The Brink’s Company 2017 Form 10-K Summary
Business context and reporting period
The filing is an annual report for the fiscal year ended December 31, 2017. The requested “2017 Q4” information is included in the full-year Form 10-K and quarterly data. Brink’s provides secure logistics, cash-in-transit, ATM, cash-management, payment, global valuables transportation and security services in more than 100 countries. Approximately 77% of 2017 revenue was generated outside the United States. The company reported three segments: North America, South America and Rest of World.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $3,347.0 million | $3,020.6 million | +11% |
| Operating profit | $273.9 million | $184.5 million | +48% |
| Operating margin | 8.2% | 6.1% | +2.1 percentage points |
| Income from continuing operations attributable to Brink’s | $16.9 million | $36.2 million | -53% |
| Diluted EPS from continuing operations | $0.33 | $0.72 | -54% |
| Net income attributable to Brink’s | $16.7 million | $34.5 million | -52% |
| Cash flow from operating activities | $252.1 million | $167.5 million | +$84.6 million |
| Capital expenditures | $174.5 million | $112.2 million | +$62.3 million |
| Cash used in acquisitions | $225.1 million | $0.7 million | +$224.4 million |
Non-GAAP revenue was $3,192.9 million, non-GAAP operating profit was $281.4 million, non-GAAP operating margin was approximately 8.8%, and non-GAAP diluted EPS from continuing operations was $3.03, compared with $2.28 in 2016. Non-GAAP results exclude selected items such as Venezuela operations, restructuring, acquisition-related costs, retirement-plan costs, prepayment penalties and tax reform.
At December 31, 2017, cash and cash equivalents were $614.3 million, compared with $183.5 million in 2016. Total debt was $1,236.7 million, compared with $443.2 million, and net debt was $611.5 million, compared with $247.2 million. Debt represented 79% of capitalization, versus 56% in 2016. Total equity was $338.2 million, including Brink’s shareholders’ equity of $317.4 million.
The company entered into a new $1.5 billion senior secured credit facility, consisting of a $1.0 billion revolving facility and a $500 million term loan, and issued $600 million of 4.625% senior unsecured notes due 2027. The revolving facility had $1.0 billion available at year-end. Management reported compliance with all financial covenants.
Material changes versus the prior comparable period
- Revenue growth was driven by organic growth, acquisitions and pricing increases, partly offset by $372.7 million of unfavorable currency effects, including a $400.8 million impact from Venezuelan devaluation.
- Segment revenue increased to $1,254.2 million in North America, $924.6 million in South America and $1,014.1 million in Rest of World. South America operating profit increased 49% to $182.8 million, while North America operating profit increased 85% to $74.0 million.
- Operating profit benefited from productivity improvements, organic growth, acquisitions and lower restructuring and disposition costs. Corporate expenses increased $32.4 million, primarily due to higher incentive compensation and security losses.
- GAAP earnings declined despite higher operating profit because of the U.S. Tax Cuts and Jobs Act, higher interest expense and higher interest and other expense. The company recorded a provisional $92 million non-cash tax charge related primarily to remeasurement of deferred tax assets.
- Brink’s completed six acquisitions in five countries for approximately $365 million, including businesses in the United States, Brazil, Chile, Argentina and France. Acquired businesses contributed approximately $100.1 million of 2017 revenue from their acquisition dates.
- Restructuring charges were $22.6 million in 2017, including $17.3 million under the 2016 restructuring program and $4.6 million from other restructuring actions. Management expects additional future costs of $10 million to $12 million under the 2016 program and less than $1 million for other actions.
- Fourth-quarter 2017 revenue was $903.2 million and operating profit was $88.3 million. Fourth-quarter attributable loss from continuing operations was $52.0 million, primarily reflecting the tax reform charge. The quarter also included an $11.1 million loss from theft of an international gold shipment and a $7.8 million net gain on Mexican real estate.
Guidance, outlook, commentary and risks
Management’s strategy is to accelerate profitable growth, improve operational efficiency and introduce differentiated services. Focus areas include high-value cash-management services, CompuSafe, recyclers, Brink’s Global Services, technology-enabled offerings, customer share expansion and acquisitions. Management believes current cash, available credit and projected operating cash flows will satisfy liquidity needs for more than the next twelve months.
In January 2018, Brink’s announced an agreement to acquire Rodoban in Brazil for approximately $145 million, subject to customary closing conditions and Brazilian antitrust approval. The transaction was expected to close in the second quarter of 2018 and was expected to contribute approximately $80 million of annual revenue.
- Venezuela remains a significant risk: cash repatriation was restricted, no U.S. dollars were repatriated in 2017 or 2016, and the company recognized a $9.1 million pretax currency remeasurement loss in 2017.
- Foreign exchange, inflation, political and regulatory conditions in international markets could materially affect revenue, earnings, cash flows and asset values.
- Reduced use of cash, competitive pricing pressure, fixed operating costs, labor issues, security losses, insurance availability and execution of acquisitions could adversely affect results.
- The company has significant retirement obligations, including UMWA and black lung liabilities. Retirement benefits other than pensions totaled $370.1 million of unfunded status at year-end, and accumulated actuarial losses were substantial.
- The company recorded a provisional tax reform charge; the accounting was not final and could change as additional guidance became available. Management expected an unfavorable effect from broadening the U.S. tax base to more than offset the lower federal tax rate.
- Management and Deloitte identified material weaknesses in internal control over financial reporting related to information-technology access controls, timely removal of terminated-user access and monitoring activities. Deloitte issued an adverse opinion on internal control, although it issued an unqualified opinion on the financial statements.
Most important facts for an investor to verify
- Reconcile GAAP earnings of $0.33 diluted EPS with non-GAAP continuing-operations EPS of $3.03, particularly the $92 million tax reform charge and other excluded items.
- Assess leverage after the acquisition program: total debt was $1.24 billion and net debt was $611.5 million at year-end.
- Review acquisition integration, contingent consideration and the announced $145 million Rodoban transaction.
- Monitor remediation of the material weaknesses and any subsequent restatements or control deficiencies.
- Evaluate Venezuela cash restrictions, currency devaluation and the ability to fund local operations without repatriation.
- Verify the sustainability of operating improvements, restructuring savings and the company’s ability to convert improved operating profit into net income and free cash flow.
- Review pension, UMWA, black lung and other legacy obligations, including assumptions that could materially change future cash requirements.