The Brink’s Company: FY2010 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2010. Brink’s provides secure transportation, cash logistics, ATM servicing, global valuables transportation, guarding, payment processing and related security services in more than 100 countries. International operations generated 71% of revenue and 79% of segment operating profit. Reportable segments are International and North America.
Key financial metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Revenue | $3,121.5 million | $3,135.0 million | Down less than 1% |
| Segment operating profit | $208.9 million | $213.4 million | Down 2% |
| Segment operating margin | 6.7% | 6.8% | Down 0.1 percentage points |
| Operating profit | $146.3 million | $166.8 million | Down 12% |
| Income from continuing operations attributable to Brink’s | $56.8 million | $195.7 million | Down 71% |
| Diluted EPS from continuing operations | $1.17 | $4.11 | Down 72% |
| Net income attributable to Brink’s | $57.1 million | $200.2 million | Down 71% |
| Cash flow from operating activities | $235.3 million | $195.2 million | Up $40.1 million |
| Capital expenditures | $148.8 million | $170.6 million | Down $21.8 million |
| Total debt | $389.2 million | $195.6 million | Up $193.6 million |
| Cash and cash equivalents | $183.0 million | $143.0 million | Up $40.0 million |
Operating margin was approximately 4.7% in 2010, compared with approximately 5.3% in 2009. The effective tax rate on continuing operations was 48.0%, compared with a tax benefit rate of 36.7% in 2009. The 2009 result included a $117.8 million reversal of a U.S. deferred tax valuation allowance.
- International revenue was $2.204 billion, down 2% on a GAAP basis, while International operating profit increased 5% to $164.8 million.
- North America revenue was $917.8 million, up 3%, but operating profit declined 22% to $44.1 million because of pricing and volume pressure in cash-in-transit services.
- Operating cash flow included a $38.5 million increase in customer obligations that is not available for general corporate purposes. Cash available for general corporate purposes was $144.5 million.
- Net debt was $244.7 million, compared with $52.6 million at December 31, 2009.
- Debt represented 40% of capitalization at year-end, compared with 25% in 2009.
Material changes versus the prior comparable period
- Revenue was broadly stable on a GAAP basis, but unfavorable currency effects reduced reported revenue by approximately $273 million, primarily because of the Venezuelan currency translation methodology. Organic revenue increased 7% on a GAAP basis.
- GAAP operating profit declined primarily because of the Venezuelan currency effect, the exit of the unprofitable Belgium cash-in-transit business and higher non-segment expenses. On a non-GAAP basis, operating profit increased 39% to $166.6 million.
- North American operating profit declined $13 million, while International operating profit increased $8 million. International non-GAAP operating profit increased 53%.
- Brink’s acquired controlling interests in Mexico’s Servicio Pan Americano de Proteccion for approximately $59.8 million and acquired Canadian payments provider Threshold for approximately $38.8 million. The acquisitions contributed $51.7 million of 2010 revenue from their acquisition dates.
- The Mexico transaction produced a $13.7 million loss on remeasurement of the previously held interest and a $5.1 million bargain-purchase gain. The filing describes the purchase accounting as provisional.
- Brink’s deconsolidated its Belgian cash-in-transit subsidiary in November 2010 after bankruptcy proceedings began. It recorded a $13.4 million write-down and approximately $1.7 million of other bankruptcy-related charges.
- Total debt increased primarily to fund acquisitions, share repurchases and capital leases. Brink’s repurchased 1.68 million shares for $33.7 million during 2010.
Guidance, outlook, risks and unusual items
Management expected 2011 organic revenue growth in the mid-to-high single-digit range. Including approximately $450 million of acquisition-related revenue from Mexico and Canada at approximately break-even margins, management expected 2011 segment operating margin at the high end of a 6.5% to 7.0% range.
- Expected 2011 interest expense was $20 million to $24 million, compared with $14.8 million in 2010. Expected capital expenditures were $190 million to $200 million, capital leases were $30 million to $40 million, and depreciation and amortization was $160 million to $170 million.
- Management expected a 2011 effective tax rate of 36% to 39% and non-segment expenses of approximately $63 million.
- Brink’s expected to contribute approximately $136 million to its primary U.S. pension plan over the five years ending in 2016. The primary U.S. pension plan was approximately 80% funded at December 31, 2010.
- Former coal operations continue to generate retiree medical, pension, black lung and other liabilities. The 2010 health-care legislation increased the estimated black lung obligation by $19.3 million.
- Venezuelan earnings and cash are subject to currency controls. At year-end, Venezuelan subsidiaries held $3.3 million of U.S.-dollar cash and short-term investments and $18.2 million of cash denominated in bolivars. Repatriation of Venezuelan cash is expected to remain restricted.
- Brink’s faced a potential claim of up to €20 million, or approximately $26.5 million, relating to the bankruptcy of Brink’s Belgium. Management considered a loss reasonably possible but not probable and recorded no accrual.
- The company had $400 million of revolving credit capacity, with $182.8 million available at year-end, and was in compliance with its financial covenants. A $100 million private placement issued in January 2011 was used to repay revolving debt.
- Key risks include foreign-exchange volatility, political and regulatory restrictions, acquisition integration, pricing pressure, security losses, insurance availability, information-technology failures, labor relations, retirement obligations and potential restructuring or litigation costs.
- Discontinued operations contributed only $0.3 million in 2010. The former BAX Global matter required an $11.5 million payment in 2010, partly offset by $1.6 million of insurance recoveries.
Most important facts for investors to verify
- Reconcile the sharp decline in GAAP EPS to the 2009 deferred-tax valuation allowance reversal and the 2010 healthcare-related tax charge.
- Assess whether International organic growth and the projected 2011 margin can offset currency, pricing and volume pressures in North America.
- Monitor integration, profitability and final purchase accounting for the Mexico and Canada acquisitions.
- Evaluate leverage, refinancing requirements, covenant headroom and the effect of the January 2011 notes issuance on interest expense.
- Review pension, retiree medical, black lung and former-coal obligations, including sensitivity to discount rates, investment returns and medical inflation.
- Track Venezuelan currency controls, cash repatriation restrictions and the effect of future exchange-rate changes on reported results.
- Follow the Belgium bankruptcy claim and other litigation, insurance recoveries and contingent liabilities.
- Note that management and the auditors excluded the recently acquired SPP business from the 2010 internal-control assessment; SPP represented $220.5 million of assets and $51.7 million of 2010 revenue.