Business Context and Reporting Period
The Brink’s Company provides cash-in-transit, ATM, cash-management, global logistics, payment, guarding and security-system services in more than 100 countries. Reportable segments are North America, South America and Rest of World. This unaudited Form 10-Q covers the three and six months ended June 30, 2018; comparable periods are the three and six months ended June 30, 2017.
Financial Performance and Position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $849.7 million | $805.9 million | $1,728.8 million | $1,594.3 million |
| Operating profit | $61.7 million | $48.3 million | $126.5 million | $119.2 million |
| GAAP operating margin | 7.3% | 6.0% | 7.3% | 7.5% |
| Net income attributable to Brink’s | $(107.9) million | $14.2 million | $(85.6) million | $48.9 million |
| GAAP diluted EPS from continuing operations | $(2.11) | $0.28 | $(1.68) | $0.95 |
| Non-GAAP diluted EPS from continuing operations | $0.74 | $0.66 | $1.39 | $1.24 |
Non-GAAP operating profit was $76.2 million in the second quarter and $147.7 million for the first six months, compared with $60.8 million and $114.3 million, respectively, in the prior-year periods. Non-GAAP operating margin was 9.2% in the quarter and 8.8% year to date.
- Second-quarter revenue increased 5%, while first-half revenue increased 8%. Reportable-segment revenue increased 8% in both periods on a non-GAAP basis.
- Second-quarter operating profit increased 28%; first-half operating profit increased 6%. GAAP results include significant unallocated and Venezuela-related items.
- Operating cash flow was $109.1 million for the first six months, down from $124.7 million. Capital expenditures were $73.3 million, and investing cash use was $107.4 million.
- Cash, cash equivalents and restricted cash totaled $650.1 million at June 30, 2018, including $548.5 million of unrestricted cash and cash equivalents. Restricted cash was $101.6 million and was not generally available for corporate purposes.
- Total debt was $1,228.6 million, including $1,187.2 million of long-term debt. Net debt, as defined by management, was $686.8 million versus $611.5 million at December 31, 2017.
- The $1.0 billion revolving credit facility was fully available at June 30, 2018. Brink’s was in compliance with its financial covenants.
- Shareholders’ equity declined to $245.1 million from $338.2 million at December 31, 2017, primarily reflecting the first-half loss and comprehensive currency effects.
Material Changes Versus the Prior Comparable Period
- Venezuela deconsolidation: Effective June 30, 2018, Brink’s concluded it no longer controlled its Venezuelan operations because of political, economic, currency, price-control and financing restrictions. It recognized a pretax loss of $126.7 million, including $106 million of accumulated foreign-currency translation losses and benefit-plan adjustments. The Venezuelan assets and liabilities derecognized were approximately $32 million and $11 million, respectively. Future periods are expected to exclude Venezuelan operating results.
- Underlying operating improvement: Non-GAAP revenue and operating profit rose 8% and 25%, respectively, in the second quarter, and 12% and 29% for the first six months. Growth was led by South America and North America, acquisitions and price increases.
- Currency pressure: Reported results were materially affected by devaluations, particularly the Venezuelan bolivar, Argentine peso and Brazilian real. The Argentine peso declined approximately 36% against the U.S. dollar in the first half of 2018.
- Argentina accounting change: Argentina was designated highly inflationary beginning July 1, 2018. Beginning in the third quarter, peso-denominated monetary assets and liabilities will be remeasured through earnings.
- Acquisition and disposition activity: No business acquisitions were completed in the first half of 2018. Brink’s agreed to acquire Rodoban in Brazil for approximately $145 million and Dunbar Armored in the United States for approximately $520 million; both were expected to close by year-end subject to conditions and regulatory approval. A French airport-security subsidiary was sold for approximately $14 million, generating a $10.3 million gain.
- Accounting adoption: New revenue-recognition, financial-assets and intra-entity-transfer standards increased January 1 retained earnings by a cumulative $3.3 million. The revenue standard had no material expected future effect on consolidated operations or balance sheets, but changed disclosures and certain reported amounts.
- Restructuring: The company recorded $6.0 million under its 2016 restructuring program and $2.2 million for other restructuring actions during the first half. Additional future costs of approximately $2 million to $4 million were expected under each program.
Guidance, Outlook, Risks and Unusual Items
No formal consolidated revenue or earnings guidance is provided in the filing. Management expects available cash, operating cash flow and credit capacity to meet liquidity needs for more than the next twelve months, while noting that pending acquisitions will increase future investing cash requirements.
- Management is pursuing productivity improvements and higher-value services to raise North America’s operating margin; it expects the margin to become more comparable to Rest of World, but not to reach South America’s level.
- The company expects restructuring actions to reduce its workforce by approximately 800 to 900 positions and produce about $20 million of annualized savings when completed. Other restructuring actions are expected to reduce the workforce by approximately 400 to 500 positions and generate about $7 million of annualized savings.
- Principal risks include foreign-exchange volatility, highly inflationary economies, political and regulatory restrictions, inability to repatriate foreign cash, labor conditions, acquisition integration, security and insurance losses, pension and legacy coal liabilities, litigation, tax-asset realization, debt covenant compliance and access to capital.
- Disclosure controls and procedures were not effective at June 30, 2018 because previously identified material weaknesses in internal control over financial reporting remained outstanding. Management nevertheless concluded that the financial statements fairly present the company’s financial position and results.
- Tax results were distorted by Venezuela: the first-half continuing-operations effective tax rate was negative 57.5%. The company had not finalized its accounting for certain 2017 Tax Reform Act amounts and expected to complete that work by year-end 2018.
- Pending lawsuits and claims are disclosed, but management does not believe their ultimate resolution would reasonably be expected to materially affect liquidity, financial position or results of operations.
Important Facts for Investors to Verify
- Whether the Rodoban and Dunbar acquisitions closed as expected, their financing, purchase accounting and effect on leverage.
- The operational and financial effects of Venezuela’s deconsolidation and Argentina’s highly inflationary accounting treatment.
- Progress in remediating the material weaknesses in internal controls.
- Actual currency movements, pricing actions and organic performance in South America and Rest of World.
- Availability under the revolving credit facility, covenant headroom and the increase in net debt.
- Cash conversion after capital expenditures, pending acquisitions and restricted-cash adjustments.
- Whether restructuring savings and North American productivity improvements are realized.
- Updates to tax-accounting estimates, deferred tax assets and legacy pension, UMWA and black-lung obligations.