The Brink’s Company: Q2 2016 Form 10-Q Summary
Business context and reporting period
The filing covers the three and six months ended June 30, 2016. Brink’s provides transportation and logistics management services for cash and valuables, including cash-in-transit, ATM, global logistics, cash management, payment, and guarding services in more than 100 countries. The company reports nine operating segments across its largest five markets, Global Markets, and Payment Services.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $739.5 million | $760.3 million | $1,461.3 million | $1,536.4 million |
| Operating profit (loss) | $22.1 million | $(14.6) million | $35.9 million | $(1.7) million |
| GAAP operating margin | 3.0% | (1.9)% | 2.5% | (0.1)% |
| Income (loss) attributable to Brink’s | $0.3 million | $(12.9) million | $(2.8) million | $(15.9) million |
| Diluted EPS from continuing operations | $0.01 | $(0.26) | $(0.06) | $(0.28) |
| Non-GAAP operating profit | $37.9 million | $30.6 million | $69.0 million | $71.2 million |
| Non-GAAP diluted EPS | $0.38 | $0.30 | $0.68 | $0.74 |
GAAP operating profit improved primarily because the $34.5 million Venezuela asset-impairment charge recorded in Q2 2015 did not recur. Non-GAAP operating profit increased in the quarter but declined for the first half, reflecting currency pressure and weaker U.S. and Mexican results.
Cash flow, balance sheet, debt, and liquidity
- Cash flow from operations was $13.4 million in the first half of 2016, down from $42.6 million in the prior-year period.
- Investing cash outflow was $42.9 million, including $45.0 million of capital expenditures, compared with $32.8 million of investing outflow in the prior year.
- Financing cash inflow was $22.7 million, supported by net borrowings. Dividends paid to Brink’s shareholders totaled $9.8 million, or $0.20 per share.
- Cash and cash equivalents were $169.6 million at June 30, 2016, compared with $181.9 million at December 31, 2015. Restricted cash was $50.7 million, substantially above the corrected prior-year balance of $16.4 million.
- Total debt was $482.5 million, including $77.2 million of short-term debt and $405.3 million of long-term debt. Net debt was $322.5 million, up from $272.8 million at year-end 2015.
- The $525 million unsecured revolving facility had $339 million available at June 30, 2016. Brink’s stated that current cash, borrowing capacity, and projected operating cash flow should meet liquidity needs for more than the next twelve months.
- All financial covenants were in compliance at June 30, 2016. Approximately $149.7 million of cash was held by foreign subsidiaries considered permanently invested and could incur additional taxes if repatriated.
Material changes versus the prior comparable period
- Q2 revenue declined 3%, and first-half revenue declined 5%, primarily because of unfavorable currency translation and dispositions. Reported organic revenue increased 9% in Q2 and 10% for the first half, driven largely by inflation-related pricing in Venezuela and Latin America.
- Q2 GAAP operating profit improved by $36.7 million, while first-half operating profit improved by $37.6 million. Key contributors included the absence of the Venezuela impairment, improved Venezuela and Latin America results, lower corporate expenses, and improved France performance.
- The U.S. segment generated an operating loss of $1.5 million in Q2 and $3.7 million for the first half, due to lower volume and higher fleet, insurance, security, and other operating costs.
- First-half non-GAAP EPS declined to $0.68 from $0.74, despite GAAP EPS improvement, primarily because of currency effects and lower non-GAAP operating profit.
- Net debt increased by approximately $50 million, primarily to fund capital expenditures.
- Brink’s continued its global restructuring program, which is expected to reduce the workforce by approximately 1,000 positions and generate $20 million to $25 million of 2016 cost savings. Cumulative pretax charges were approximately $16 million at June 30, 2016.
- The company is exiting Republic of Ireland and Northern Ireland operations. First-half exit-related charges included $4.6 million of severance, $1.8 million of property impairments, and $4.0 million of operating and other costs. Additional costs of up to approximately $5 million were expected later in 2016.
Guidance, outlook, commentary, and risks
- 2016 GAAP revenue was expected to be approximately $2.95 billion, with operating profit of $135 million to $150 million and operating margin of 4.6% to 5.1%.
- 2016 non-GAAP revenue was expected to be approximately $2.9 billion, with operating profit of $185 million to $200 million and operating margin of 6.4% to 6.9%. Non-GAAP EPS guidance was $1.95 to $2.10.
- Management expected approximately 6% GAAP organic revenue growth, offset by an estimated 8% negative currency impact. The non-GAAP outlook assumed approximately 5% organic growth and a 6% negative currency impact.
- 2016 capital expenditures were expected at $100 million to $110 million on a GAAP basis, with total fixed-asset acquisitions, including capital leases, of $135 million to $145 million.
- Management could not provide a fully reconciled GAAP outlook for certain tax, earnings, EPS, and EBITDA measures because the impact of Venezuela and related exchange rates could be significant and could not be forecast reliably.
- Venezuela remained a material risk. The DICOM exchange rate declined 57% during Q2 to approximately 628 bolivars per dollar. Brink’s recognized a $4.6 million remeasurement loss in the first half and had $6.8 million of bolivar-denominated cash that had not been repatriated.
- Other significant risks include foreign-exchange volatility, restrictions on cash repatriation, political and economic instability, labor costs and work stoppages, insurance and security costs, pension and postretirement obligations, deferred-tax-asset realizability, litigation, and access to credit markets.
- A Mexican legal matter had an accrued exposure of $2 million, with additional reasonably possible losses of up to $10 million. A Mexican antitrust investigation could result in future claims, but the company could not estimate the probability or amount of loss.
- The company corrected prior-year balance-sheet classifications related to restricted cash, customer obligations, short-term borrowings, and current debt maturities. Management stated the correction was not material and did not affect operations or comparability.
Investor verification checklist
- Verify the sustainability of reported organic growth after removing inflation-related pricing, Venezuela effects, acquisitions and dispositions, and currency translation.
- Assess whether the U.S. and Mexico margin targets can be achieved given the reported cost, volume, and productivity pressures.
- Monitor Venezuela exchange rates, cash-access restrictions, remeasurement losses, and the possibility of further impairments.
- Reconcile GAAP results to non-GAAP results, particularly the effects of restructuring, Ireland exit costs, retirement-plan charges, Venezuela, and tax-rate adjustments.
- Track net debt, capital expenditures, available revolving capacity, covenant compliance, and the decline in operating cash flow.
- Review the outcome and potential exposure from the Mexican legal and antitrust matters.
- Evaluate whether restructuring savings offset the related charges and whether additional Ireland exit costs remain within management’s estimate.