The Brink’s Company — Q2 2013 Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and six months ended June 30, 2013. Brink’s provides cash-in-transit, ATM, global valuables transportation, cash management, payment processing, and security services in more than 100 countries. Reportable segments are International and North America.
Financial results and key metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $990.5 million | $935.6 million | $1,962.0 million | $1,871.1 million |
| Operating profit | $33.2 million | $31.4 million | $50.4 million | $79.0 million |
| Income from continuing operations attributable to Brink’s | $13.2 million | $34.4 million | $15.9 million | $56.1 million |
| Diluted EPS from continuing operations | $0.27 | $0.71 | $0.33 | $1.16 |
| Net income attributable to Brink’s | $8.7 million | $30.5 million | $(7.9) million | $47.5 million |
| Cash flow from operating activities | Not provided for the quarter | Not provided for the quarter | $41.1 million | $30.3 million |
- Q2 revenue increased 6%; six-month revenue increased 5%. Reported Q2 operating margin was approximately 3.4%, compared with 3.4% in the prior-year quarter. Six-month operating margin declined to approximately 2.6% from 4.2%.
- Q2 International revenue rose 8% to $751.8 million and segment operating profit rose 16% to $48.0 million. North America revenue was essentially flat at $238.7 million, while segment operating profit declined 40% to $6.8 million.
- Six-month International segment operating profit declined 21% to $84.6 million; North America declined 74% to $4.4 million. Six-month segment margin was 4.5%, versus 6.7% in 2012.
- Q2 net income included a $4.5 million loss from discontinued operations. The six-month loss from discontinued operations was $23.8 million, including $16.2 million of German severance expenses.
- Cash and cash equivalents were $239.8 million at June 30, 2013, compared with $201.7 million at December 31, 2012. Approximately $226.5 million was held by subsidiaries considered permanently invested and potentially subject to additional taxes if repatriated.
- Total debt was $526.9 million, up from $389.3 million at December 31, 2012. Net debt was $343.2 million, compared with $231.6 million at year-end. Cash available for general corporate purposes was $183.7 million after excluding cash held for Cash Management Services operations.
- Operating cash flow was $41.1 million; investing cash flow was $(88.1) million, including $79.7 million of capital expenditures and $18.0 million for acquisitions; financing cash flow was $101.3 million. Cash increased $38.1 million after a $16.2 million foreign-exchange effect.
- Brink’s paid $9.6 million of common dividends, or $0.20 per share, during the first half.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by organic growth in International operations, partly offset by unfavorable currency translation. Q2 International organic revenue growth was 10%; six-month organic growth was 9%.
- Six-month operating profit was reduced by an $18.7 million loss related to the February 2013 Brussels robbery and a $13.4 million Venezuela currency-remeasurement loss.
- The prior-year period benefited from a $21 million non-cash tax benefit related to a change in retiree healthcare funding strategy. This benefit did not recur, contributing to the decline in reported earnings and EPS.
- North America performance weakened because of lower U.S. cash-in-transit demand and continued pricing pressure. Brazil also experienced higher wage costs that were not fully recovered through pricing and a weaker economy.
- Brink’s acquired Brazil-based Rede Trel for approximately $27.7 million, including contingent consideration, and acquired the remaining 26% interest in its Chile cash logistics business for approximately $18 million.
- Discontinued operations expanded as Brink’s exited selected European businesses. France and Poland divestitures were completed earlier in 2013, Turkey operations were shut down in June, and the German cash-in-transit sale was expected in the third quarter. The sale of German aviation security services was completed in July 2013.
Guidance, outlook, commentary, and risks
- Management expects 2013 organic revenue growth of 5% to 8%, with currency reducing reported revenue by approximately 2% to 4%.
- Expected 2013 GAAP segment margin is 5.0% to 5.5%; International margin is 6.0% to 7.0%; North America margin is 1% to 2%. Non-GAAP segment margin guidance is 6.0% to 6.5%.
- Management expects 2013 GAAP effective tax rate of 49% to 52%, compared with 17% in 2012; non-GAAP tax rate guidance is 36% to 39%.
- Expected 2013 capital expenditures are approximately $195 million, capital leases approximately $10 million, and depreciation and amortization $180 million to $190 million.
- The $480 million unsecured revolving credit facility matures in January 2017; $289 million was available at June 30, 2013. Brink’s was in compliance with its financial covenants.
- Management believes current cash, available credit facilities, and projected operating cash flow will meet liquidity needs for more than the next twelve months. The company also had approximately $39 million available under three multi-currency revolving facilities and approximately $32 million available under letter-of-credit facilities.
- Venezuela is a significant exposure: it represented $191.6 million, or 9.8%, of first-half revenue. Brink’s held $66.9 million of bolivar-denominated cash and was uncertain whether it could obtain sufficient U.S. dollars for imported supplies and fixed assets. Potential consequences include business interruptions, higher operating costs, further devaluation losses, and restrictions on repatriation.
- Brink’s had a significant underfunded U.S. retirement obligation. It contributed $4.5 million to the primary U.S. pension plan in the first half and expected to contribute an additional $8.4 million in the second half. Estimated future contributions to the primary U.S. pension plan totaled $234.4 million at June 30, 2013, based on year-end 2012 assumptions.
- Other risks include foreign-exchange volatility, political and regulatory conditions, security losses, labor costs and work stoppages, customer pricing pressure, insurance recoveries, pension assumptions, deferred tax asset realization, litigation, and the execution of business exits and acquisitions.
Investor verification points
- Verify the sustainability of International organic growth and whether currency devaluation, particularly in Venezuela, continues to offset reported revenue and profit.
- Assess the recovery plan for North America, including U.S. demand, pricing, cost efficiency, and the stated margin improvement objective.
- Reconcile reported GAAP results with management’s non-GAAP measures, particularly adjustments for the Brussels robbery, Venezuela remeasurement, retirement costs, severance, and exited operations.
- Monitor net debt growth, borrowing levels, credit-facility availability, covenant compliance, and the portion of cash unavailable for general corporate purposes.
- Track German and other European divestitures, severance payments, discontinued-operation losses, and any additional contingencies.
- Evaluate pension and other retirement-benefit funding requirements, actuarial assumptions, and their effect on future cash flow.
- Review subsequent filings for developments in Venezuela, including access to U.S. dollars, exchange rates, operating continuity, and repatriation restrictions.