BCO

Business Context and Reporting Period

This Form 10-Q covers The Pittston Company (parent of Brink's, BHS, and BAX Global) for the quarterly period ended June 30, 2002. The Company operates primarily in Business and Security Services (Brink's, Brink's Home Security, BAX Global) and Other Operations (gold, timber, natural gas). The Company is in the process of exiting its coal business, which is reported as discontinued operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Surge: Income from continuing operations increased significantly to $38.2 million (6 months 2002) from $12.5 million (6 months 2001), driven by higher operating profits at Brink's and BAX Global.
• Revenue Growth: Total revenues rose 1.4% to $1,818.6 million. Brink's revenues increased 7% due to euro currency distribution projects and improved performance. BAX Global revenues declined 5% due to weak economic conditions in the U.S. and Europe.
• Discontinued Operations: The Coal Operations segment recorded a loss of $11.0 million (net of tax) for the six months ended June 30, 2002, compared to no loss in the prior year period. This reflects an increased estimate of pretax loss due to adverse coal market conditions.
• Accounting Changes: The Company adopted SFAS No. 142, eliminating goodwill amortization. This contributed to a lower effective tax rate and higher reported net income compared to 2001, where goodwill amortization was a significant expense.

Guidance, Outlook, and Risks

• Coal Exit Strategy: The Company expects to complete the sale or shutdown of remaining coal assets in 2002. Proceeds are expected to exceed $100 million. However, the Company anticipates ongoing annual expenses of $45 million to $55 million (pre-tax) related to retained coal liabilities (pensions, black lung, reclamation) after the disposal is complete.
• Capital Expenditures: Expected capital expenditures for continuing operations in 2002 range from $190 million to $210 million. An additional $15 million to $20 million is expected for discontinued operations.
• Preferred Stock Redemption: The Company announced the redemption of all Convertible Preferred Stock in August 2002, which is expected to reduce diluted EPS by $0.01 in the third quarter due to the premium paid.
• Key Risks:
  • Coal Disposal: Uncertainty regarding the timing of sales, final proceeds, and potential increases in withdrawal liabilities for multi-employer pension plans.
  • Foreign Currency: Operations in over 100 countries expose the Company to exchange rate fluctuations.
  • Regulatory/Litigation: Pending claims for Federal Black Lung Excise Tax refunds (potential up to $20 million) and a $9 million claim for relief under the Air Transportation Safety and System Stabilization Act for BAX Global.
  • Pension Funding: Potential need for voluntary contributions to the primary U.S. pension plan if investment markets remain weak.

Investor Verification Checklist

• Coal Asset Sales: Verify the closing dates and final proceeds for the Kentucky and West Virginia coal asset sales expected in late 2002.
• Retained Liabilities: Confirm the actuarial assumptions used for the estimated $45-$55 million annual post-disposal coal liability costs.
• Brink's France Receivables: Monitor the resolution of billing adjustments at French subsidiaries, which caused a $42.1 million increase in receivables.
• BAX Global Restructuring: Track the execution of the 2000 restructuring plan and the impact of fleet reductions on future operating margins.
• Goodwill Impairment: Review the annual goodwill impairment test results, as the Company no longer amortizes goodwill under SFAS No. 142.