The Brink’s Company: Q2 2010 Form 10-Q Summary
Business context and reporting period
The Brink’s Company provides transportation and logistics services for cash and valuables, including armored transportation, ATM replenishment, cash processing, cash logistics, payment services, Global Services and guarding. The company operates in more than 50 countries and reports International and North America segments. This unaudited Form 10-Q covers the three and six months ended June 30, 2010, compared with the corresponding 2009 periods.
Financial performance and key metrics
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $729.4 million | $751.9 million | $1,464.8 million | $1,484.4 million |
| Operating profit | $31.5 million | $26.7 million | $55.3 million | $68.4 million |
| Operating margin | 4.3% | 3.6% | 3.8% | 4.6% |
| Income from continuing operations attributable to Brink’s | $20.7 million | $16.0 million | $15.9 million | $38.2 million |
| Diluted EPS from continuing operations | $0.42 | $0.34 | $0.32 | $0.82 |
| Net income attributable to Brink’s | $21.5 million | $20.3 million | $13.3 million | $43.3 million |
Q2 segment operating profit increased to $44.1 million from $28.9 million, and segment margin improved to 6.0% from 3.8%. International segment profit increased to $33.8 million from $15.9 million, while North America declined to $10.3 million from $13.0 million. First-half segment operating profit decreased to $79.0 million from $81.3 million, with International improvement offset by weaker North America results.
Q2 GAAP revenue declined 3%, primarily because unfavorable currency effects, particularly the Venezuelan exchange-rate impact, exceeded 7% organic growth. First-half GAAP revenue declined 1%, despite 5% organic growth. On the company’s non-GAAP basis, Q2 revenue increased 5%, first-half revenue increased 7%, and first-half diluted EPS from continuing operations was $0.51 versus $0.39 in the prior-year comparable measure.
Cash and cash equivalents were $143.3 million at June 30, 2010, essentially unchanged from $143.0 million at December 31, 2009. Six-month operating cash flow was $48.5 million versus $85.8 million in 2009. Capital expenditures were $61.2 million versus $74.5 million, and acquisition spending was $13.6 million versus $49.0 million. Cash used before financing activities improved to $28.3 million from $40.0 million.
Total debt was $262.5 million at June 30, 2010, compared with $195.6 million at year-end 2009. Reported net debt increased to $119.2 million from $52.6 million. Total equity was $559.6 million, compared with $595.8 million at December 31, 2009. The company paid $0.20 per common share in dividends during the first half.
Material changes versus the prior comparable period
- Q2 operating profit improved despite lower GAAP revenue, driven by stronger International results, lower impairment losses and favorable currency-related items.
- North America experienced lower CIT demand, pricing pressure and higher labor costs; first-half North America operating profit fell 25%.
- Venezuela became highly inflationary for accounting purposes on January 1, 2010. The new SITME currency process and weaker exchange rate significantly reduced reported Venezuelan revenue and increased currency volatility.
- The company recorded a $7.9 million non-cash tax benefit in Q2 from a tax settlement. For the first half, a $13.9 million reduction in deferred tax assets related to U.S. healthcare legislation contributed to a 58.2% effective tax rate.
- Other comprehensive loss attributable to Brink’s was $41.8 million for the first half, primarily reflecting a $42.9 million unfavorable foreign-currency translation adjustment.
- The company acquired Est Valeurs in France and a majority stake in a Russian cash-processing business. Acquisition spending totaled $13.6 million in the first half.
- The company purchased 180,000 shares for $3.5 million during the first half. Through July 27, 2010, it purchased an additional 940,000 shares for $18.5 million, leaving $11.7 million available under the repurchase authorization.
Guidance, outlook, risks and unusual items
- Management expects 2010 organic revenue growth in the low-to-mid single-digit percentage range from the $2.9 billion 2009 non-GAAP revenue base.
- Expected full-year 2010 segment operating margin is 6.5% to 7.0%. Non-segment expenses are expected to be approximately $57 million.
- Expected 2010 capital expenditures are $160 million to $175 million, and depreciation and amortization is expected to be $130 million to $140 million.
- Management expects a 47% to 50% full-year GAAP effective tax rate, or 36% to 39% excluding the deferred tax charge related to U.S. healthcare legislation.
- A new $400 million unsecured revolving credit facility was entered into in July 2010, replacing the prior facility and extending the term to July 2014. The company stated that it was in compliance with financial covenants at June 30, 2010 and expects liquidity to meet needs for more than 12 months.
- Venezuelan law limits approved currency-conversion transactions to $350,000 per legal entity per month. Management expects sufficient dollars for local operations but does not anticipate repatriating Venezuelan cash for the foreseeable future. Venezuelan subsidiaries held $14.2 million of cash, including $8.8 million in bolivar fuertes, at June 30.
- U.S. retirement liabilities remain significant. The company reported $175.2 million of accrued pension costs and $216.8 million of other retirement benefits. The black lung obligation increased by $19.3 million to $61.6 million after legislative changes increased estimated approval rates.
- Operating lease residual-value guarantees totaled approximately $44.4 million. The company is involved in ordinary-course litigation and cannot estimate losses for some matters, although it does not expect a material adverse effect.
- Royalty income from the former home security business is expected to end after the third quarter of 2010.
Investor verification points
- Reconcile GAAP results with management’s non-GAAP measures, particularly the effects of Venezuelan currency translation, tax-rate normalization and discontinued or former-business items.
- Monitor Venezuelan exchange-rate policy, cash-repatriation restrictions, currency remeasurement gains or losses and the carrying value of Venezuelan investments.
- Review the increase in debt and net debt, the terms and covenants of the July 2010 revolving facility, and available borrowing capacity.
- Assess whether North American pricing, volume and labor-cost pressures improve and whether International organic growth supports the 6.5% to 7.0% margin outlook.
- Evaluate the sustainability of earnings excluding the $7.9 million tax settlement benefit and the impact of the elevated projected tax rate.
- Track black lung, UMWA, pension and other retirement obligations, including changes in actuarial assumptions and future cash requirements.
- Confirm the timing and economics of post-quarter share repurchases and the remaining authorization.