Business Context and Reporting Period
The Brink’s Company filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. Brink’s provides cash-in-transit, ATM, cash-management, payment, global logistics, and security and guarding services in more than 100 countries through four reportable segments: Latin America, EMEA, North America, and Asia Pacific.
Key Financial Metrics
| In millions, except per-share amounts | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $913.1 | $982.4 | $2,806.2 | $2,902.8 |
| Operating profit (loss) | $47.5 | $59.2 | $(14.3) | $109.3 |
| Income (loss) from continuing operations attributable to Brink’s | $18.7 | $29.8 | $(37.4) | $45.9 |
| Net income (loss) attributable to Brink’s | $20.2 | $23.8 | $(36.7) | $15.9 |
| Diluted EPS from continuing operations | $0.38 | $0.61 | $(0.76) | $0.94 |
| Operating margin | 5.2% | 6.0% | (0.5)% | 3.8% |
| Cash flow from operations | Not provided for the quarter | Not provided for the quarter | $72.5 | $104.4 |
Q3 revenue declined 7% and operating profit declined 20%. Nine-month revenue declined 3%, while the company moved from operating profit to an operating loss. The nine-month effective tax rate on continuing operations was negative 115.7%, primarily because the $121.6 million Venezuela remeasurement loss was largely nondeductible. Excluding Venezuela-related nondeductible expenses, management reported a nine-month effective tax rate of approximately 44%.
Liquidity, Debt, and Capital Resources
- Cash and cash equivalents were $223.0 million at September 30, 2014, down from $255.5 million at December 31, 2013.
- Total debt was $493.9 million, compared with $436.0 million at year-end 2013. Debt comprised $59.4 million of short-term debt and $434.5 million of long-term debt.
- Management’s supplemental net debt was $312.1 million, up from $211.8 million, after excluding $41.2 million of customer funds held in Cash Management Services operations.
- The $480 million unsecured revolving facility had $235 million available at September 30, 2014. Other committed facilities provided additional availability, including $20 million under multi-currency facilities and $12 million under a separate committed facility.
- Brink’s prepaid $43.2 million of DTA bond principal during the third quarter, paying $44.3 million including accrued interest.
- Operating cash flow was reduced by $87.2 million of contributions to the primary U.S. pension plan. Capital expenditures were $83.8 million, acquisitions were $4.9 million, and investing cash outflows were $30.2 million after $62.6 million of proceeds from sales of property and other investments.
- Management stated that current cash, available credit, and projected operating cash flows should cover liquidity needs for more than the next twelve months.
Material Changes Versus the Prior Comparable Period
- Venezuela: Effective March 24, 2014, Brink’s began using the SICAD II rate, approximately 50 bolivars per U.S. dollar, rather than the 6.3 official rate. The change produced a $121.6 million remeasurement loss in the first nine months, compared with $13.4 million in the prior-year period, and materially reduced reported Venezuelan revenue, assets, and operating results.
- Segment performance: Nine-month Latin America revenue fell 11% to $1.118 billion and segment operating results declined to an $81.4 million loss from $90.6 million of profit. EMEA revenue increased 4% to $904.4 million, North America revenue was broadly flat at $673.7 million, and Asia Pacific revenue increased 2% to $110.0 million.
- Netherlands restructuring: Brink’s recorded $10.5 million of estimated severance costs and $5.1 million of fixed-asset impairment charges in the third quarter, for total restructuring-related charges of approximately $15.6 million. The charges followed notice that a significant customer expects to terminate its Netherlands contract in June 2015.
- Peru divestiture: A $44.3 million gain on the sale of an equity interest in a Peruvian cash-in-transit business significantly improved third-quarter non-segment results. The gain is excluded from management’s Non-GAAP measures.
- Security loss: Q3 results included a $10.4 million loss related to a theft in Chile. The comparable nine-month 2013 period included an $18.7 million robbery loss in Brussels.
- Pension funding: Cash contributions to the primary U.S. pension plan increased from $13.0 million in the first nine months of 2013 to $87.2 million in 2014, reducing operating cash flow but accelerating portions of expected 2015 and 2016 contributions.
- Discontinued operations: Discontinued operations contributed $0.7 million after tax in the first nine months of 2014, compared with a $30.0 million loss in the prior-year period, which included severance and sale-related charges from previously disposed businesses.
Guidance, Outlook, Risks, and Unusual Items
- Management projected 2014 revenue of approximately $3.7 billion, organic revenue growth of 11% to 13%, and negative currency impact on revenue of 17% to 19%.
- Expected 2014 GAAP segment margin was 1.0% to 2.0%; expected Non-GAAP segment margin was 5.5% to 6.0%. Management also maintained longer-term targets of an 8% Non-GAAP segment margin, $290 million to $330 million of segment operating profit, and $2.50 to $3.00 of EPS by 2016.
- Management expected a fourth-quarter 2014 non-cash U.S. pension settlement charge of $50 million to $65 million related to lump-sum or reduced-annuity elections. Expected December pension-plan disbursements were $120 million to $150 million.
- The Netherlands restructuring may include closing up to three facilities, disposing of assets, and reducing the workforce by approximately 600 employees. Estimated severance and employee-benefit costs could reach $16 million, and future lease termination costs were estimated at approximately $1 million.
- Venezuela remains subject to exchange restrictions, uncertain access to SICAD II, inflation, political and economic instability, and potential inability to obtain U.S. dollars for imported supplies, capital expenditures, or repatriation.
- Brink’s had accrued $1.8 million for a Mexican legal matter involving SERPAPROSA. Additional reasonably possible losses could be up to $10 million, based on September 30 exchange rates.
- Other significant risks include foreign-currency volatility, restrictions on repatriating foreign cash, pension and postretirement obligations, security losses and theft, labor actions, customer concentration, pricing pressure, litigation, insurance recoveries, and the ability to execute cost reductions.
Important Facts for Investors to Verify
- Whether Venezuela’s exchange-rate restrictions or SICAD II availability cause additional remeasurement losses, cash-access constraints, or operating disruption.
- The final amount and accounting impact of the fourth-quarter U.S. pension settlement charge and the related lump-sum payments.
- The scope, timing, and ultimate cost of the Netherlands restructuring and the loss of the significant customer contract.
- Whether Latin America can convert reported organic revenue growth into sustainable operating profit after currency effects and security costs.
- Availability and covenant headroom under the revolving, committed, and letter-of-credit facilities, particularly as debt and net debt increased.
- The outcome of the Mexican SERPAPROSA litigation and other claims for which the company cannot estimate a loss range.
- The reconciliation and continuing usefulness of management’s Non-GAAP and Venezuela-adjusted results, which exclude material currency, restructuring, pension, disposition, and other items.