The Brink’s Company: Q3 2011 Form 10-Q Summary
Business context and reporting period
The Brink’s Company provides cash and valuables transportation, ATM servicing, cash logistics, payment processing, Global Services and security services in more than 100 countries. Reportable segments are International and North America. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Revenue | $995.8 million | $776.1 million | $2,888.4 million | $2,240.9 million |
| Operating profit | $62.5 million | $44.1 million | $119.9 million | $99.4 million |
| Income from continuing operations attributable to Brink’s | $31.5 million | $21.7 million | $55.7 million | $37.6 million |
| Net income attributable to Brink’s | $30.8 million | $23.9 million | $58.7 million | $37.2 million |
| Diluted EPS from continuing operations | $0.66 | $0.45 | $1.16 | $0.77 |
| Diluted net EPS | $0.64 | $0.50 | $1.22 | $0.76 |
| Operating margin | 6.3% | 5.7% | 4.2% | 4.4% |
| Segment operating margin | 7.0% | 7.5% | 5.5% | 6.1% |
Operating cash flow for the first nine months was $170.0 million, up from $142.5 million. Capital expenditures were $118.7 million, compared with $102.5 million, producing cash flow before financing activities of $73.3 million versus $11.4 million. Cash and cash equivalents were $200.5 million at September 30, 2011, compared with $183.0 million at December 31, 2010.
Total debt was $401.4 million, compared with $389.2 million at year-end 2010. Management-reported net debt was $229.6 million, or $245 million excluding cash and debt in Venezuelan operations. The $400 million revolving credit facility had $278 million available at September 30, 2011. The company was in compliance with all financial covenants.
Total assets were $2.34 billion and total equity was $625.0 million at September 30, 2011. Brink’s paid $0.10 per common share in the third quarter and $0.30 per share for the first nine months.
Material changes versus the prior comparable period
- Third-quarter revenue increased 28%, while nine-month revenue increased 29%, primarily reflecting the 2010 Mexico acquisition, organic growth and favorable currency translation.
- International revenue increased 37% in the third quarter and 39% year to date. North America revenue increased 7% in both comparisons, largely from the Canada acquisition and currency effects.
- Third-quarter operating profit rose 42% to $62.5 million. Nine-month operating profit increased 21% to $119.9 million.
- International segment operating profit increased 17% in the third quarter and 20% for the nine months. North America improved in the quarter but was approximately flat for the nine-month period due to lower U.S. CIT demand and pricing pressure.
- Interest expense increased to $6.5 million in the quarter and $18.2 million year to date, primarily because of higher borrowings, higher interest rates and the January 2011 issuance of $100 million of private-placement notes.
- Cash flow benefited from higher operating profit, working-capital changes and lower acquisition spending, partly offset by higher capital expenditures, taxes, interest payments and the Belgium settlement payment.
Guidance, outlook, risks and unusual items
- Management expected 2011 organic revenue growth in the mid-to-high single-digit range. Including approximately $400 million of Mexico acquisition revenue, 2011 segment operating margin was expected at 6.0% to 6.3%, below the prior 6.5% to 7.0% target.
- For 2012, management expected mid-to-high single-digit organic revenue growth and segment operating margin of 6.5% to 7.0%, supported by higher-margin opportunities, information-technology investment, improving Mexico and Latin America results, North America margin improvement and continued Global Services momentum.
- Other 2011 estimates included interest expense of $22 million to $24 million, an effective tax rate of 36% to 39%, capital expenditures of $180 million to $190 million, capital leases of $40 million to $50 million, depreciation and amortization of $160 million to $170 million, and noncontrolling-interest income of $20 million to $24 million.
- Reported results included a $6.7 million gain on the sale of the U.S. Document Destruction business, a $2.1 million bargain-purchase gain related to Mexico, and a $10.1 million Belgium bankruptcy settlement charge in the first half of 2011. The second quarter also included a $4.2 million pretax gain from Federal Black Lung Excise Tax refunds.
- Management highlighted potentially significant increases in 2012 U.S. retirement-plan expense, depending on year-end interest rates and plan-asset performance. U.S. pension contributions were expected to begin in 2012 and total approximately $135.5 million over five years under current assumptions.
- Venezuela represented $178.5 million, or 6%, of nine-month revenue. Currency conversion and repatriation are restricted under the SITME process; Venezuelan cash included $13.1 million denominated in bolivar fuertes, and management expects future repatriation of invested cash to be limited.
- The company had approximately $30.1 million of residual-value guarantees related to operating leases. Other risks include foreign exchange, political and economic conditions, labor and regulatory matters, security threats, litigation, pension obligations, acquisition integration and customer pricing pressure.
- The former Brink’s Belgium CIT subsidiary entered bankruptcy. A €7 million settlement was finalized in September 2011, with court withdrawal of the related litigation pending. Management stated that other ordinary-course claims were not expected to have a material adverse effect.
- Management stated that current cash, available credit and projected operating cash flow should meet liquidity needs for more than the next 12 months. Disclosure controls and procedures were deemed effective, with no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether organic growth and margin performance can offset the lower-margin contribution from the Mexico acquisition.
- The sustainability of International segment growth and the extent of continued weakness in North American CIT volumes and pricing.
- Actual 2011 capital spending, debt levels, interest expense and availability under revolving and other credit facilities.
- The effect of pension-market performance and required U.S. retirement-plan contributions on 2012 earnings and cash flow.
- Venezuelan currency controls, cash repatriation restrictions and the potential effect of exchange-rate changes on reported results.
- The final resolution of the Belgium bankruptcy litigation and the amount of any additional legal or contingent liabilities.
- The distinction between GAAP results and management’s non-GAAP measures, particularly adjustments for asset-sale gains, settlement charges and tax benefits.