2016 outlook called for GAAP revenue of approximately $2.975 billion, GAAP operating profit of $135 million to $150 million, and GAAP operating margin of 4.5% to 5.0%. Non-GAAP revenue was expected to be approximately $2.9 billion, with non-GAAP operating profit of $185 million to $200 million, non-GAAP operating margin of 6.4% to 6.9%, and non-GAAP diluted EPS from continuing operations of $1.95 to $2.10.
Management expected approximately 8% GAAP organic revenue growth, offset by a roughly 10% negative currency impact. Non-GAAP organic revenue growth was expected at approximately 5%, with a roughly 6% negative currency impact. Capital expenditures were expected at $100 million to $110 million on a GAAP basis, with total fixed-asset additions of $135 million to $145 million including capital leases.
The 2015 restructuring was substantially complete by September 30, 2016, with cumulative pretax charges of approximately $17 million. The program was expected to eliminate approximately 1,100 positions and produce $20 million to $25 million of 2016 cost savings. Executive leadership and board restructuring generated an additional $4.3 million of charges in the first nine months.
- Venezuela remains a major risk because of hyperinflation, currency devaluation, restrictions on currency conversion and repatriation, and limited access to U.S. dollars. The DICOM rate declined 59% from March 31 to approximately 659 bolivars per U.S. dollar at September 30, 2016.
- The company recognized a $4.7 million pretax Venezuela remeasurement loss in the first nine months and retained $112.5 million of accumulated other comprehensive losses attributable to Brink’s shareholders related to Venezuela.
- Management stated that the 2016 non-GAAP tax, earnings, EPS, effective tax rate, and adjusted EBITDA outlook could not be reconciled to GAAP without unreasonable effort because Venezuela results and exchange rates could materially affect the outcome.
- The effective tax rate for continuing operations was 60.1% for the first nine months, compared with 341.3% in 2015. Management expected a 2016 GAAP effective tax rate of approximately 50% and a non-GAAP rate of approximately 39%.
- Brink’s had $157.3 million of cash held by subsidiaries considered permanently invested; repatriation could create additional tax liabilities.
- A Mexican antitrust investigation involving potential anti-competitive practices in the cash-logistics industry could result in future claims or proceedings, although no legal proceeding had been initiated against the subsidiary as of the filing date.
- The company identified significant ongoing exposure to foreign exchange, labor and regulatory conditions, insurance costs, pension and postretirement obligations, deferred-tax-asset realization, litigation, cybersecurity, and access to capital markets.
Important facts for investors to verify
- Whether 2016 GAAP and non-GAAP operating-profit and EPS guidance was achieved, particularly given the filing’s inability to forecast Venezuela’s fourth-quarter impact.
- The sustainability of organic growth in Latin America and Brazil and the recovery plan for U.S. and Mexico profitability.
- Actual cash conversion, working-capital trends, capital spending, and the increase in net debt.
- Changes in Venezuela’s exchange rates, cash repatriation restrictions, operating results, and potential future impairment exposure.
- Progress and final costs of the Ireland exits and leadership restructuring.
- Developments in the Mexican antitrust investigation and other litigation or contingent matters.
- The realizability of deferred tax assets and the potential tax cost of repatriating foreign cash.