The Brink’s Company 2014 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2014, including fourth-quarter results. Brink’s provides secure logistics and security services, including cash-in-transit, ATM replenishment and maintenance, cash management, secure transportation of valuables, payment services and guarding. Operations span more than 100 countries, with approximately 64,100 employees, 1,100 facilities and 12,300 vehicles. Approximately 80% of revenue and 94% of operating profit before unallocated items were generated outside the United States.
Beginning in 2014, the Company reported nine operating segments: the United States, France, Mexico, Brazil, Canada, Latin America, EMEA, Asia and Payment Services.
Key financial metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $3,562.3 million | $3,778.6 million | Down 6% |
| GAAP operating profit (loss) | $(27.5) million | $163.2 million | Unfavorable |
| GAAP operating margin | (0.8%) | 4.3% | Down approximately 5.1 points |
| Income (loss) from continuing operations attributable to Brink’s | $(54.8) million | $66.0 million | Unfavorable |
| Diluted EPS from continuing operations | $(1.12) | $1.35 | Unfavorable |
| Net income (loss) attributable to Brink’s | $(83.9) million | $56.8 million | Unfavorable |
| GAAP operating cash flow | $141.3 million | $201.5 million | Down $60.2 million |
| Capital expenditures | $136.1 million | $172.9 million | Down $36.8 million |
| Total debt | $466.8 million | $436.0 million | Up $30.8 million |
| Cash and cash equivalents | $176.2 million | $255.5 million | Down $79.3 million |
| Net debt | $318.6 million | $211.8 million | Up $106.8 million |
| Total equity | $473.8 million | $779.5 million | Down $305.7 million |
Non-GAAP operating profit was $169.0 million, compared with $227.3 million in 2013, and non-GAAP diluted EPS from continuing operations was $1.49, compared with $2.13. Non-GAAP operating margin was approximately 4.7% in 2014.
Operating cash flow before pension contributions was $207.6 million, essentially unchanged from $207.2 million in 2013. The Company contributed $87.2 million to its primary U.S. pension plan, compared with $13.0 million in 2013. Investing cash outflow was $94.0 million, while financing activities provided $3.3 million. Dividends to Brink’s shareholders were $19.4 million, or $0.40 per share.
At December 31, 2014, the Company had $247 million available under its $480 million unsecured revolving facility, approximately $20 million available under multi-currency facilities, $24 million available under another committed facility and approximately $72 million available under letter-of-credit facilities. Management stated that current cash, borrowing capacity and projected operating cash flow should meet liquidity needs for more than the next twelve months.
Material changes versus the prior comparable period
- Revenue declined $216.3 million, primarily because of $740.3 million of unfavorable currency effects, including Venezuela, partly offset by $524.0 million of organic revenue growth.
- GAAP operating profit fell $190.7 million. Major adverse items included $206.6 million of currency effects, $21.8 million of restructuring charges, $20.2 million of higher U.S. pension costs and a $16.6 million organic profit decline in Mexico.
- Venezuela adopted the SICAD II exchange rate in March 2014. The change produced a $121.6 million remeasurement loss and $21.1 million of additional expense from higher historical bases of nonmonetary assets.
- Organic revenue and operating profit improved in the United States. U.S. revenue increased 3% to $727.8 million and operating profit increased 78% to $22.8 million.
- Mexico revenue declined 8% and operating profit declined 64% to $9.6 million, reflecting the loss of a major customer, currency effects and higher insurance costs.
- Payment Services revenue increased 76% to $96.6 million, but the segment recorded a $4.9 million operating loss due partly to U.S. marketing investments.
- The Company sold its noncontrolling interest in a Peruvian cash-in-transit business for approximately $60 million and recognized a $44.3 million gain.
- The Netherlands cash-in-transit business, which generated $126 million of 2014 revenue, was sold in December 2014 after the loss of a major customer. Australia and Puerto Rico cash-in-transit operations were also sold or shut down during 2014.
- Total equity declined substantially because of Venezuelan currency effects, lower discount rates and updated mortality assumptions for retirement obligations.
Guidance, outlook, commentary and unusual items
Management expected 2015 organic revenue growth of approximately 6%, or $200 million, versus 2014 Adjusted Non-GAAP results, offset by an estimated $250 million, or 7%, negative currency impact. Total 2015 revenue was expected to decline approximately 1% to about $3.4 billion. Non-GAAP operating margin guidance was 5.1% to 5.6%, with non-GAAP diluted EPS from continuing operations of $1.55 to $1.75.
Management projected 2016 non-GAAP revenue of $3.6 billion, operating margin of 6.7% and diluted EPS of $2.00 to $2.40. The filing states that these outlook measures were not reconciled to GAAP because certain adjustments could not be quantified without unreasonable effort.
The fourth-quarter 2014 reorganization eliminated or planned to eliminate approximately 1,700 positions and centralized management and support functions. Brink’s estimated direct cost savings of $45 million to $50 million in 2015, excluding severance, lease termination, accelerated depreciation and pension settlement charges. The Company recorded $21.8 million of fourth-quarter severance charges and estimated cumulative pretax restructuring charges of approximately $25 million.
The Company recorded a $56.1 million fourth-quarter pension settlement loss related to a lump-sum buyout accepted by approximately 4,300 participants. It also adopted updated mortality tables, increasing obligations for major U.S. plans by approximately $87 million in aggregate. The primary U.S. pension plan was approximately 88% funded at year-end, and management did not expect additional contributions based on then-current assumptions.
Key risks include further Venezuelan devaluation and restrictions on repatriating cash, foreign currency volatility, declining use of cash, competitive pricing pressure, execution of restructuring and turnaround initiatives, pension and retiree medical obligations, deferred tax asset realization, cybersecurity and information-technology failures, losses of customer valuables, regulatory compliance, litigation and compliance with debt covenants.
In February 2015, Venezuela replaced SICAD II with SIMADI. Using a hypothetical rate of 170 bolivars per U.S. dollar, the Company estimated that 2014 revenue would have been $183 million lower, operating profit before unallocated items $39 million lower and net monetary assets $16 million lower.
The Company accrued $2 million for a Mexican legal proceeding; reasonably possible additional losses could be up to $10 million. Management stated that other pending claims were not expected to have a material adverse effect, except that some matters could not be estimated.
Management identified a material weakness in general information-technology controls affecting revenue recording in the United States and Canada. New controls were implemented in the fourth quarter, and management and KPMG concluded that internal control over financial reporting was effective as of December 31, 2014.
Most important facts for an investor to verify
- Whether Venezuela’s SIMADI exchange rate and currency restrictions produce additional revenue, profit, cash and asset write-downs.
- Progress against the $45 million to $50 million restructuring savings target and the effect of remaining severance and other implementation costs.
- Recovery of profitability in the United States and Mexico, including customer retention, pricing, insurance costs and operating margins.
- Cash conversion after pension contributions, capital expenditures, working-capital changes and cash held for customers.
- Debt maturities, revolving-facility availability, letter-of-credit requirements and continued compliance with financial covenants.
- Funding requirements and accounting expense for U.S. pensions, UMWA retiree medical plans and black lung obligations.
- Realizability of the $287 million of U.S. deferred tax assets and the potential tax cost of repatriating foreign cash.
- Remediation and sustainability of the identified information-technology control improvements over revenue recognition.
- Potential additional losses from the Mexican litigation and other unquantified claims, contingencies and former coal operations.
- Whether reported Non-GAAP performance is comparable with GAAP results, particularly after excluding Venezuela currency effects, restructuring, pension and other unusual items.