FINANCIAL REVIEW
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TABLE OF CONTENTS
Management's Discussion and Analysis...............................2
Statement of Management Responsibility............................37
Independent Auditors' Report......................................38
Consolidated Balance Sheets.......................................39
Consolidated Statements of Operations.............................40
Consolidated Statements of Comprehensive Loss.....................42
Consolidated Statements of Shareholders' Equity...................43
Consolidated Statements of Cash Flows.............................44
Notes to Consolidated Financial Statements........................45
Selected Financial Data...........................................78
Board of Directors and Senior Management..........................80
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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The Pittston Company ("Pittston") has three primary operating segments within
its "Business and Security Services" businesses: Brink's, Incorporated
("Brink's"), Brink's Home Security, Inc. ("BHS") and BAX Global Inc. ("BAX
Global"). The fourth operating segment is Other Operations, which consists of
Pittston's gold, timber and natural gas operations. The Company also has
significant assets and liabilities associated with its former coal operations
and expects to have significant ongoing expenses and cash outflows related to
former coal operations in the future. Pittston and its subsidiaries are referred
to herein as the "Company."
During 2002, the Company completed its planned exit of the coal business by
selling or shutting down its remaining coal operations. The results of
operations of the Company's former coal operations have been reported as
discontinued operations for all years reported. The Company defines certain of
the liabilities associated with its former coal operations as its "legacy"
liabilities. Information about the Company's legacy liabilities is contained in
several sections of Management's Discussion and Analysis, including
"Applications of Critical Accounting Policies and Recent Accounting
Pronouncements," "Liquidity and Capital Resources - Legacy Liabilities and
Assets," "Liquidity and Capital Resources - Significant Contractual Obligations"
and "Results of Operations - Former Coal Operations." Disclosures in these
sections discuss critical estimates used, provide a sensitivity analysis,
reconcile the legacy liability components to U.S. generally accepted accounting
principles ("GAAP") measures and show five-year projections for estimated future
payments and expense associated with the legacy liabilities.
For the year ended December 31, 2002, the Company reported net income of $26.1
million, or $0.48 per diluted share, compared with $16.6 million, or $0.31 per
diluted share, for 2001 and a net loss of $256.6 million, or $5.12 per diluted
share, in 2000.
Net income in 2002 included $19.2 million ($12.5 million after tax) of
impairment and other charges associated with the Company's former coal business
and $7.1 million ($5.0 million after tax) of impairment and other charges
related to its gold mining and exploration interests. Also included in 2002 net
income was a charge of $42.9 million (after tax) related to the Company's
discontinued operations and $3.7 million (after tax) income related to a
Stabilization Act compensation payment.
RESULTS OF OPERATIONS
Revenues Operating Profit (Loss)
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2002 2001 2002 2001
Years Ended December 31 VS. Vs. Years Ended December 31 VS. Vs.
(In millions) 2002 2001 2000 2001 2000 2002 2001 2000 2001 2000
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(%) (%) (%) (%)
BUSINESS SEGMENTS
Brink's $ 1,579.9 1,536.3 1,462.9 3 5 $ 96.1 92.0 108.5 4 (15)
BHS 282.4 257.6 238.1 10 8 60.9 54.9 54.3 11 1
BAX Global 1,871.5 1,790.1 2,097.6 5 (15) 17.6 (27.6) (99.6) NM 72
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Business and Security Services 3,733.8 3,584.0 3,798.6 4 (6) 174.6 119.3 63.2 46 89
Other Operations 42.9 40.2 35.5 7 13 0.4 7.6 5.7 (95) 33
Former coal operations - - - - - (19.2) - - NM -
General corporate expense - - - - - (23.1) (19.3) (21.2) (20) 9
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$ 3,776.7 3,624.2 3,834.1 4 (5) $ 132.7 107.6 47.7 23 126
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-2-
Net income in 2001 included a charge of $29.2 million (after tax) reflecting
adjustments to the estimated loss on disposition of the discontinued operations.
Results in 2000 included a $207.3 million loss (after tax) from discontinued
operations, a $52.0 million (after tax) charge to record the cumulative effect
of an accounting change and a $35.7 million (after tax) restructuring charge.
Revenue from continuing operations in 2002 increased primarily due to higher BAX
Global air export volumes from Asia-Pacific, largely due to improved economic
conditions in that region. In addition, revenue increased in 2002 at Brink's and
BHS. Operating profit increased in 2002 due to improved operating performance in
the Company's business and security services segments, particularly at BAX
Global, partially offset by the charges related to the Company's former coal
operations and gold mining and exploration interests.
Revenue from continuing operations in 2001 decreased compared to 2000 primarily
due to lower volumes at BAX Global resulting from weak economic conditions.
Operating profit in 2000 included a pretax $57.5 million restructuring charge at
BAX Global (see discussion below). In 2001, improved operating performance at
BAX Global (even after excluding the 2000 restructuring charge) was partially
offset by a decrease in operating profit at Brink's.
BRINK'S
2002 2001
Years Ended December 31 VS. Vs.
(In millions, except percentages) 2002 2001 2000 2001 2000
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(%) (%)
REVENUES
North America (a) $ 694.9 680.3 642.4 2 6
International 885.0 856.0 820.5 3 4
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$ 1,579.9 1,536.3 1,462.9 3 5
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OPERATING PROFIT
North America (a) $ 52.2 42.4 55.5 23 (24)
International 43.9 49.6 53.0 (11) (6)
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$ 96.1 92.0 108.5 4 (15)
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OPERATING MARGIN (IN PERCENTAGES) (%) (%) (%)
North America (a) 7.5 6.2 8.6
International 5.0 5.8 6.5
Total 6.1 6.0 7.4
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Depreciation and amortization,
excluding goodwill amortization $ 61.3 60.1 58.2 2 3
Goodwill amortization N/A 2.1 2.0 NM 5
Capital expenditures 79.3 71.3 73.9 11 (4)
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<FN>
(a) Comprises U.S. and Canada.
</FN>
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Comparison of 2002 and 2001
Brink's revenues increased in both North America and International operations,
and although operating profit increased in North America, operating profit was
lower in the International operations, primarily due to lower operating profits
in South America.
Revenue increases from North American operations in 2002 were primarily related
to increased currency processing and armored transportation activities (which
includes ATM services). Operating profit increased in 2002 primarily due to
improved performance in U.S. Global Services and, to a lesser extent, armored
transportation operations and currency processing.
Revenues from International operations in 2002 increased 5% over 2001 excluding
the effects of changes in foreign currency exchange rates. International
revenues in 2002 decreased a net $14 million due to changes in exchange rates as
South American currencies weakened relative to the U.S. dollar while most
European currencies strengthened. Revenues in Europe reflected increased volumes
in armored transportation, ATM servicing, currency processing and Global
Services operations. South American revenues in 2002 were negatively impacted by
the continuing effects of difficult economic and operating conditions.
The decrease in International operating profit was primarily due to lower
results in South America, which more than offset improved results in
Asia-Pacific and Europe. Lower operating profits in South America reflect the
previously mentioned difficult economic and operating conditions, which are
expected to continue into 2003. Absent improvement in such conditions,
management expects lower year-over-year performance in the first half of 2003.
Europe's operating profits in the fourth quarter of 2001 and the first quarter
of 2002 were higher as a result of nonrecurring euro-related processing and
transportation work, and in 2002, by the transportation and processing work
associated with the final return of the legacy currencies. The first nine months
of 2001 reflected upfront costs associated with preparations for the euro work,
and results throughout 2002 reflected higher than normal labor expenses as
staffing levels remained high following the euro work performed in the first
half of the year. Brink's incurred severance expense associated with a reduction
in staffing levels in Germany in the second half of 2002. Brink's expects to
further reduce staffing levels in Europe in 2003 and incur additional severance
expense. European operating performance reflected higher volume and operational
improvements in certain countries despite softness in European economies. Such
softness has continued into 2003.
Asia-Pacific operating profits in 2002 were well above the prior year,
reflecting higher pricing in Australia. International operating profits for 2001
included approximately $2 million of pretax gains on the sale of two
non-strategic international affiliates.
Brink's North American operating results in 2003 are expected to be adversely
affected by approximately $10 million higher pension expense for its primary
U.S. pension plan due to the effects of unfavorable returns on plan assets over
the last three years and a lower discount rate used to determine projected
benefit obligations.
-4-
Comparison of 2001 and 2000
Brink's worldwide consolidated revenues increased $73.4 million (5%) in 2001 as
compared to 2000. This increase was attributable to both the North America and
International operations and was partially offset by the impact of the stronger
U.S. dollar relative to 2000. Brink's 2001 operating profit of $92.0 million
represented a 15% decrease from 2000, with decreases in both the North America
and International regions. Operating profit in 2000 benefited from a $4.9
million settlement associated with an insurance recovery related to a prior
year's robbery loss.
Revenues and operating profit from North American operations in 2001 increased
$37.9 million and decreased $13.1 million, respectively, from 2000. The 6%
increase in revenues for 2001 primarily related to higher revenues from armored
car operations, which includes ATM services. Excluding the $4.9 million gain in
2000 from an insurance settlement related to a prior year's robbery loss,
operating profit decreased 16% in 2001 primarily due to increased employee
benefits, particularly for medical benefits and workers' compensation costs, all
risk costs, higher operating losses incurred by the Global Services business in
the U.S. (partly due to lower volumes and higher transportation costs) and a
downturn in performance of the armored car business in Canada due to the loss of
certain customer contracts and the effects of a labor dispute during the first
nine months of 2001.
Revenues and operating profit from International operations in 2001 increased
$35.5 million and decreased $3.4 million, respectively, from 2000. International
revenues in 2001 were reduced by approximately $50 million as a result of the
year-over-year strengthening of the U.S. dollar relative to certain local
currencies, primarily in Latin America and, to a lesser extent, Europe.
Excluding these foreign currency effects, International revenues increased 10%,
primarily due to operations in Europe and, to a lesser extent, Latin America and
Asia-Pacific. The increase in Europe reflected revenues associated with armored
car services performed under contracts with central banks and other banks to
distribute the euro currency throughout Europe, as well as increased volumes in
armored transportation, ATM servicing, currency processing and air courier
operations. Increases in Latin America (excluding foreign currency effects) were
primarily due to higher revenues in Brazil and Venezuela.
The net decrease in International operating profit was due to lower results in
Latin America which more than offset improved results in Europe and
Asia-Pacific. Lower operating profits in Latin America reflected severe pricing
competition and unfavorable exchange rate effects in Brazil as well as high
labor costs and deteriorating economic conditions in Argentina. Improved results
in Europe included the higher margin euro transportation and distribution work
as well as volume increases in armored transportation, ATM services and currency
processing. Revenues and operating profits for euro transportation and
distribution were primarily earned during the fourth quarter of 2001. Operating
results in the United Kingdom were well below the prior year primarily due to
costs associated with expansion into the ATM business, a decline in air courier
volumes and reduced armored transportation business. International operating
profits for 2001 benefited from approximately $2 million of pretax gains on the
sale of the Company's investments in two non-strategic international affiliates.
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BRINK'S HOME SECURITY
2002 2001
(Dollars in millions, Years Ended December 31 VS. Vs.
subscriber data in thousands) 2002 2001 2000 2001 2000
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(%) (%)
REVENUES $ 282.4 257.6 238.1 10 8
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OPERATING PROFIT
Recurring services (a) 109.5 100.9 96.4 9 5
Investment in new subscribers (b) (48.6) (46.0) (42.1) (6) (9)
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$ 60.9 54.9 54.3 11 1
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OPERATING MARGIN (IN PERCENTAGES) 21.6% 21.3% 22.8%
Monthly recurring revenues (c) $ 21.1 19.2 18.0
Annualized disconnect rate 7.1% 7.6% 7.6%
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Number of subscribers:
Beginning of period 713.5 675.3 643.3
Installations 105.8 90.9 82.0 16 11
Disconnects (52.6) (52.7) (50.0) - (5)
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End of period 766.7 713.5 675.3 7 6
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Average 739.0 693.5 659.8 7 5
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Depreciation and amortization (d) $ 43.9 36.8 32.0 19 15
Impairment charges from subscriber
disconnects 32.3 33.8 30.1 (4) 12
Amortization of deferred revenue (23.9) (23.9) (20.6) - 16
Net cash deferrals on new subscribers (e) 9.4 12.1 13.1 (22) (8)
Capital expenditures $ 86.9 81.3 74.5 7 9
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<FN>
(a) Reflects monthly operating profit generated from the existing subscriber
base plus the amortization of deferred revenues less the amortization of
deferred subscriber acquisition costs (primarily direct selling expenses).
(b) Primarily marketing and selling expenses, net of the deferral of direct
selling expenses, incurred in the acquisition of new subscribers.
(c) Calculated based on the number of subscribers at period end multiplied by
the average fee per subscriber received in the last month of the period for
contractual monitoring and maintenance services. The amortization of
deferred revenues is excluded. See "Reconciliation of Non-GAAP Measures".
(d) Includes amortization of deferred subscriber acquisition costs of $6.6
million, $5.8 million and $5.3 million in 2002, 2001 and 2000, respectively.
(e) Consists of nonrefundable payments received from customers for new
installations for which revenue recognition has been deferred, net of
payments for direct selling costs for which expense recognition has been
deferred. The amount is equal to "Deferred subscriber acquisition costs" and
"Deferred revenue from new subscribers" as reported in the Company's
Consolidated Statements of Cash Flows.
</FN>
Operating profit comprises recurring services minus the cost of the investment
in new subscribers. Recurring services reflects the monthly monitoring and
service earnings generated from the existing subscriber base and the
amortization of deferred revenues and deferred direct costs from installations.
Impairment charges from subscriber disconnects and depreciation and amortization
expenses are charged to recurring services.
-6-
Recurring services is affected by changes in the average monitoring fee per
subscriber, the amount of operational costs including depreciation, the size of
the subscriber base and the level of subscriber disconnect activity. Investment
in new subscribers is the net expense (primarily marketing and selling expenses)
incurred in adding to the subscriber base every year.
The amount of such investment charged to income may be influenced by several
factors, including the growth rate of new subscriber installations and the level
of costs incurred in attracting new subscribers. As a result, increases in the
rate of investment (the addition of new subscribers) may have a negative effect
on current segment operating profit but a positive impact on long-term operating
profit, cash flow and economic value.
Comparison of 2002 and 2001
Revenues increased 10% in 2002 primarily due to a 7% larger average subscriber
base, as well as higher average monitoring rates, higher revenues from home
builders and higher service revenues. These factors also contributed to a 10%
increase in monthly recurring revenues as measured at year end. Installations in
2002 were 16% higher than in 2001, primarily as a result of successful marketing
efforts and new distribution channels.
Operating profit for 2002 increased 11% as higher profit from recurring services
was partially offset by an increased investment in new subscribers. Higher
profit from recurring services was due to increased monitoring and service
revenues resulting from a larger average subscriber base and 4% lower impairment
charges reflecting a lower disconnect rate, partially offset by increased
depreciation from the larger number of security systems and higher monitoring
costs. Investment in new subscribers increased only 6% on 16% higher
installations during 2002, reflecting more effective marketing and installation
efforts and the use of new distribution channels. The Company believes the
improvement in the 2002 annualized disconnect rate of 7.1% over the 7.6% of 2001
was due primarily to the effects of higher credit standards established for new
customers in recent years.
Police departments in two major western U.S. cities do not respond to calls from
alarm companies unless an emergency has been visually verified. If more police
departments in the future refuse to respond to calls from alarm companies
without visual verification, this could have an adverse effect on future results
of operations for BHS.
BHS's operating results in 2003 are expected to be adversely affected by
approximately $1 million higher pension expense for its primary U.S. pension
plan, due to the effects of unfavorable returns on plan assets over the last
three years and a lower discount rate used to determine projected benefit
obligations.
Comparison of 2001 and 2000
Revenues for BHS increased 8% in 2001 versus 2000, primarily due to the 5%
growth in the average subscriber base. Monthly recurring revenues, measured at
year end, grew 7% from 2000 to 2001 as the subscriber base grew 6% from year end
to year end. Installations in 2001 were 11% higher than in 2000 and disconnects
were 5% higher in 2001 compared to 2000 on the higher subscriber base as the
disconnect rate stayed the same.
Segment operating profit for 2001 grew by $0.6 million to $54.9 million as
subscriber volume-related growth in recurring services was partially offset by
increased field service costs and the $3.9 million increase (9%) in the
investment in new subscribers (the number of installations increased 11% in 2001
versus 2000).
2000 Accounting Change
BHS defers all new installation revenue and the portion of the new installation
costs deemed to be direct costs of subscriber acquisition. Such revenues and
costs are amortized over the expected term of the relationship with the
subscriber.
BHS accounted for the adoption of Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements," as a change in accounting principle,
effective January 1, 2000. The Company recorded a noncash, pretax charge of
$84.7 million ($52.0 million after tax) in 2000 to reflect the cumulative effect
of the change in accounting principle on years prior to 2000.
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BAX GLOBAL
2002 2001
Years Ended December 31 VS. Vs.
(In millions) 2002 2001 2000 2001 2000
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(%) (%)
REVENUES
Americas $ 989.9 1,008.1 1,236.6 (2) (18)
International 951.7 845.0 917.3 13 (8)
Eliminations/other (70.1) (63.0) (56.3) (11) (12)
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$ 1,871.5 1,790.1 2,097.6 5 (15)
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OPERATING PROFIT (LOSS)
Americas (a) $ (15.1) (46.0) (96.2) 67 52
International (a) 43.8 35.6 33.2 23 7
Corporate and other (11.1) (17.2) (36.6) 35 53
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$ 17.6 (27.6) (99.6) NM 72
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OPERATING MARGIN (IN PERCENTAGES) (%) (%) (%)
Americas (1.5) (4.6) (7.8)
International 4.6 4.2 3.6
Total 0.1 (1.5) (4.7)
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Depreciation and amortization,
excluding goodwill amortization $ 44.4 49.4 53.8 (10) (8)
Goodwill amortization N/A 7.4 7.5 NM (1)
Capital expenditures 27.1 33.1 60.1 (18) (45)
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Intra U.S. revenue $ 445.4 457.3 604.6 (3) (24)
Worldwide expedited freight services:
Revenues $ 1,452.4 1,427.2 1,724.2 2 (17)
Weight in pounds 1,559.3 1,453.4 1,764.9 7 (18)
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<FN>
(a) Operating loss includes restructuring charges in 2000 of $54.6 million
for Americas and $2.9 million for International.
</FN>
BAX Global operates throughout most of the world. The Americas includes
operations in the U.S., Latin America and Canada; International includes BAX
Global's Atlantic and Asia-Pacific operating regions. Each region includes both
expedited and non-expedited freight services. Non-expedited freight services
primarily include deferred delivery freight shipments, supply chain management
and ocean freight services. Revenues and profits are shared among the origin and
destination countries on most export volumes.
BAX Global's U.S. business, the region with the largest export and domestic
volume, significantly affects the results of BAX Global's worldwide expedited
freight services.
In addition, BAX Global's operations include an international customs brokerage
business as well as a federally certificated airline, Air Transport
International ("ATI"). ATI's results include the results of charter air service
and are included in the Americas region. Eliminations/other revenues primarily
include intercompany revenue eliminations on shared services. Corporate and
other operating profit (loss) primarily consists of global support costs
including global information technology costs and, in 2001 and 2000, goodwill
amortization.
-8-
Comparison of 2002 and 2001
The 5% increase in BAX Global's worldwide operating revenues in 2002 as compared
to 2001 was attributable to the addition of new business and economic recovery
in Asia-Pacific. Worldwide operating profit in 2002 improved $45.2 million,
primarily reflecting the benefit of ongoing efforts in the Americas to better
align transportation costs and operating expenses with market demands and
economic conditions, and the volume improvement in Asia-Pacific.
Americas revenues decreased 2% in 2002 as compared to 2001 due to a lower volume
of domestic and outbound international expedited airfreight services associated
with the continuing weak economies in the U.S. and Europe. Americas 2002
revenues from charter activity were $15 million higher than 2001.
Despite the reduction in revenues, the operating loss in the Americas was
reduced by 67% in 2002 as compared to 2001. The improvement was primarily due to
reductions in Americas transportation costs. Costs per pound shipped in 2002
decreased as compared to 2001 as a result of fleet reductions undertaken during
2001 and an increased use of ground transportation. Recent increases in carrier
rates on export shipments and higher employee benefit costs are expected to
increase costs in 2003. ATI is renegotiating most of its aircraft leases and, if
successful, expects further reductions in transportation costs in 2003 as a
result of more favorable lease terms.
In 2002, International revenues increased 13% and operating profit increased 23%
as compared to 2001. The increases were primarily due to improved economic
conditions and new business in several Asia-Pacific countries which resulted in
increased air export volumes to the U.S., primarily associated with the high
technology industry. In addition, a port dispute on the West Coast of the U.S.
resulted in a higher volume of air export freight from Asia-Pacific during the
fourth quarter of 2002. Margins on such shipments were lower due to higher
airline transportation costs, not all of which were passed on to customers. In
the Atlantic region, low export and import air-freight volumes and lower prices
caused by the continuing weak European economy resulted in a decrease in
revenues and operating profit for 2002 as compared to 2001. The Company expects
this weakness to continue into 2003.
The decrease in Corporate and other expenses in 2002 as compared to 2001 was
primarily due to the amortization of goodwill in 2001 ($7.4 million). See Note 1
to the Consolidated Financial Statements.
BAX Global's operating results in 2003 are expected to be adversely affected by
approximately $5 million higher pension expense for its primary U.S. pension
plan, due to the effects of unfavorable returns on plan assets over the last
three years and a lower discount rate used to determine projected benefit
obligations.
Comparison of 2001 and 2000
The 15% decrease in BAX Global's worldwide operating revenues in 2001 as
compared to 2000 was attributable to both the Americas and International
regions. Worldwide operating loss in 2001 was $27.6 million, compared to $99.6
million in 2000. The 2000 operating loss included a restructuring charge of
$57.5 million (discussed below).
Revenues in the Americas decreased $228.5 million (18%) in 2001 compared to 2000
as a result of lower demand for expedited freight primarily caused by weak
economic conditions during 2001, particularly in the U.S. and Asia. Domestic
expedited volumes and yields in 2001 declined over the prior year. Results in
2000 for the Americas included a restructuring charge of $54.6 million
(discussed below), a bad debt provision related to one customer of $4.5 million
and a charge of approximately $4 million relating to the decision to terminate a
logistics contract due to inadequate operating returns. Beginning in 2001,
certain U.S.-based logistics revenues and costs were refocused from a global to
a largely Americas role, resulting in certain revenues and costs that were
classified as Corporate and other during 2000 being classified within the
Americas results in 2001. Corporate and other expense in 2000 included $7.1
million of such costs. Excluding the effects of the above-mentioned 2000 charges
and the effects of the change in allocation, the Americas operating loss in 2001
increased $5.8 million over 2000. Although lower freight volume reduced revenues
significantly, the effect on operating profit of the lower volume was largely
offset by cost savings associated with the 2000 restructuring plan and ongoing
cost reduction efforts.
-9-
In 2001, International revenues decreased $72.3 million (8%) and operating
profit increased $2.4 million (7%) as compared to 2000. The decrease in revenues
was primarily a result of weak economic conditions during 2001 in the U.S. and
Asia-Pacific. Results for the Atlantic region in 2000 included a $2.9 million
restructuring charge (see discussion below). Although International operating
profit in 2001 was impacted by lower export volumes from the Asia-Pacific
region, cost savings from the previously mentioned 2000 restructuring plan and
continuing efforts to reduce overhead costs resulted in essentially flat profit
performance from 2000 to 2001 despite the decline in revenue.
The decrease in 2001 eliminations/other revenue was largely due to the
refocusing of certain U.S.-based logistics revenues from a global to an Americas
role.
Eliminations/other revenue in 2000 included $5.8 million of these logistics
revenues. Such revenues in 2001 are included within the Americas. Corporate and
other expense for 2001 decreased $19.4 million as compared to 2000. The
improvement was primarily due to lower global administrative expenses stemming
from cost control efforts, as well as the reclassification of the U.S.-based
logistics costs noted above. Corporate and other expense included goodwill
amortization of $7.4 million in 2001 and $7.5 million in 2000.
2000 Restructuring Plan
BAX Global finalized a restructuring plan in 2000 aimed at reducing the capacity
and cost of its airlift capabilities in the U.S. as well as reducing station
operating expenses, sales, general and administrative costs in the Americas and
Atlantic regions. The actions taken included:
o The removal of ten planes from the fleet, nine of which were dedicated to
providing lift capacity in BAX Global's commercial cargo system.
o The closure of nine operating stations and realignment of domestic
operations.
o The reduction of employee-related costs through the elimination of
approximately 300 full-time positions including aircraft crew and station
operating, sales and business unit overhead positions.
In addition, certain Atlantic region operations were streamlined in order to
reduce overhead costs and improve overall performance in that region. The
Atlantic region planned restructuring efforts involved severance costs and
station closing costs in the UK, Denmark, Italy and South Africa. Approximately
50 positions were eliminated, most of which were positions at or above manager
level.
The following is a summary of the 2000 restructuring charges:
Americas Atlantic Total
(In millions) Region Region BAX Global
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Fleet related charges $ 49.7 - 49.7
Severance costs 1.1 1.2 2.3
Station and other closure costs 3.8 1.7 5.5
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Restructuring charge $ 54.6 2.9 57.5
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Approximately $45.2 million of the restructuring charge was noncash and
approximately $0.3 million of the charge was paid in 2000. The following
analyzes the changes in the remaining liabilities for such costs:
Station
Fleet and
(In millions) Charges Severance Other Total
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December 31, 2000 $ 6.6 2.0 3.4 12.0
Adjustments 0.6 (0.4) (0.4) (0.2)
Payments (5.1) (1.5) (0.9) (7.5)
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December 31, 2001 2.1 0.1 2.1 4.3
Payments (2.1) (0.1) (0.6) (2.8)
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December 31, 2002 $ - - 1.5 1.5
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The remaining accrual includes contractual commitments for facilities and is
expected to be paid by the end of 2007.
The Company decreased its accrual for restructuring in 2001 by a net $0.2
million as a result of changes in the estimate of certain liabilities.
-10-
FORMER COAL OPERATIONS
During December 2002, the Company concluded its plan to sell or shut down its
coal mining operations. The Company recorded charges to both continuing
operations and discontinued operations in 2002 related to its former coal
operations.
Continuing Operations
The proposed sale of the Company's remaining West Virginia coal operations and
reserves did not occur in the fourth quarter 2002 as planned. The Company shut
down its West Virginia coal mining operations prior to the end of 2002 and is no
longer operating as an active coal producer. Residual assets have been
reclassified by the Company as held and used and were tested for impairment on
an individual property basis with a resulting net impairment loss of $14.1
million recorded within operating profit from continuing operations in 2002.
Prior to December 2002, the Company's expectation was to sell the majority of
the West Virginia assets as a group and, as such, these assets were not
previously considered to be impaired. The Company also accrued $5.1 million of
future lease payments related to advance royalty agreements associated with
properties it no longer believes will be transferred to purchasers.
Ongoing Expenses Related to Legacy Liabilities
After completing the disposal of its coal business, the Company has retained
certain coal-related liabilities and related expenses. Retained liabilities
include obligations related to postretirement benefits for Company-sponsored
plans, black lung benefits, reclamation and other costs related to idle
(shut-down) mines which have been retained, Health Benefit Act, workers'
compensation claims and costs of withdrawal from multi-employer pension plans.
Expenses related to these liabilities have been reflected in the loss from
discontinued operations through the disposal date. Subsequent to the completion
of the disposal process (for the period beginning January 1, 2003), adjustments
to coal-related contingent liabilities will be reflected in discontinued
operations, and expenses related to Company-sponsored pension and postretirement
benefit obligations and black lung obligations will be reflected in continuing
operations. In addition, subsequent to the disposal date, the Company expects to
have certain ongoing costs related to the administration of the retained
liabilities and will report those costs in continuing operations.
The following table reflects the Company's current estimates of projected
expenses for the next five years based on actuarial and operational assumptions
as of December 31, 2002. Such assumptions usually are adjusted annually and the
actual amount of expense reported in future periods may be materially different
than amounts presented below:
Projected Expenses for the Years Ending December 31 (a)
- ---------------------------------------------------------------------------------------------------------------------------------
(In millions) 2003 2004 2005 2006 2007
- ---------------------------------------------------------------------------------------------------------------------------------
Company-sponsored coal-related postretirement
benefits other than pensions $ 49 49 49 50 50
Black lung 7 6 6 6 5
Pension 1 3 7 9 7
Administrative and legal expenses 5-8 3-4 2-3 2-3 2-3
- ---------------------------------------------------------------------------------------------------------------------------------
Projected legacy expenses $ 62-65 61-62 64-65 67-68 64-65
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Excludes operating lease payments, advance minimum royalty payments,
property taxes and insurance related to assets that are projected to be
sold. The timing of the sales and the amount of expenses each year of these
assets is not determinable. The above table does not include any potential
future adjustments to contingent liabilities or assets.
</FN>
The above table does not include certain costs of assets expected to be sold.
Such costs may be significant in early 2003. Further, administrative and other
costs are expected to be incurred more heavily in early quarters of 2003.
The amounts to be ultimately recorded in 2004 and later years will be dependent
on many factors, including inflation in health care and other costs, discount
rates, the market value of pension plan assets, the number of participants in
various benefit programs, the number of idle mine sites ultimately transferred
and the timing of such transfers, and the amount of administrative costs needed
to manage the retained liabilities.
-11-
Discontinued Operations
Proceeds received from the sales transactions in 2002 approximated $88 million
including cash of $42 million, notes receivable of $8 million (six-month term),
$16 million representing the present value of royalties (five-year term, $20
million total payments), and liabilities assumed by the purchasers of
approximately $22 million.
The assets disposed of primarily included operations including coal reserves,
property, plant and equipment, the Company's economic interest in Dominion
Terminal Associates ("DTA") and inventory. Certain liabilities, primarily
reclamation costs related to properties disposed of, were assumed by the
purchasers.
The losses from discontinued operations in the Company's Consolidated Statements
of Operations were as follows:
Years Ended December 31
(In millions) 2002 2001 2000
- -------------------------------------------------------------------
Pretax loss from the operations of
the discontinued segment $ - - (32.4)
Income tax benefit - - (14.2)
- -------------------------------------------------------------------
Loss from the operations of the
discontinued segment, after tax - - (18.2)
- -------------------------------------------------------------------
Loss on the disposal 13.2 (15.9) (85.9)
Operating losses during
the disposal period (28.1) (22.2) (45.0)
Health Benefit Act liabilities and
curtailment of benefit plans (24.0) (8.0) (163.3)
Withdrawal liabilities (26.8) (8.2) -
- -------------------------------------------------------------------
Pretax loss on the disposal
of the discontinued segment (65.7) (54.3) (294.2)
Income tax benefit (22.8) (25.1) (105.1)
- -------------------------------------------------------------------
Loss on the disposal of the
discontinued segment, after tax (42.9) (29.2) (189.1)
- -------------------------------------------------------------------
Loss from discontinued
operations $ (42.9) (29.2) (207.3)
- -------------------------------------------------------------------
Loss on the Disposal
During 2000, an estimated loss of $85.9 million was
recorded to reflect the difference between expected proceeds and the carrying
value of assets to be sold. During 2001, an estimated additional net loss of
$15.9 million was recorded to reflect changes in expected proceeds to be
received and changes in the expected values of assets and liabilities through
the anticipated dates of sale or shutdown. A $13.2 million reversal of the
previously estimated loss on sale was recorded during 2002 to reflect the final
adjustment based on the actual proceeds and values of assets and liabilities at
the dates of sale.
Operating Losses
Discontinued Operations accounting required the accrual of expenses expected to
be incurred through the end of the disposal period. Accordingly, operating
losses (including significant expenses the Company expects to retain and
classify in continuing operations subsequent to the disposal date related to
Company-sponsored pension and postretirement benefit obligations and black lung
obligations) were recognized within discontinued operations in different periods
than they would have been recorded if coal were a continuing operation. Total
recorded charges for Company-sponsored pension and postretirement benefit
obligations and black lung obligations were approximately $2 million, $53
million and $48 million in 2002, 2001 and 2000, respectively. The year 2000
included expenses incurred in 2000 and those expected to be incurred in 2001,
while 2001 (which included expenses expected to be incurred in 2002) included
only one year of expenses. The amount in 2002 represents the difference between
the estimated amount of expenses relating to 2002 that were accrued in 2001 and
the amount actually incurred in 2002. The increase in the average amount of
annual expense for 2002 (recorded in 2001) versus prior years primarily resulted
from the effects of actuarial assumption changes on postretirement medical and
pension benefits.
Estimated operating losses, including the above employee expenses, through the
originally anticipated period of disposal of $45.0 million were recorded in
2000.
The Company increased the estimated operating losses in 2001 by $22.2 million.
The $22.2 million increase included the effect of extending the anticipated
period of disposal through the end of 2002, which resulted in $53 million of
additional postretirement, pension, and black lung benefit expenses. Also
included in the $22.2 million increase was a refund of $23.4 million (including
interest) of Federal Black Lung Excise Tax ("FBLET") received during 2001 and an
accrual of $9.5 million for litigation settlements that were paid during early
2002.
-12-
The Company recorded an additional $28.1 million of operating losses during
2002, primarily reflecting worse-than-expected price, volume and costs per ton
of coal as a result of adverse coal market conditions during the year and the
sale of coal operations and reserves in 2002.
Health Benefit Act Liabilities and Curtailment of Benefit Plans
In 2000, the Company recorded a $161.7 million liability for its obligations
under the Coal Industry Retiree Health Benefit Act of 1992 (the "Health Benefit
Act"). In 2002 and 2001, the Company recorded additional charges of $24.0
million and $8.0 million, respectively, to reflect changes in the estimates of
the undiscounted liability. This liability will be adjusted in future periods as
assumptions change.
The $24.0 million of additional 2002 expense primarily resulted from the
Company's being able to obtain and use Company-specific information regarding
the age of the beneficiaries covered by the Health Benefit Act rather than using
averages relating to the entire population of beneficiaries covered, slightly
higher per-beneficiary health care premiums, and slightly lower mortality than
was estimated at the end of 2001 for the plan year ended September 30, 2002.
The $8.0 million additional 2001 expense was primarily the result of a higher
number of assigned beneficiaries as of October 1, 2001 than was estimated at the
end of 2000. The Combined Fund premium per beneficiary for the plan year
beginning October 1, 2001 was essentially equal to that estimated at the end of
2000.
During 2000, the Company also recorded a net curtailment loss of $1.6 million,
comprising a $6.0 million net curtailment loss on the Company's medical benefit
plans and a $4.4 million net curtailment gain on the Company's pension plans.
Withdrawal Liabilities
At December 31, 2001, the Company recorded estimated withdrawal liabilities for
coal-related multi-employer pension plans of $8.2 million associated with its
planned exit from the coal business. At December 31, 2002, the Company increased
the estimated liabilities by $26.8 million to $35.0 million.
The estimated liabilities at December 31, 2002 increased because the funded
status of the multi-employer plans deteriorated as of the most recent
measurement date. The actual withdrawal liability, if any, is subject to several
factors, including funding and benefit levels of the plans as of annual
measurement dates (June 30 each year) and the date that the Company is
determined to have completely withdrawn from the plans. Accordingly, the
ultimate obligation could change materially.
Income Taxes
Income tax benefits attributable to the loss on the disposal of the discontinued
segment include the benefits of percentage depletion generated from the active
operations during the sale period.
Operating Performance of Former Coal Operations
Since estimated operating losses from the measurement date to the date of
disposal of the former coal operations were recorded as part of the estimated
loss on the disposal, actual operating results of operations during the disposal
period are not included in Consolidated Statements of Operations in the period
that they are earned. The following table shows selected financial information
for former coal operations during 2002, 2001 and 2000.
(In millions) 2002 2001 2000
- --------------------------------------------------------------------------------
Sales $ 266.5 384.0 401.0
Operating loss (77.5) (31.7) (37.0)
- --------------------------------------------------------------------------------
Sales in 2002 of $266.5 million for the Company's former coal operations were
$117.5 million lower than in 2001 primarily due to a decrease in sales volume
because of weak demand in the coal industry and the sale of coal operations and
reserves in 2002. The operating loss of $77.5 million in 2002 was $45.8 million
higher than in 2001, primarily due to the lower sales volumes, lower Federal
Black Lung Excise Tax ("FBLET") refunds and higher benefit costs in 2002. See
"Liquidity and Capital Resources - Other Contingent Gains and Losses" for a
discussion of FBLET refunds.
Sales in 2001 for the discontinued coal operations decreased $17.0 million as
compared to 2000, primarily due to a decrease in volumes, partially offset by
higher realizations. The operating loss in 2001 of $31.7 million was $5.3
million lower than in 2000. Results in 2001 included a pretax gain on the
receipt of $23.4 million of FBLET refunds during the fourth quarter, partially
offset by increased costs associated with difficult geological conditions, an
accrual for litigation settlements of $9.5 million as well as higher idle and
closed mine costs.
-13-
OTHER OPERATIONS
Other Operations comprises the Company's gold, timber and natural gas
operations. The Company expects to exit these activities to focus resources on
its core Business and Security Services segments. The nature and timing of the
exit and any interim actions could result in gains or losses material to
operating results in one or more periods.
Revenues Operating Profit (Loss)
- ------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
Years Ended December 31 VS. vs. Years Ended December 31 VS. vs.
(In millions) 2002 2001 2000 2001 2000 2002 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------
OTHER OPERATIONS (%) (%) (%) (%)
Gold $ 15.2 14.6 16.6 4 (12) $ (7.6) (1.0) (1.6) NM 38
Timber 20.9 18.2 13.0 15 40 (1.0) (2.7) (1.6) 63 (69)
Natural gas (a) 6.8 7.4 5.9 (8) 25 9.0 11.3 8.9 (20) 27
- ------------------------------------------------------------------------------------------------------------------
$ 42.9 40.2 35.5 7 13 $ 0.4 7.6 5.7 (95) 33
- ------------------------------------------------------------------------------------------------------------------
<FN>
(a) Natural gas royalties are included within other operating income.
</FN>
Gold
In the fourth quarter 2002, the Company entered into an agreement to negotiate
the sale of its interests in its gold mining joint ventures to MPI Mines Ltd.
("MPI"), a publicly traded equity affiliate in which the Company has a minority
interest, in exchange for additional shares of MPI and other consideration. The
transfer is contingent upon various factors. The Company does not presently
control MPI and does not expect to control MPI after the exchange.
The 4% increase in revenues for the Company's gold operations in 2002 resulted
from an 8% stronger Australian dollar compared to the U.S. dollar, partially
offset by a 4% decrease in the ounces of gold sold. Gold prices in U.S. dollar
terms were 8% higher in 2002 over 2001, however Australian dollar gold prices
were even with prior year due to the stronger Australian dollar. The 2002
operating loss reflected a $5.7 million impairment of long-lived assets and the
recognition of $1.4 million of previously deferred losses on certain gold
forward sales contracts. The losses on these contracts, which had previously
been accounted for as hedges, were recognized in earnings since the hedged
transactions were no longer deemed probable as a result of the potential
transfer of the Company's interest in its joint ventures to MPI.
Lower net sales for the Company's gold operations during 2001 as compared to
2000 primarily resulted from a decrease in ounces of gold sold and a strong U.S.
dollar, partially offset by higher gold realizations. The lower operating loss
in 2001 as compared to 2000 reflected the effects of a stronger U.S. dollar and
higher gold realizations, partially offset by a reduction in sales and
production volume. In addition, the operating loss in 2000 included expenses of
$0.4 million associated with the discontinuation of exploration activities in
Nevada and a charge of $1.1 million relating to the impairment of an open pit
project in Australia.
Timber
Revenues from the Company's timber operations are primarily from the sale of
wood chips, logs and lumber. Revenues for the Company's timber operations were
higher in 2002 as compared to 2001 primarily due to a 95% increase in the volume
of logs sold. In addition, higher revenues in 2002 resulting from a 12% increase
in the volume of wood chips sold were partially offset by a 12% decrease in the
volume of lumber sold. The improved operating results in 2002 were primarily due
to the higher revenues discussed above.
-14-
The increase in revenues from the Company's timber operations in 2001 as
compared to 2000 was primarily due to increased timber sales volumes, partially
offset by a decline in lumber prices. The increase in operating loss for 2001 as
compared to 2000 was largely the result of the lower lumber prices.
Natural Gas
The decrease in revenues and operating profit including royalty income from the
Company's natural gas operations in 2002 as compared to 2001 resulted from a 7%
reduction in natural gas prices and a 4% reduction in volumes sold. Prices of
natural gas increased in the fourth quarter of 2002 and were 15% higher than the
third quarter of 2002.
The increase in revenues and operating profit in 2001 compared to 2000 resulted
from higher natural gas prices and increases in productive assets.
FOREIGN OPERATIONS
A portion of the Company's financial results is derived from activities in over
100 countries, each with a local currency other than the U.S. dollar. Because
the financial results of the Company are reported in U.S. dollars, its results
are affected by changes in the value of the various foreign currencies in
relation to the U.S. dollar. Changes in exchange rates may also affect
transactions which are denominated in currencies other than the functional
currency. The diversity of foreign operations helps to mitigate a portion of the
impact that foreign currency fluctuations in any one country may have on the
translated results.
Brink's Venezuelan subsidiary was considered highly inflationary in 2000, 2001
and 2002, however Venezuela will no longer be treated as highly inflationary
effective January 1, 2003. The Company estimates that had Venezuela not been
treated as highly inflationary effective January 1, 2002, revenues in 2002 would
have decreased by $1.1 million and operating profit and pretax income would have
increased by $2.4 million and $1.9 million, respectively. It is possible that
Venezuela may be considered highly inflationary again at some time in the
future.
The Company is exposed to certain risks when it operates in highly inflationary
economies, including the risk that
o the rate of price increases for services will not keep pace with cost
inflation,
o adverse economic conditions in the highly inflationary country may
discourage business growth which could affect the demand for the
Company's services and;
o the devaluation of the currency may exceed the rate of inflation and reported
U.S dollars revenues and profits may decline.
The Company, from time to time, uses foreign currency forward contracts to hedge
transactional risks associated with foreign currencies. (See "Market Risk
Exposures" below.)
The Company is also subject to other risks customarily associated with doing
business in foreign countries, including labor and economic conditions,
political instability, controls on repatriation of earnings and capital,
nationalization, expropriation and other forms of restrictive action by local
governments. The future effects, if any, of such risks on the Company cannot be
predicted.
CORPORATE EXPENSES
In 2002, general corporate expenses totaled $23.1 million compared with $19.3
million and $21.2 million in 2001 and 2000, respectively. Year-over-year
variances primarily reflected lower employee-related costs in 2001.
INTEREST EXPENSE
Interest expense decreased $9.3 million in 2002 and $11.0 million in 2001 as
compared to 2001 and 2000, respectively. These decreases were primarily due to
lower average borrowings and borrowing costs.
OTHER EXPENSE, NET
Other expense, net, of $2.6 million in 2002 decreased from $6.7 million in 2001,
primarily due to the receipt of $5.9 million in Stabilization Act compensation
in 2002, partially offset by a $3.9 million gain on the sale of marketable
securities in 2001.
-15-
Minority interest expense in 2002 decreased $3.6 million as compared to 2001.
Discounts and other fees associated with the sale of a revolving interest in
certain of BAX Global's accounts receivable decreased $2.4 million as a result
of lower borrowing costs of the conduit that purchased BAX Global's accounts
receivable. The discount on the sale of the receivables is based on its
conduits' borrowing costs.
Other expense, net, of $6.7 million in 2001 increased from $3.9 million in 2000,
primarily due to an increase of $3.4 million in discounts and other fees related
to BAX Global's accounts receivables (the securitization program began at the
end of 2000) and a $3.2 million increase in minority interest expense, partially
offset by a 2001 gain of $3.9 million on the sale of marketable securities.
INCOME TAXES
The provision for income taxes from continuing operations was greater than the
statutory federal rate primarily due to the changes in valuation allowances
($1.5 million in 2002, $1.3 million in 2001 and $1.8 million in 2000) related to
foreign deferred tax assets, and certain differences in foreign tax rates versus
the statutory federal tax rate. The 2002 effective tax rate was even with 2001,
reflecting the reversal of certain accruals for U.S. tax contingencies in 2002,
offset by the tax effects of the Company's change in the method of accounting
for goodwill (See Note 1 to the Consolidated Financial Statements).
In 2001 and 2000, the provision for income taxes from continuing operations was
greater than the statutory federal income tax rate of 35% primarily due to
goodwill amortization, partially offset by lower taxes on foreign income. In
2000, the $57.5 million BAX Global restructuring charge and lower consolidated
pretax income caused non-deductible items (principally goodwill amortization) to
be a more significant factor in calculating the effective tax rate. As a result
of Coal Operations being reported as discontinued operations, the tax benefits
of percentage depletion are not reflected in the effective tax rate of
continuing operations.
Based on the Company's historical and future expected taxable earnings,
management believes it is more likely than not that the Company will realize the
benefit of the deferred tax assets, net of the valuation allowance, recorded at
December 31, 2002.
RECONCILIATION OF NON-GAAP MEASURES
Monthly Recurring Revenues
Years Ended December 31
(In millions) 2002 2001 2000
- ----------------------------------------------------------------------
Monthly recurring
revenues ("MRR") $ 21.1 19.2 18.0
Amounts excluded from MRR:
Amortization of deferred revenue 2.0 1.8 2.0
Other revenues (a) 1.2 1.6 0.6
- ----------------------------------------------------------------------
Revenues (GAAP basis):
December 24.3 22.6 20.6
January - November 258.1 235.0 217.5
- ----------------------------------------------------------------------
January - December $ 282.4 257.6 238.1
- ----------------------------------------------------------------------
(a) Revenues that are not pursuant to monthly contractual billings.
The Company believes the presentation of MRR is useful to investors because the
measure is used to assess the amount of recurring revenues a home security
business produces.
-16-
LIQUIDITY AND CAPITAL RESOURCES
Summary of cash flows before financing activities:
Years Ended December 31
(In millions) 2002 2001 2000
- -------------------------------------------------------------------------
OPERATING ACTIVITIES
Before changes in operating
assets and liabilities $ 286.6 275.0 275.5
Changes in assets and
liabilities 21.3 38.2 63.9
Discontinued operations (66.6) 6.9 30.4
- -------------------------------------------------------------------------
Operating activities 241.3 320.1 369.8
- -------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital and aircraft heavy
maintenance expenditures (235.2) (208.6) (264.9)
Proceeds from disposition of
assets and investments 48.0 9.3 4.1
Other (1.5) (14.7) (5.5)
Discontinued operations (19.7) (11.1) (7.4)
- -------------------------------------------------------------------------
Investing activities (208.4) (225.1) (273.7)
- -------------------------------------------------------------------------
Cash flows before
financing activities $ 32.9 95.0 96.1
- -------------------------------------------------------------------------
OPERATING ACTIVITIES
Cash provided by operating activities was $78.8 million lower in 2002 than in
2001. The primary reason was an increase of $73.5 million in cash used by
discontinued operations as a result of higher losses from discontinued
operations. In addition, $40.7 million higher income from continuing operations
(before $17.5 million of after-tax impairment and other charges) was more than
offset by a $35.1 million contribution to the Company's primary U.S. pension
plan and the lower level of cash provided by changes in net working capital. The
after-tax impairment and other charges of $17.5 million were related to the
Company's former coal operations ($12.5 million) and its gold interests ($5.0
million).
Cash provided by net working capital in 2001 reflected lower receivable levels
at BAX Global associated with lower 2001 revenue. Higher cash used by the
Company's discontinued coal operations in 2002 was primarily related to higher
operating losses resulting from weak coal market conditions and the sale of coal
operations and reserves in 2002, lower FBLET refunds and the payment of
litigation settlements.
Changes in cash as a result of the Company's accounts receivable securitization
program are included in "changes in assets and liabilities" within operating
activities. The Company sold its initial interest in BAX Global's accounts
receivables for $85.0 million in 2000. During 2001, the net amount of revolving
interest sold decreased by $16.0 million to $69.0 million. During 2002, the net
amount of revolving interest sold increased by $3.0 million to $72.0 million.
INVESTING ACTIVITIES
Capital Expenditures and Aircraft Heavy Maintenance Activities
Years Ended December 31
(In millions) 2002 2001 2000
- --------------------------------------------------------------------------------
CAPITAL EXPENDITURES
Brink's $ 79.3 71.3 73.9
BHS 86.9 81.3 74.5
BAX Global 27.1 33.1 60.1
Other 10.8 7.2 5.1
Corporate 0.1 0.2 0.8
- --------------------------------------------------------------------------------
Total $ 204.2 193.1 214.4
- --------------------------------------------------------------------------------
Aircraft heavy
maintenance expenditures $ 31.0 15.5 50.5
- --------------------------------------------------------------------------------
-17-
Higher capital expenditures in 2002 as compared to 2001 were primarily due to an
increase in spending on armored vehicles, facilities and information technology
at Brink's and an increase in customer installations at BHS.
Aircraft heavy maintenance expenditures increased $15.5 million during 2002 as
compared to 2001 as a result of the timing of regularly scheduled maintenance
for airplanes. The Company expects to spend between $25 million and $35 million
on aircraft heavy maintenance in 2003.
Capital expenditures for continuing operations in 2003 are currently expected to
range from $200 million to $230 million, depending on operating results
throughout the year. Expected capital expenditures for 2003 reflect an increase
in customer installations at BHS and information technology spending at Brink's
and BAX Global.
Proceeds from Disposition of Assets and Investments
Proceeds from disposition of assets and investments in 2002 included
approximately $42 million of cash proceeds associated with the disposal of the
Company's former coal operations.
BUSINESS SEGMENT CASH FLOWS
The Company's consolidated cash flows available for financing depends on each of
the operating segments' cash flows.
Years Ended December 31
(In millions) 2002 2001 2000
- ----------------------------------------------------------------------
CASH FLOWS BEFORE FINANCING ACTIVITIES
Brink's $ 57.6 40.7 37.1
BHS 26.3 25.8 22.1
BAX Global 13.4 32.1 (3.2)
Corporate and Other Operations (20.4) 0.6 17.1
Former coal operations
sales proceeds 42.3 - -
Discontinued operations (86.3) (4.2) 23.0
- ----------------------------------------------------------------------
Cash flows before
financing activities $ 32.9 95.0 96.1
- ----------------------------------------------------------------------
Comparison of 2002 and 2001
Cash flows before financing activities at Brink's in 2002 were above the 2001
period primarily due to an increase in cash generated by working capital during
2002, and an improvement in operating performance.
Cash flows before financing activities at BHS in 2002 increased slightly,
primarily due to higher operating profit and noncash depreciation in 2002,
partially offset by higher capital expenditures and deferred subscriber
acquisition costs associated with a higher number of installations.
The decrease in cash flows before financing activities at BAX Global in 2002 as
compared to 2001 is primarily due to $15.5 million of higher aircraft heavy
maintenance expenditures and a decrease in cash provided from changes in working
capital levels discussed above, partially offset by improved operating results
and lower capital expenditures. Cash flows before financing for BAX Global in
2001 included $3.9 million of proceeds from the sale of marketable securities.
Cash flows before financing for Corporate and Other Operations in the 2002
period reflect a contribution of $35.1 million to the Company's primary U.S.
pension plan.
Discontinued operations' cash flow before financing was lower in 2002 than 2001
primarily due to a larger operating loss resulting from weak coal market
conditions and the sale of coal operations and reserves in 2002, necessary
spending on the development of a deep mine, lower FBLET refunds and payments of
litigation settlements. Discontinued operations' cash flows before financing in
2001 included $23.4 million of FBLET refunds. Included in the discontinued
operations cash flows before financing are payments for benefits for inactive
coal employees, reclamation and other liabilities. Following the disposition of
its discontinued operations, the Company expects to continue to be liable for
such payments (See Significant Contractual Obligations below).
-18-
Comparison of 2001 to 2000
The improvement in cash flows before financing activities at Brink's in 2001 as
compared to 2000 was primarily due to higher cash generated by working capital,
partly offset by lower operating results in 2001. Cash flows before financing
activities at BHS in 2001 approximated those in 2000.
The improvement in cash flows before financing at BAX Global in 2001 over 2000
is primarily due to $62.1 million lower spending for capital expenditures and
aircraft heavy maintenance and a reduction in net working capital.
Discontinued operations' cash flow before financing in 2000 was higher than 2001
primarily as a result of a $44.4 million reduction in working capital used in
2000. Discontinued operations in 2001 included a $23.4 million refund of FBLET.
FINANCING ACTIVITIES
Net cash flows used by financing activities were $16.7 million for 2002 compared
with $101.7 million in 2001 and $124.5 million in 2000. The Company's cash
provided by financing activities are typically from short-term borrowings or
from net borrowings under the Company's revolving bank credit facility,
discussed below. The Company also borrowed $20 million during 2002 and $75
million during 2001 under long-term issuances of Senior Notes, as discussed
below. During 2002 the Company redeemed all outstanding shares of its
convertible preferred stock at an aggregate redemption price of $10.8 million.
Net cash flows used in financing activities in 2000 reflected repayments under a
bank credit facility (described below) with the proceeds from the sale of $85.0
million of accounts receivable at BAX Global, as well as from the proceeds of
increased borrowings in late 1999 and repayments of a portion of the debt of
Brink's France and Venezuela affiliates during 2000.
In September 2002, the Company entered into an unsecured $350 million bank
credit facility (the "Facility") which replaced the previous bank credit
agreement of $362.5 million. The Company may borrow on a revolving basis over a
three-year term ending September 2005. At December 31, 2002, $199.8 million was
available for borrowing under the Facility.
The Company has three unsecured multi-currency revolving bank credit facilities
that total $110 million in available credit, of which $43.5 million was
available at December 31, 2002 for additional borrowing. Various foreign
subsidiaries maintain other secured and unsecured lines of credit and overdraft
facilities with a number of banks.
Amounts borrowed under these agreements are included in short-term borrowings.
During November 2002, the Company entered into a new multi-currency facility
totaling $35 million and during December 2002, the Company renegotiated a $45
million multi-currency revolving bank facility (to replace an existing $60
million facility). These facilities are included in the $110 million noted
above.
In April 2002, the Company completed a $20.0 million private placement of 7.17%
Senior Notes with maturities ranging from four to six years. The Company also
has $75.0 million of Senior Notes issued in 2001, that are scheduled to be
repaid in 2005 through 2008. The Company has the option to prepay all or a
portion of the Notes prior to maturity with a prepayment penalty. The proceeds
from issuance of the Senior Notes were used to repay borrowings under the
Company's U.S. revolving bank credit facility in each year. The Notes are
unsecured.
-19-
The U.S. bank credit agreement, the agreement under which the Senior Notes were
issued and the multi-currency revolving bank credit facilities each contain
various financial and other covenants. The financial covenants limit the
Company's total indebtedness, provide for minimum coverage of interest costs,
and require the Company to maintain a minimum level of net worth. A failure to
comply with the terms of one of these loan agreements could result in the
acceleration of the repayment terms in that agreement as well as the Company's
other agreements. At December 31, 2002, the Company was in compliance with all
financial covenants.
The Company believes it has adequate sources of liquidity to meet its near-term
requirements.
As of December 31, 2002, debt as a percentage of capitalization (total debt and
shareholders' equity) was 49% compared to 38% at December 31, 2001. The increase
was due to $95 million lower equity and $61 million higher debt. The Company
recorded a $131 million charge to equity in 2002 related to minimum pension
liabilities. The Company also reclassified $43 million associated with DTA to
long-term debt in 2002 from other liabilities. See Notes 11 and 12.
During 2002, 2001 and 2000, the Company paid dividends on Pittston Common Stock
of $5.2 million ($0.10 per share), $5.1 million ($0.10 per share) and $5.0
million ($0.10 per share), respectively. In 2002, 2001, and 2000, dividends paid
on the Convertible Preferred Stock amounted to $0.5 million, $0.7 million and
$0.9 million, respectively.
Future regular dividends are dependent on the Company's earnings, financial
condition, cash flow and business requirements and must be declared by the
Board. At present, the annual dividend rate for Pittston Common Stock is $0.10
per share. In February 2003, the Board declared a quarterly cash dividend of
$0.025 per share on Pittston Common Stock, payable on March 3, 2003 to
shareholders of record on February 18, 2003.
Under a share repurchase program authorized by the Board, the Company purchased
$2.2 million of Convertible Preferred Stock during 2000 and redeemed all its
outstanding shares of Convertible Preferred Stock for $10.8 million in 2002. See
Capitalization below for further information on the Company's share repurchase
program.
-20-
SIGNIFICANT CONTRACTUAL OBLIGATIONS
The following table includes certain significant contractual obligations of the
Company. See Notes 12, 14 and 21 to the Consolidated Financial Statements for
additional information related to these and other obligations.
Payments Due by Period
- ---------------------------------------------------------------------------------------------
2004- 2006- Later
(In millions) 2003 2005 2007 Years Total
- ---------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS WITH FIXED MINIMUM PAYMENTS
ONGOING BUSINESSES:
Operating leases (a) $ 123.6 161.9 82.1 144.6 512.2
Unconditional purchase obligations (b):
ACMI (c) 32.5 6.6 - - 39.1
Service contracts 6.1 5.9 - - 12.0
Property and equipment - 13.2 - - 13.2
Long-term debt (d) 13.3 170.5 57.7 76.0 317.5
Aircraft lease obligations 13.4 42.1 - - 55.5
FORMER COAL OPERATIONS:
Operating leases expected to be:
Assumed by purchasers 0.5 0.2 0.1 - 0.8
Retained (e) 1.2 - - - 1.2
Advance minimum royalties expected to be:
Assumed by purchasers 0.7 1.9 1.5 21.0 25.1
Retained (e) 2.2 5.2 2.1 19.6 29.1
- ---------------------------------------------------------------------------------------------
Total $ 193.5 407.5 143.5 261.2 1,005.7
- ---------------------------------------------------------------------------------------------
<FN>
(a) Payments for operating leases in ongoing businesses are recognized as an
expense in the Consolidated Statement of Operations as incurred.
(b) Payments made pursuant to unconditional purchase obligations are recognized
as an expense in the Consolidated Statement of Operations as incurred.
Unconditional purchase obligations generally specify a minimum amount of
service or product to be consumed by the Company, and the Company currently
expects to consume at least the minimum levels specified in its contracts.
(c) Aircraft, crew, maintenance and insurance agreements.
(d) Long-term debt (including capital lease obligations) is reduced when
payments of principal are made. Table excludes interest payments.
(e) Former coal operations' obligations that have been or are expected to be
retained have been recorded as liabilities. See "Legacy Liabilities" below.
</FN>
-21-
The following table includes certain other significant estimated payments
related to the Company's former coal operations for the next five years where
minimum payments are not fixed. The amounts are based on actuarial and
operations assumptions as of December 31, 2002. The actual amount of payments
made in future periods may be materially different than amounts presented below:
Estimated Payments by Period
- --------------------------------------------------------------------------
2004- 2006-
(In millions) 2003 2005 2007
- --------------------------------------------------------------------------
Postretirement benefits other than pensions:
Company-sponsored medical plans $31 68 76
Health Benefit Act 9 19 20
Black lung 6 12 12
Workers' compensation 6 8 5
Reclamation and inactive mine costs 12 4 2
Administrative 5 7 4
- --------------------------------------------------------------------------
Total (a) $69 118 119
- --------------------------------------------------------------------------
(a) Excludes the Company's estimated withdrawal obligations of $35.0 million
from coal-related multi-employer pension plans. The timing and the actual
amount to be paid, if any, will be based on the funded status of the plans
as of the beginning of the plan year that a withdrawal has deemed to have
occurred.
Pension Plans
The Company has noncontributory defined benefit pension plans covering
substantially all nonunion employees in the U.S. who meet certain requirements.
Information regarding these plans and the Company's other pension plans can be
found in Note 15 to the Consolidated Financial Statements.
Due to the continuing weak performance of U.S. and international investment
markets during 2002, the Company made a voluntary contribution of $35.1 million
to its primary U.S. pension plan trust in September 2002.
Based on the plan's liabilities and asset position as of December 31, 2002 as
well as actuarial assumptions as of that date, there is no requirement for the
Company to contribute additional amounts through 2005, but it could be required
to make significant contributions after 2005.
Funding requirements depend on applicable regulations and laws, future returns
on plan assets and future discount rates and other factors. The Company may
elect to contribute to its U.S. pension plan prior to any future required
funding date. Amounts which are required to be funded in future periods could
change materially from current estimates.
As discussed in Results of Operations, each of the Company's business segments
and its former coal operations expects to report higher pension expense in 2003.
On a consolidated basis, the increase in pension expense for 2003 is expected to
be approximately $23 million, including $6 million related to former coal
operations. The Company also expects approximately $13 million in average
increases in each of 2004 and 2005 based on assumptions as of December 31, 2002.
For additional information regarding the assumptions that the Company has used
to project further pension expense, see "Application of Critical Accounting
Policies and Recent Accounting Pronouncements."
-22-
Other Commercial Commitments
The following table includes certain commercial commitments of the Company as of
December 31, 2002. See Notes 12, 14 and 21 of the Consolidated Financial
Statements for additional information related to these and other commitments.
Amount of Commitment Expiring each Period
----------------------------------------------
2004- 2006- Later
(In millions) 2003 2005 2007 Years Total
- --------------------------------------------------------------------------
Undrawn letters
of credit $ 58.4 - - 4.0 62.4
Operating leases (a) 3.4 12.1 - - 15.5
- --------------------------------------------------------------------------
(a) Maximum residual guarantees of certain operating leases. See Note 14
in the Consolidated Financial Statements.
Accounts Receivable Securitization
At December 31, 2002, the Company has sold an undivided interest in certain of
its BAX Global U.S. accounts receivable balances, which amounts are not included
in the Consolidated Balance Sheets or in the previous table. See Note 13 to the
Consolidated Financial Statements. Under this program, the Company sells without
recourse an undivided ownership interest in a pool of accounts receivable to a
third party (the "conduit"). The conduit issues debt to fund their purchase, and
the Company used the proceeds it received from the initial purchase primarily to
pay down its outstanding debt. The Company has no obligation related to the
conduit's debt, and there is no existing obligation to repurchase sold
receivables. Upon termination of the program, the conduit would cease purchasing
new receivables and collections related to the sold receivables would be
retained by the conduit. If the program is terminated, the Company would more
than likely use its credit sources to finance the higher level of receivables.
Surety Bonds
The Company is required by various state and federal laws to provide security
with regard to its obligations to pay workers' compensation, to reclaim lands
used for mining by the Company's former coal operations and to satisfy other
benefits. As of December 31, 2002, the Company had outstanding surety bonds with
third parties totaling approximately $235 million that it has arranged in order
to satisfy the various security requirements. Most of these bonds provide
financial security for previously recorded liabilities. Because some of the
Company's reclamation obligations have been assumed by purchasers of the
Company's former coal operations, $67 million of the Company's surety bonds are
expected to be replaced by purchasers' surety bonds. These bonds are typically
renewable on a yearly basis, however there can be no assurance the bonds will be
renewed or that premiums in the future will not increase. If the surety bonds
are not renewed, the Company believes that it has adequate available borrowing
capacity under its U.S. credit facility to provide letters of credit or other
collateral to secure its obligations.
-23-
LEGACY LIABILITIES AND ASSETS
Under U.S. generally accepted accounting principles ("GAAP"), some of the
Company's assets and liabilities from its former coal operations ("Legacy"
assets and liabilities) are not fully recorded on the balance sheet because
certain losses have been deferred. In addition, some of the liabilities under
GAAP are discounted to reflect a present value, while others have not been
discounted. To facilitate an understanding of the estimated present value of the
Company's legacy liabilities as of December 31, 2002, the following table
presents a "Legacy Value" that includes the full value of the Company's
liabilities, discounted to a present value (for those liabilities with extended
payment dates). PLEASE NOTE THAT THIS IS NOT A GAAP PRESENTATION AND THIS TABLE
SHOULD ONLY BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS.
The Legacy Values are considered non-GAAP measures, and the table below
reconciles each Legacy Value to its GAAP counterpart.
December 31, 2002
- -----------------------------------------------------------------------------------------------------------------------
Legacy Add Back Present Losses Not Yet Recognized GAAP
(In millions) Value (e) Value Effect Under GAAP Amount
- -----------------------------------------------------------------------------------------------------------------------
Legacy liabilities:
Company-sponsored retiree medical (a) $ 518.3 - (250.6) 267.7
Health Benefit Act (b) 90.2 83.9 - 174.1
Black lung (c) 60.0 - (14.6) 45.4
Workers' compensation 37.4 - - 37.4
Reclamation and inactive mines 21.5 - - 21.5
Advance minimum royalties 14.7 - - 14.7
- -----------------------------------------------------------------------------------------------------------------------
Legacy liabilities (d) 742.1 83.9 (265.2) 560.8
- -----------------------------------------------------------------------------------------------------------------------
Legacy assets:
VEBA $ 18.2 - - 18.2
Present value of royalties receivable 15.7 - - 15.7
Deferred tax assets (f) 247.8 29.4 (92.8) 184.4
- -----------------------------------------------------------------------------------------------------------------------
<FN>
(a) Company-sponsored retiree medical liabilities are accounted for in the
Company's Consolidated Financial Statements in accordance with SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
Generally, SFAS No. 106 requires a liability be recorded for the present
value of future obligations, although SFAS No. 106 requires an exception for
actuarial gains and losses. Actuarial gains and losses occur as a result of
actual events differing from assumptions and changes in assumptions used to
estimate the liability, including assumptions as to the discount rate used
to compute the present value, expected health care inflation rates and life
expectancy rates. Actuarial gains and losses are not immediately recognized
in earnings because SFAS No. 106 requires employers to defer these gains and
losses and then amortize these gains and losses into earnings in future
periods if the total unrecognized net gains and losses exceed 10% of the
accumulated postretirement benefit obligation. As a result, the Company's
balance sheet does not reflect these liabilities at the full present value
of the ultimate projected obligations at the end of the year. The Legacy
Value in the table reflects the Company's liability had the Company's total
projected obligations been fully accrued at the end of the year. The Company
discloses the projected amount of its obligation before the required
deferral of unrecognized gains and losses as "accumulated plan benefit
obligation" in Note 15 to the Consolidated Financial Statements.
(b) Health Benefit Act liabilities are accounted for in accordance with EITF No.
92-13, "Accounting for Estimated Payments in Connection with the Coal
Industry Retiree Health Benefit Act of 1992" and accordingly, the Company
has accrued the undiscounted estimate of its projected obligation. As
discussed in Note 15 to the Consolidated Financial Statements, the Company
uses various assumptions to estimate its liability to The United Mine
Workers of America Combined Fund (the "Combined Fund") for future annual
premiums, including the number of assigned and unassigned beneficiaries in
future periods, medical inflation, and the amount of funding of the Combined
Fund to be provided from the Abandoned Mine Reclamation Fund in future
periods. The estimated annual payments are expected to be paid out over the
next seventy or more years. To determine its Legacy Value, the Company's
actuaries discounted the estimated future cash flows to a present value
amount using a discount rate of 6.75%. The Company's estimates of annual
payments may change materially due to changes in future assumptions.
Statutory changes to the 1992 law under which such benefits are paid also
could materially affect the Company's estimate of its liability in the
future. The estimation of the Legacy Value should not be considered a
precise estimate because of the many variables that have been used to
determine the estimate, including the discount rate and the amount of
expected annual cash flows. There are many factors that may change and cause
the amount recorded in the balance sheet to not be representative of the
amount the Company may actually pay.
-24-
(c) Actuarial gains and losses resulting from changes in estimates of the Company's
black lung liabilities are deferred and amortized into earnings in future
periods. As a result, the Company's balance sheet does not report these
liabilities as if the Company's projected obligation had been fully accrued
at the end of the year. The Legacy Value in the table reflects the Company's
projected obligations had it been fully accrued at the end of the year. Of
the Company's $60.0 million of present value of self-insured black lung
benefit obligations at December 31, 2002, approximately $45.4 million had
been recognized on the balance sheet, with the difference relating to
deferred unrecognized actuarial losses (see Note 15 to the Consolidated
Financial Statements).
(d) Legacy liabilities above exclude the Company's estimated withdrawal
obligations of $35.0 million from coal-related multi-employer pension plans.
The timing and actual amount to be paid, if any, will be based on the funded
status of the plans as of the beginning of the plan year in which a
withdrawal has deemed to have occurred. See "Results of Operations - Former
Coal Operations" and "Application of Critical Accounting Policies and Recent
Accounting Pronouncements."
(e) The Legacy Value table includes the Company's significant long-term
coal-related assets and liabilities. Other shorter-term coal-related assets
and liabilities have been excluded from the total amount of the Legacy Value
table.
(f) The Company has not yet taken deductions in its tax returns for most of the
accrued legacy liabilities. The Company has recorded a deferred tax asset
for the amount of taxes on future taxable income it will not have to pay
resulting from the payment/tax deductions of the legacy liabilities. An
estimate of the incremental tax effect of the pretax reconciling items have
been included in the deferred tax assets (Legacy Value basis) assuming a 35%
incremental tax rate.
</FN>
The above estimated Legacy Value and GAAP amounts are as of December 31, 2002.
These estimated amounts will be adjusted annually to reflect actual experience,
annual actuarial revaluations and periodic revaluations of reclamation
liabilities. The amounts are based on a variety of estimates, including
actuarial assumptions, as described below in the Application of Critical
Accounting Policies and in the Notes to the Consolidated Financial Statements.
Under the Health Benefit Act, the Company and various subsidiaries are jointly
and severally liable for approximately $386 million, at Legacy Value, of
postretirement medical and Health Benefit Act obligations in the above table.
OTHER CONTINGENT GAINS AND LOSSES
Federal Black Lung Excise Tax ("FBLET")
On February 10, 1999, the U.S. District Court of the Eastern District of
Virginia entered a final judgment in favor of certain of the Company's
subsidiaries, ruling that the FBLET is unconstitutional as applied to export
coal sales. A total of $0.8 million (including interest) was refunded in 1999
for the FBLET that those companies paid for the first quarter of 1997. The
Company sought refunds of the FBLET it paid on export coal sales for all open
statutory periods and received refunds of $23.4 million (including interest)
during the fourth quarter of 2001. During the fourth quarter of 2002, the
Company reached a settlement under which it will collect additional refunds of
$3.2 million.
The Company continues to pursue the refund of other FBLET payments. Due to
uncertainty as to the ultimate additional future amounts to be received, if any,
which could amount to as much as $18 million (before income taxes), as well as
the timing of any additional FBLET refunds, the Company has not currently
recorded receivables for such other FBLET refunds.
Environmental Remediation
The Company has agreed to pay 80% of the remediation costs arising from
hydrocarbon contamination at a formerly owned petroleum terminal facility
("Tankport") in Jersey City, New Jersey, which was sold in 1983. The Company is
in the process of remediating the site under an approved plan. The Company
estimates its portion of the actual remaining clean-up and operational and
maintenance costs, on an undiscounted basis, to be between $2.2 million and $4.3
million. The Company is in discussions with another potentially responsible
party to recover a portion of the amount paid and to be paid by the Company
related to this matter.
Litigation
The Company is defending potentially significant civil suits relating to its
former coal business. Although the Company is defending these cases vigorously
and believes that its defenses have merit, there exists the possibility that one
or more of these suits ultimately may be decided in favor of the plaintiffs. If
so, the Company expects that the ultimate amount of unaccrued losses could range
from $0 to $25 million.
-25-
CAPITALIZATION
At December 31, 2002, the Company had 100 million shares of Pittston Common
Stock authorized and 54.3 million shares issued and outstanding. The Company has
the remaining authority to purchase up to 1.0 million shares of Pittston Common
Stock with an aggregate purchase price limitation of $19.1 million. The Company
made no such purchases during 2002.
The Company has the authority to issue up to 2.0 million shares of preferred
stock, par value $10 per share.
2000 ACCOUNTING CHANGE
Pursuant to guidance issued in Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements," by the Securities and Exchange Commission
in December 1999, and a related interpretation issued in October 2000, BHS
changed its method of accounting for nonrefundable installation revenues and a
portion of the related direct costs of obtaining new subscribers (primarily
sales commissions). Under the new method, all of the nonrefundable installation
revenues and a portion of the new installation costs deemed to be direct costs
of subscriber acquisition are deferred and recognized in income over the
estimated term of the subscriber relationship. Prior to 2000, BHS charged
against earnings as incurred, all marketing and selling costs associated with
obtaining new subscribers and recognized as revenue all nonrefundable payments
received from such subscribers to the extent that costs exceeded such revenues.
The accounting change was implemented in 2000 and the Company reported a
noncash, after-tax charge of $52.0 million ($84.7 million pretax), to reflect
the cumulative effect of the accounting change on years prior to 2000. The
pretax cumulative effect charge of $84.7 million comprised a net deferral of
$121.1 million of revenues partially offset by $36.4 million of customer
acquisition costs. The change in accounting principle decreased operating profit
for 2000 by $2.3 million, reflecting a net decrease in revenues of $6.4 million
and a net decrease in operating expenses of $4.1 million. Net income for 2000
was reduced by $1.4 million ($0.03 per diluted share).
MARKET RISK EXPOSURES
The Company has activities in over 100 countries and a number of different
industries. These operations expose the Company to a variety of market risks,
including the effects of changes in foreign currency exchange rates and interest
rates. In addition, the Company consumes and sells certain commodities in its
businesses, exposing it to the effects of changes in the prices of such
commodities. These financial and commodity exposures are monitored and managed
by the Company as an integral part of its overall risk management program.
The Company utilizes various derivative and non-derivative hedging instruments,
as discussed below, to hedge its foreign currency, interest rate, and commodity
exposures when appropriate. The risk that counterparties to such instruments may
be unable to perform is minimized by limiting the counterparties used to major
financial institutions with investment grade credit ratings. Management of the
Company does not expect any losses due to such counterparty default.
The Company maintains a control system to monitor changes in interest rate,
foreign currency and commodity exposures that may adversely impact expected
future cash flows. The risk management control systems involve the use of
analytical techniques to estimate the expected impact of changes in interest
rates, foreign currency exchange rates and commodity prices on the Company's
future cash flows. The Company does not use derivative instruments for purposes
other than hedging.
The sensitivity analyses discussed below for the market risk exposures were
based on facts and circumstances in effect at December 31, 2002. Actual results
will be determined by a number of factors that are not under management's
control and could vary materially from those disclosed.
INTEREST RATE RISK
The Company uses both fixed and floating rate debt denominated primarily in U.S.
dollars to finance its operations. Floating rate debt obligations, including the
Company's U.S. bank credit facility, expose the Company to fluctuations in
interest expense due to changes in the general level of interest rates. To a
lesser extent, the Company uses debt denominated in foreign currencies,
primarily including euros and British pounds.
-26-
In order to limit the variability of the interest expense on its debt, the
Company has converted the floating rate cash flows on a portion ($65.0 million
effective through September 2003 and $50.0 million effective September 2003
through August 2005) of its $350.0 million revolving credit facility to
fixed-rate cash flows by entering into interest rate swap agreements which
involve the exchange of floating rate interest payments for fixed rate interest
payments. The fair value liability of these interest swaps at December 31, 2002
was $2.4 million. In addition to the interest rate swaps, the Company also has
fixed rate debt, including the Company's Senior Notes. The fixed rate debt and
interest rate swaps are subject to fluctuations in their fair values as a result
of changes in interest rates.
Based on the effective interest rates on the floating rate debt outstanding at
December 31, 2002, a hypothetical 10% increase in these rates would increase
interest expense by approximately $0.5 million over a twelve-month period. (In
other words, the Company's weighted average interest rate on its floating rate
debt was 3.68% per annum at December 31, 2002. If that average rate were to
increase by 37 basis points to 4.05%, the interest expense associated with these
borrowings would increase by $0.5 million annually). The effect on the fair
value of fixed rate debt and interest rate swaps for a hypothetical 10% uniform
shift (as a percentage of market interest rates) in the yield curves for
interest rates in various countries from year-end 2002 levels is not material.
FOREIGN CURRENCY RISK
The Company, primarily through its Brink's and BAX Global operations, has
certain exposures to the effects of foreign exchange rate fluctuations on the
results of foreign operations which are reported in U.S. dollars.
The Company is exposed periodically to the foreign currency rate fluctuations
that affect transactions not denominated in the functional currency of domestic
and foreign operations. To mitigate these exposures, the Company, from time to
time, enters into foreign currency forward contracts.
The Company does not purchase derivative instruments to hedge investments in
foreign subsidiaries due to their long-term nature.
The effects of a hypothetical simultaneous 10% appreciation in the U.S. dollar
from year-end 2002 levels against all other currencies of countries in which the
Company operates were measured for their potential impact on, (i) translation of
earnings into U.S. dollars based on 2002 results, (ii) transactional exposures,
and (iii) translation of investments in foreign subsidiaries. The hypothetical
effects would be approximately (i) $3.6 million unfavorable for the translation
of net income into U.S. dollars, (ii) $2.6 million favorable net income effect
for transactional exposures, and (iii) $33.1 million unfavorable change to the
Company's cumulative translation adjustment (equity).
COMMODITIES PRICE RISK
The Company consumes and sells various commodities in the normal course of its
business and, from time to time, utilizes derivative instruments to minimize the
variability in forecasted cash flows due to price movements in these
commodities. The derivative contracts are entered into in accordance with
guidelines set forth in the Company's hedging policies.
The Company utilizes forward swap contracts for the purchase of jet fuel to fix
a portion of forecasted jet fuel costs at specific price levels and it utilizes
option strategies to hedge a portion of the remaining risk associated with jet
fuel. In most cases, the Company is able to adjust its pricing through the use
of surcharges on customers to partially offset large increases in the cost of
jet fuel.
The Company utilizes forward sales contracts and option strategies to hedge the
selling price on a portion of its forecasted natural gas and gold sales.
The following table represents the Company's outstanding commodity hedge
contracts as of December 31, 2002. Amounts presented as the fair value after a
hypothetical 10% change in commodity prices reflect a hypothetical 10% reduction
in the future price of jet fuel and a hypothetical 10% increase in the future
prices of gold and natural gas.
-27-
Estimated Fair Value of
Assets (Liabilities)
--------------------------
Notional With 10%
(In millions, except as noted) Amount Actual Price Change
- --------------------------------------------------------------------------------
Forward gold sale contracts (a) 89.0 $ (2.9) (5.5)
Forward swap and option contracts:
Jet fuel purchases (b) 19.0 2.3 0.8
Natural gas sales (c) 0.6 (0.7) (1.0)
- --------------------------------------------------------------------------------
(a) Notional amount in thousands of ounces of gold. Excludes equity affiliates.
(b) Notional amount in millions of gallons of fuel.
(c) Notional amount in millions of MMBTUs.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS
The application of accounting principles requires the use of estimates and
judgments which are the responsibility of management. Management makes such
estimates and judgments based on, among other things, knowledge of operations,
markets, historical trends and likely future changes, similarly situated
businesses and, when appropriate, the opinions of advisors with knowledge and
experience in certain fields. Many assumptions, judgments and estimates are
straightforward. However, due to the nature of certain assets and liabilities,
there are uncertainties associated with some of the judgments, assumptions and
estimates which are required to be made. Reported results could have been
materially different under a different set of assumptions and estimates for
certain accounting principle applications.
Management has discussed the development and selection of the following critical
accounting estimates with the Audit and Ethics Committee of the Board of
Directors and the Audit and Ethics Committee has reviewed the Company's
disclosure relating to such estimates.
DEFERRED TAX ASSETS
It is common for companies to record expenses and accruals before such expenses
and costs are paid. In the U.S. and most other countries and tax jurisdictions,
many deductions for tax return purposes cannot be taken until the expenses are
paid.
Similarly, certain tax credits and tax loss carryforwards cannot be used until
future periods when sufficient taxable income is generated. In these
circumstances, under GAAP, companies accrue for the tax benefit expected to be
received in future years if, in the judgment of management, it is "more likely
than not" that the company will receive such benefits. Such benefits (deferred
tax assets) are often offset, in whole or in part, by the effects of deferred
tax liabilities which relate primarily to deductions available for tax return
purposes under existing tax laws and regulations before such expenses are
reported as expenses under GAAP.
As of December 31, 2002, the Company had in excess of $400 million of net
deferred tax assets on its consolidated balance sheet. For more details
associated with this net balance, see Note 17 to the accompanying Consolidated
Financial Statements.
Since there is no absolute assurance that these assets will be ultimately
realized, management periodically reviews the Company's deferred tax positions
to determine if it is more likely than not that such assets will be realized.
Such periodic reviews include, among other things, the nature and amount of the
tax income and expense items, the expected timing when certain assets will be
used or liabilities will be required to be reported and the reliability of
historical profitability of businesses expected to provide future earnings.
Furthermore, management considers tax-planning strategies it can employ in order
to increase the likelihood that the use of tax assets will be achieved. These
strategies are also considered in the periodic reviews. If after conducting such
a review, management determines that the realization of the tax asset does not
meet the "more-likely-than-not" criteria, an offsetting valuation reserve is
recorded thereby reducing net earnings and the deferred tax asset in that
period. For these reasons and since changes in estimates can materially effect
net earnings, management believes the accounting estimate related to deferred
tax asset valuation reserves is a "critical accounting estimate."
Of the net deferred tax assets at December 31, 2002, approximately 92% relates
to the Company's operations in the U.S., including individual state tax
jurisdictions.
-28-
Because of its expectation that the historically reliable profitability of the
Company's U.S. portion of the Business and Security Services operations will
continue and the lengthy period over which certain of the recorded expenses will
become available for deduction on tax returns, management has concluded that it
is more likely than not that these net deferred tax assets will be realized.
For international operations, the Company has evaluated its ability to fully
utilize the net assets on an individual country basis and due to doubts in
certain countries about whether future operating performance will be profitable
enough to offset prior tax losses, the Company has recorded a $9.8 million
valuation allowance at December 31, 2002.
Should tax statutes, the timing of deductibility of expenses, or if expectations
for future performance change in the future, the Company could decide to record
additional valuation allowances, thereby increasing the tax provision.
GOODWILL AND PROPERTY AND EQUIPMENT VALUATIONS
At December 31, 2002, the Company has $871 million of property and equipment and
$228 million of goodwill, net of accumulated depreciation and amortization. The
Company reviews the assets for possible impairment using the guidance in SFAS
No. 142, "Goodwill and Other Intangible Assets," for goodwill and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-lived Assets," for property
and equipment. The review for impairment requires the use of significant
judgments about the future performance of the Company's operating subsidiaries.
Goodwill is reviewed for impairment at least annually. The Company estimates the
fair value of Brink's and BAX Global, the two reporting units that have
goodwill, primarily using estimates of future cash flows. The fair value of the
reporting unit is compared to its carrying value to determine if an impairment
exists. At December 31, 2002, net goodwill was $65 million at Brink's and $163
million at BAX Global.
To determine if an impairment exists of property and equipment, the Company
compares estimates of the future undiscounted net cash flows of the asset to its
carrying value when there is a triggering event for a review. For purposes of
assessing impairment, assets are grouped at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows of other
groups of assets.
Due to a history of profitability and cash flow, the carrying values of
long-lived assets of Brink's are believed to be appropriate.
Each quarter, when BHS customers disconnect their monitoring service, BHS
records an impairment charge related to the carrying value of the related home
security systems estimated to be permanently disconnected based on historical
reconnection experience. Such charge is included within the Recurring Services
component of operating profit. BHS makes estimates about future reconnection
experience in its estimate of impairment charges. Future reconnection experience
is estimated using historical data. Should the estimate of future reconnection
experience change, BHS's impairment charges would be affected.
-29-
BAX Global had a profit in 2002 and losses in 2001 and 2000. Changes to the
Company's operations, resources used, and cost structure in 2000 resulted in a
trend of improved year-over-year operating results in each of the last two
years, despite a significant decline in revenue from 2000. In management's
opinion, the changes implemented at BAX Global plus a return to more normal
levels of global economic performance will result in substantial improvement in
operating performance and cash flow over time. Based on this judgment, the
Company prepared multi-year projections of operating performance for BAX Global,
which it used to estimate fair value and undiscounted cash flow, neither of
which indicated impairment.
Had the Company expected no long-term improvement in the performance of BAX
Global, or a worsening of conditions at the Company's other subsidiaries, the
Company may have concluded that its goodwill or fixed assets were impaired and,
in such circumstances, would have reduced the carrying values of such assets and
recognized a loss.
As required by SFAS No. 144, certain residual long-lived assets associated with
the Company's former coal operations were reclassified from assets of
discontinued operations to assets held and used at December 31, 2002. These
assets were tested for impairment on an individual property basis with a
resulting net impairment loss of $14.1 million recorded within operating profit
from continuing operations. Prior to December 2002, the Company's expectation
was to sell the majority of these assets as a group and, as such, the assets
were not previously considered to be impaired. Different estimates of the net
realizable value of the residual coal assets could have materially affected the
net impairment loss recorded.
COAL-RELATED LEASE OBLIGATIONS
The Company has not accrued approximately $26 million of future minimum lease
and royalty payments related to the equipment and idle coal mines and reserves
which management believes will be sold. If the Company is unable to transfer its
commitments to buyers of these assets, the Company will recognize the
obligations as liabilities, with a charge to earnings.
WITHDRAWAL LIABILITIES
The Company recorded an estimate of the value of potential withdrawal
obligations for coal-related multi-employer pension plans in 2001 associated
with its exit from the coal business. During the fourth quarter of 2002, the
Company increased the estimated withdrawal liabilities to $35.0 million. The
withdrawal liabilities were estimated by the Company using a formula that
depends on the funded status of the multi-employer pension plans at the time
that the Company is deemed to have withdrawn from the plans.
-30-
The $35 million for the estimated withdrawal liabilities is based on the funded
status of the plan as of June 30, 2002. The Company expects that its actual
withdrawal liability for each of the plans will be based on the funded status of
the plans as of June 30, 2003 or possibly later.
The estimate may change materially each year until the Company is deemed to have
withdrawn from the plan. Annual changes in this estimate will be recorded in
discontinued operations.
MULTI-YEAR EMPLOYEE AND RETIREE BENEFIT OBLIGATIONS
The Company provides its employees and retirees benefits arising from both
Company-sponsored plans (e.g. defined benefit pension plans) and statutory
requirements (e.g. medical benefits for otherwise ineligible former employees
and non employees under the Health Benefit Act). Certain of these benefit
obligations require payments to be made by the Company or by trusts funded by
the Company over long periods of time.
The primary benefits which require cash payments over an extended period of
years are:
o Defined Benefit Pension
o Postretirement Medical
o Health Benefit Act Medical
o Black Lung
As is normal for such benefits, cash payments will be made for periods ranging
from the current year to well over fifty years from now for certain benefits.
The amount of such payments and related expenses will be affected over time by
inflation, investment returns and market interest rates, changes in the numbers
of plan participants and changes in the benefit obligations and/or laws and
regulations covering the benefit obligations.
GAAP requires that the Company reevaluate all significant benefit obligations at
least annually, and as a result of such reevaluations, the Company records
increases or decreases in liabilities and associated expenses over time as
required under GAAP.
Below are the critical assumptions that determine the carrying values of such
liabilities and the resulting annual expense. The plans that are affected by the
assumptions discussed are identified parenthetically in the relevant title.
-31-
Discount Rate (Pension Plans, Postretirement Medical Benefits Under
Company-Sponsored Plans and "Black Lung" Benefits)
The discount rate is used to determine the present value of future payments.
This rate reflects returns expected from high-quality bonds and will fluctuate
over time with market interest rates. In general, the Company's liability
changes in an inverse relationship to interest rates, i.e. the lower the
discount rate, the higher the associated liability for the noted benefit
obligations.
The Company selects a discount rate for its pension liabilities after reviewing
published long-term yield information for a small number of high quality fixed
income securities (Moody's AA bond yields), yields for the broader range of
long-term high quality securities and a calculated plan-specific rate of return
developed by its actuaries using long-term high quality bonds with similar
maturities to the liability. After considering the above, the Company selected a
discount rate of 6.75% for the valuation as of December 2002. A year ago, such
discount rate was 7.25%.
Calculations of net periodic pension expense are based on the assumptions used
for the previous year-end measurements of plan assets and obligations.
Accordingly, the discount rate selected at the end of each year affects the
pension expense in the following year. In general, the lower the discount rate,
the higher the calculated expense. If the discount rate were to decrease by 25
basis points, the related expense would increase by approximately $3 million
before tax in 2002.
Under government regulations, funding requirements for the Company's primary
U.S. pension plan are determined using a different set of assumptions than is
used for financial accounting purposes. Near term funding requirements would,
therefore, not be affected unless interest rates declined sharply.
Return on Assets (Pension Plan)
The Company's primary defined benefit pension plan had assets at December 31,
2002 of approximately $431 million. This pension plan's assets are invested
primarily using actively managed accounts with asset allocation targets of 70%
equities, which include a broad array of market cap sizes and investment styles
and international equities, and 30% fixed income securities. Among other
factors, the performance of asset groups and investment managers will affect the
long-term rate of return. Pension accounting principles require companies to use
estimates of expected asset returns over long periods of time. The Company
selects the expected long-term rate of return assumption using advice from its
investment advisor and its actuary considering the plan's asset allocation
targets and expected overall investment manager performance and a review of its
most recent ten year historical average compounded rate of return. After
following the above process, the Company selected 8.75% as its expected
long-term rate of return as of December 31, 2002. The expected long-term rate
was 10.0% as of December 31, 2001.
Because returns from global financial markets fluctuate, it is unlikely that in
any given year, the actual rate of return will be the same as the assumed
long-term rate of return. In general, if actual returns exceed the expected
long-term rate of return, future levels of expense will go down and vice-versa.
The Company's assumed long-term rate of return is 8.75% as of December 31, 2002.
Over the last ten years, the annual returns of the Company's primary pension
plan have fluctuated from a high of a 25% gain (1995) to a low of a 9% loss
(2002). During that time period there were six years in which returns exceeded
the assumed long-term rate of return and four years, including the last three
years, with returns below the assumed long-term rate of return.
-32-
If the Company were to use a different long-term rate of return assumption, it
would affect annual pension expense but would have no immediate effect on
funding requirements. For every hypothetical change of 25 basis points in the
assumed long-term rate of return on plan assets, the Company's U.S. annual
pension plan expense in 2002 would increase or decrease by approximately $1.3
million before tax.
The Company calculates expected investment returns by applying the expected
long-term rate of return to the market-related value of plan assets. The
market-related value of plan assets is calculated by deferring and amortizing
investment gains or losses on a straight-line basis over five years. Investment
gain or loss for each year is the difference between the actual return and the
expected return calculated using the beginning market-related asset value less
non-investment expenses and the expected long-term rate of return. Each year's
gain or loss is then amortized over five years.
The Company has had significant investment losses in the last three years that
have not yet fully affected pension expense. The Company expects its pension
expense will increase in the next several years because of the amortization of
investment gains and losses.
The offset (or "credit") to expense associated with the assumed investment
return fluctuates based on the level of plan assets (over time, the higher the
level of assets, the higher the credit and vice versa) and the assumed rate of
return (the higher the rate, the higher the credit and vice versa). Plan assets
for the Company's primary defined benefit plan have declined by approximately
$28 million in 2002 and $122 million over the three years ended December 31,
2002 as a result of general investment market conditions. In addition, the plan
paid out approximately $25 million in benefits and the Company contributed $35
million to plan assets during the same time period. With the reduction in plan
assets in 2002 and the expected rate of return, the investment credit is
expected to decline by $8.5 million in 2003. This will have the effect of
increasing the Company's net pension expense.
Inflation Assumptions on Salary Levels (Pension Plan) and Medical Inflation
(Postretirement Medical Benefits, Health Benefit Act Medical Benefits)
Pension expense and liabilities will vary with the expected rate of salary
increases - the higher or lower the annual increase, the higher or lower the
liability and expense. The Company expects its salary increase assumption to
remain at or about 5.1%, assuming current rates of inflation.
Changes in medical inflation will affect liability and expense amounts
differently for the three plans noted. There is a direct link between medical
inflation and expected spending for postretirement medical benefits under the
Company's plan for 2003 and for later years. Future cash payments associated
with the Health Benefit Act will reflect some but not all of the effect of
medical inflation as a result of statutory limitations on premium growth.
With the increase in medical inflation seen over the last few years, the Company
raised the assumed level of inflation in its plans in 2001 and again in 2002.
Because of the volatility of medical inflation it is likely that there will be
future adjustments, although the direction and extent of such adjustments cannot
be predicted at the present time.
Numbers of Participants (All Plans)
The valuations of all of these benefit plans are affected by the life expectancy
of the participants. Accordingly, the Company relies on actuarial information to
predict the number and life expectancy of participants. Further, due to the
complexity of the contractual relationship with the United Mine Workers of
America ("UMWA") for postretirement medical benefits and the application of
regulations associated with the Health Benefit Act, the Company's related
liability and expense has and will continue to fluctuate as new participants are
made known to the Company and as the Company and others investigate such
applications. As a result, the Company's liabilities under its plans will vary
as the expected number and life expectancy of participants change.
-33-
Changes in Laws
The Company's valuations of its liabilities are determined under existing laws
and regulations. Changes in laws and regulations which affect the ultimate level
of liabilities and expense are reflected once the changes are final and their
impact can be reasonably estimated. Recent changes in black lung regulations
could increase the Company's total liability. Future changes in laws directed at
reducing national levels of medical inflation or changing the funding available
for medical benefits (e.g. proposals for coverage of pharmaceuticals under
Medicare) could significantly reduce the Company's ultimate liability for
certain postretirement medical benefits.
WORKERS' COMPENSATION
Besides the effects of changes in medical costs, workers' compensation costs are
affected by the severity and types of injuries, changes in state and federal
regulations and their application and the quality of programs which assist an
employee's return to work. The Company's liability for future payments for
workers' compensation claims is evaluated annually with the assistance of its
actuary.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 143, "Accounting for Asset Retirement Obligations," was issued in June
2001 and addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS No. 143 requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it becomes
an obligation, if a reasonable estimate of fair value can be made. The Company
will adopt SFAS No. 143 in the first quarter of 2003. The implementation of the
new standard is not expected to have a material effect on the Company's results
of operations or financial position.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities,
" was issued in June 2002 and applies to costs associated with an exit activity
(including restructuring) or with a disposal of long-lived assets. This
statement nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)." Under
SFAS No. 146, a commitment to a plan to exit an activity or dispose of
long-lived assets will no longer be sufficient to record a charge for most
anticipated costs. Instead, a liability for costs associated
with an exit or disposal activity will be recorded when that liability is
incurred and can be measured at fair value. SFAS No. 146 also revises accounting
for specified employee and contract terminations that are part of restructuring
activities. SFAS No. 146 is effective for exit or disposal activities initiated
after December 31, 2002.
SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and
Disclosure," was issued in December 2002 and provides alternative methods of
transition for a voluntary change to the fair value-based method of accounting
for stock-based compensation. It also amends the disclosure provisions of SFAS
No. 123 to require prominent disclosure in the "Summary of Significant
Accounting Policies" about the effects on reported net income of an entity's
accounting policy decisions with respect to stock-based employee compensation.
SFAS No. 148 requires disclosure as to the pro forma effects on interim
financial statements if stock-based compensation is accounted for under the
intrinsic value method prescribed in APB No. 25. The amendments to SFAS No. 123
as to transition alternatives and as to prominent disclosure are effective for
fiscal years ending after December 15, 2002. The amendment is effective for
interim periods beginning after December 15, 2002.
In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 requires that upon issuance of a guarantee, the guarantor must
recognize a liability for the fair value of the obligation it assumes under that
guarantee. FIN 45 also requires additional disclosures by a guarantor in its
interim and annual financial statements about the obligations associated with
guarantees issued. The required disclosures have been included in Notes 12, 14
and 21. The recognition and measurement provisions are effective on a
prospective basis to guarantees issued or modified after December 31, 2002. The
adoption of this interpretation is not expected to have a material effect on the
Company's Consolidated Financial Statements.
-34-
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 provides guidance on the
identification of entities for which control is achieved through means other
than through voting rights, variable interest entities, and how to determine
when and which business enterprises should consolidate variable interest
entities. Variable interest entities created after January 31, 2003, if any,
will be assessed for consolidation using the new interpretation beginning in the
first quarter of 2003.
Variable interest entities in which the Company holds a variable interest that
it acquired before February 1, 2003 will be assessed for consolidation beginning
in the third quarter of 2003. The adoption of this interpretation is not
expected to have a material effect on the Company's Consolidated Financial
Statements.
FORWARD-LOOKING INFORMATION
Certain of the matters discussed herein, including statements regarding the
impact of difficult economic and operating conditions in South America on
Brink's performance in the first half of 2003, reductions in staffing levels by
Brink's in Europe in 2003 and related increases in severance expense, expected
increases in pension expenses and the adverse affect on Brink's, BHS' and BAX
Global's 2003 operating results of higher pension expense, the impact that the
refusal of police departments to respond to calls from alarm companies without
visual verification would have on BHS' results of operations, the impact of
increases in carrier rates and employee benefit health costs on BAX's costs in
2003, possible reductions in transportation costs resulting from aircraft lease
negotiations, the weakness of the European economy in 2003, payment by BAX
Global of contractual commitments for facilities by the end of 2007, the
retention of certain coal-related liabilities and related expenses and cash
outflows following completion of disposal, projected expenses related to legacy
liabilities of former coal operations (including estimated ranges of these
expenses), the significance in early 2003 of certain costs of assets expected to
be sold, the expectation that administrative and other costs related
to the former coal operations will be incurred more heavily in the early
quarters of 2003, the disposal of the Company's gold, timber and natural gas
operations, control of MPI following the exchange of the Company's interest in
gold mining joint ventures for additional shares of MPI and other consideration,
the impact on 2002 revenues, operating profit and pretax income if Venezuela had
not been treated as highly inflationary effective January 1, 2002 and the
possibility that Venezuela may be considered highly inflationary again, the
expectation that the Company will realize the benefit of its net deferred tax
assets, expenditures for aircraft heavy maintenance in 2003, capital
expenditures for continuing operations in 2003, estimated significant
contractual obligations for the next five years, required pension plan funding
after 2005, the replacement of some of the Company's surety bonds due to the
assumption of various reclamation obligations by purchasers of the Company's
former coal operations, the ability of the Company to provide letters of credit
or other collateral to replace any surety bonds that are not renewed in the
future, the timing of Combined Fund payments, the amount and timing of
additional FBLET refunds, if any, estimated remaining clean-up, operational and
maintenance costs for the Tankport matter and the possibility that the Company
will be able to recover a portion of the amount paid from another potentially
responsible party, the outcome of pending litigation, the likelihood of losses
due to non-performance by parties to hedging instruments, operating performance
of the Company's subsidiaries, the timing of and liability for withdrawal from
multi-employer pension plans associated with the exit from the coal business,
the sale of additional coal assets, expected decline in the pension plan
investment credit, changes in the assumed level of inflation for a number of the
Company's benefit plans, the impact of recent regulatory changes on the
Company's total black lung liability, and the impact of recent accounting
pronouncements on the Company's results of operations involve forward-looking
information which is subject to known and unknown risks, uncertainties, and
contingencies which could cause actual results, performance or achievements, to
differ materially from those which are anticipated.
-35-
Such risks, uncertainties and contingencies, many of which are beyond the
control of the Company, include, but are not limited to, government reforms and
initiatives in South America, strategic decisions by Brink's competitors with
respect to their South American operations, the matching of staffing levels with
the demand for Brink's services in Europe, the ultimate amount of pension
expense, determinations made by police departments and municipalities regarding
responses to alarms, the willingness of BHS' customers to pay for private
response personnel or other alternatives to police responses to alarms, the size
and timing of rate and cost increases, the aircraft leasing market, the
satisfaction of contractual obligations by third parties, the willingness and
ability of purchasers of the remaining coal assets to assume liabilities, the
timing of any sale of remaining coal assets, the timing of the pass-through of
costs relating to the disposal of coal assets by third parties and governmental
authorities, the negotiation of definitive agreements with respect to the
Company's gold joint ventures and the satisfaction of any conditions contained
therein, actions taken by MPI to reduce the number of its outstanding shares,
changes in strategy or the allocation of resources, the market for the Company's
gold, timber and natural gas operations and the ability to negotiate and
conclude sales of those operations on mutually agreeable terms, the performance
of U.S. and international investment markets, the profitability of the Company
in the U.S. and abroad, the completion and processing of permit replacement
documentation and the ability of purchasers of coal assets to post the required
bonds, capacity for borrowing under the Company's U.S. credit facility, the
position taken by various governmental entities with respect to the claims for
FBLET refunds, changes in the scope or method of remediation or monitoring of
the Tankport property, the negotiation of a mutually acceptable agreement with
the potentially responsible party in the Tankport matter, the funding and
benefit levels of the multi-employer plans and pension plans, actual retirement
experience of the Company's coal employees, black lung claims incidence, the
number of dependents covered, coal industry turnover rates, actual medical and
legal costs relating to benefits, changes in inflation rates (including the
continued volatility of medical inflation), fluctuations in interest rates,
overall economic and business conditions, developing guidance with respect to
recent accounting pronouncements, foreign currency exchange rates, the impact of
continuing initiatives to control costs and increase profitability, pricing and
other competitive industry factors, fuel prices, new government regulations,
legislative initiatives, judicial decisions, variations in costs or expenses and
the ability of counterparties to perform.
-36-
STATEMENT OF MANAGEMENT RESPONSIBILITY
- --------------------------------------------------------------------------------
The management of The Pittston Company (the "Company") is responsible for
preparing the accompanying Consolidated Financial Statements and for their
integrity and objectivity. The statements were prepared in accordance with
accounting principles generally accepted in the United States of America.
Management has also prepared the other information in the annual report and is
responsible for its accuracy.
In meeting our responsibility for the integrity of the Consolidated Financial
Statements, we maintain a system of internal controls designed to provide
reasonable assurance that assets are safeguarded, that transactions are executed
in accordance with management's authorization and that the accounting records
provide a reliable basis for the preparation of the Consolidated Financial
Statements. Qualified personnel throughout the organization maintain and monitor
these internal controls on an ongoing basis. In addition, the Company maintains
an internal audit department that systematically reviews and reports on the
adequacy and effectiveness of the controls, with management follow-up as
appropriate.
Management has also established a formal Business Code of Ethics for all
employees including its financial executives. We acknowledge our responsibility
to establish and preserve an environment in which all employees properly
understand the fundamental importance of high ethical standards in the conduct
of our business.
The Company's Consolidated Financial Statements have been audited by KPMG LLP,
independent auditors.
The Company's Board of Directors pursues its oversight role with respect to the
Company's Consolidated Financial Statements through the Audit and Ethics
Committee, which is composed solely of outside directors. The Committee meets
periodically with the independent auditors, internal auditors and management to
review the Company's control system and to ensure compliance with applicable
laws and the Company's Business Code of Ethics.
We believe that the policies and procedures described above are appropriate and
effective and enable us to meet our responsibility for the integrity of the
Company's Consolidated Financial Statements.
-37-
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders
The Pittston Company
We have audited the accompanying consolidated balance sheets of The Pittston
Company and subsidiaries (the "Company") as of December 31, 2002 and 2001, and
the related consolidated statements of operations, comprehensive loss,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Pittston Company
and subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets." Also as
discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for nonrefundable installation revenues and the
related direct costs of acquiring new subscribers in 2000 as a result of the
implementation of Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements."
/s/ KPMG LLP
KPMG LLP
Richmond, Virginia
February 10, 2003
-38-
THE PITTSTON COMPANY AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31
(In millions, except per share amounts) 2002 2001
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 102.3 86.7
Accounts receivable, (net of estimated uncollectible
amounts: 2002 - $35.5; 2001 - $41.8) 540.0 493.3
Prepaid expenses and other current assets 58.4 57.5
Deferred income taxes 81.3 103.1
Discontinued operations - 19.9
- -----------------------------------------------------------------------------------------------------------------
Total current assets 782.0 760.5
Property and equipment, net 871.2 818.1
Goodwill, net 227.9 224.8
Prepaid pension assets 23.8 109.0
Deferred income taxes 349.3 233.2
Other 205.7 184.9
Discontinued operations - 92.7
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 2,459.9 2,423.2
- -----------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 41.8 27.8
Current maturities of long-term debt 13.3 17.2
Accounts payable 244.0 256.6
Accrued liabilities 494.2 516.1
Discontinued operations - 3.3
- -----------------------------------------------------------------------------------------------------------------
Total current liabilities 793.3 821.0
Long-term debt 304.2 252.9
Accrued pension costs 122.6 22.9
Postretirement benefits other than pensions 471.7 445.0
Deferred revenue 127.0 123.8
Deferred income taxes 28.4 20.7
Other 231.5 231.2
Discontinued operations - 29.6
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 2,078.7 1,947.1
Commitments and contingent liabilities (Notes 5, 8, 12, 13, 14, 15, 17 and 21)
Shareholders' equity:
Preferred stock, par value $10 per share,
$31.25 Series C Cumulative Convertible Preferred Stock
Authorized: 0.161 shares
Issued and outstanding: 2001 - 0.021 shares - 0.2
Common stock, par value $1 per share:
Authorized: 100.0 shares
Issued and outstanding: 2002 and 2001- 54.3 shares 54.3 54.3
Capital in excess of par value 383.0 400.1
Retained earnings 213.1 193.3
Employee benefits trust, at market value (33.0) (58.9)
Accumulated other comprehensive loss:
Minimum pension liabilities (137.2) (6.5)
Foreign currency translation (93.5) (101.6)
Deferred expense on cash flow hedges (5.2) (4.7)
Unrealized losses on marketable securities (0.3) (0.1)
- -----------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive loss (236.2) (112.9)
- -----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 381.2 476.1
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,459.9 2,423.2
- -----------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements.
-39-
THE PITTSTON COMPANY AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Years Ended December 31
(In millions, except per share amounts) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
REVENUES $ 3,776.7 3,624.2 3,834.1
EXPENSES:
Operating expenses 3,164.0 3,090.6 3,264.2
Selling, general and administrative expenses 466.3 448.6 477.8
Impairment and other charges related to:
Former coal operations 19.2 - -
Gold operations 7.1 - -
Restructuring charge - (0.2) 57.5
- ------------------------------------------------------------------------------------------------------------------------------
Total expenses 3,656.6 3,539.0 3,799.5
Other operating income, net 12.6 22.4 13.1
- ------------------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT 132.7 107.6 47.7
Interest income 3.2 4.7 4.2
Interest expense (23.1) (32.4) (43.4)
Other expense, net (2.6) (6.7) (3.9)
- ------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes
and cumulative effect of change in accounting principle 110.2 73.2 4.6
Provision for income taxes 41.2 27.4 1.9
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 69.0 45.8 2.7
- ------------------------------------------------------------------------------------------------------------------------------
Discontinued operations, net of income taxes:
Loss from operations, net of $14.2 of income tax benefits - - (18.2)
Estimated loss on disposition, net of
income tax benefits of: $22.8 (2002), $25.1 (2001) and $105.1 (2000) (42.9) (29.2) (189.1)
- ---------------------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations
(Includes certain retained expenses of former coal operations which,
beginning in 2003, will be recorded in continuing operations - such
expenses (pretax) recorded in 2002, 2001 and 2000 were $2 million, $53
million, and $48 million respectively. See Note 5.) (42.9) (29.2) (207.3)
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change
in accounting principle 26.1 16.6 (204.6)
Cumulative effect of change in accounting principle,
net of $32.7 income tax benefit - - (52.0)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 26.1 16.6 (256.6)
Preferred stock dividends, net (1.1) (0.7) 0.8
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) attributed to common shares $ 25.0 15.9 (255.8)
- ---------------------------------------------------------------------------------------------------------------------------------
-40-
THE PITTSTON COMPANY AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Years Ended December 31
(In millions, except per share amounts) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE
Basic:
Continuing operations $ 1.30 0.88 0.07
Discontinued operations (0.82) (0.57) (4.14)
Cumulative effect of change in accounting principle - - (1.04)
- ---------------------------------------------------------------------------------------------------------------
$ 0.48 0.31 (5.11)
- ---------------------------------------------------------------------------------------------------------------
Diluted:
Continuing operations $ 1.30 0.88 0.05
Discontinued operations (0.82) (0.57) (4.13)
Cumulative effect of change in accounting principle - - (1.04)
- ---------------------------------------------------------------------------------------------------------------
$ 0.48 0.31 (5.12)
- ---------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements.
-41-
THE PITTSTON COMPANY AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
- --------------------------------------------------------------------------------
Years Ended December 31
(In millions) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 26.1 16.6 (256.6)
Other comprehensive income (loss):
Minimum pension liability adjustments:
Adjustment to minimum pension liability (210.8) (9.9) -
Tax benefit related to minimum pension liability adjustment 80.1 3.4 -
- ---------------------------------------------------------------------------------------------------------------------------------
Minimum pension liability adjustments, net of tax (130.7) (6.5) -
- ---------------------------------------------------------------------------------------------------------------------------------
Foreign currency:
Translation adjustments 8.1 (28.4) (14.1)
Reclassification adjustment for loss included in net income (loss) - 0.5 -
- ---------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustments 8.1 (27.9) (14.1)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flow hedges:
Deferred benefit (expense) on cash flow hedges (4.2) 2.4 (8.0)
Tax benefit (expense) related to deferred benefit (expense)
on cash flow hedges 1.3 (1.0) 1.8
Reclassification adjustment for cash flow hedge expense (benefits)
realized in net income (loss) 3.5 3.9 (7.7)
Tax expense (benefit) related to cash flow hedge
realized in net income (loss) (1.1) (1.4) 2.8
- ---------------------------------------------------------------------------------------------------------------------------------
Deferred benefit (expense) on cash flow hedges, net of tax (0.5) 3.9 (11.1)
- ---------------------------------------------------------------------------------------------------------------------------------
Marketable securities:
Unrealized net gains (losses) on marketable securities 0.6 3.5 (0.1)
Tax expense related to unrealized gains on marketable securities (0.2) (1.2) -
Reclassification adjustment for gains realized in net income (loss) (0.8) (4.0) (0.3)
Tax expense related to gains realized in net income (loss) 0.2 1.4 0.1
- ---------------------------------------------------------------------------------------------------------------------------------
Unrealized net gains (losses) on marketable securities, net of tax (0.2) (0.3) (0.3)
- ---------------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss (123.3) (30.8) (25.5)
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss $ (97.2) (14.2) (282.1)
- ---------------------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements.
-42-
THE PITTSTON COMPANY AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Years Ended December 31, 2002, 2001 and 2000
Capital Accumulated
in Excess Employee Other
Preferred Common of Par Retained Benefits Comprehensive
(In millions) Stock Stock Value Earnings Trust Loss Total
- ---------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1999 (a) $ 0.3 71.8 341.0 443.4 (50.3) (56.6) 749.6
Net loss - - - (256.6) - - (256.6)
Other comprehensive loss - - - - - (25.5) (25.5)
Dividends:
Common stock - - - (5.0) - - (5.0)
Preferred stock - - - (0.9) - - (0.9)
Exchange of stock (b) - (20.0) 20.2 - (0.2) - -
Repurchase shares of Preferred stock (0.1) - (3.8) 1.7 - - (2.2)
Employee benefits trust:
Remeasurement - - (8.3) - 8.3 - -
Shares used for employee benefit programs - - (0.4) - 16.7 - 16.3
Tax benefit of stock options exercised - - 0.1 - - - 0.1
- ---------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2000 0.2 51.8 348.8 182.6 (25.5) (82.1) 475.8
Net income - - - 16.6 - - 16.6
Other comprehensive loss - - - - - (30.8) (30.8)
Dividends:
Common stock - - - (5.1) - - (5.1)
Preferred stock - - - (0.7) - - (0.7)
Employee benefits trust:
Shares issued to trust - 2.5 51.6 - (54.1) - -
Remeasurement - - 2.4 - (2.4) - -
Shares used for employee benefit programs - - (2.7) - 23.1 - 20.4
Tax benefit of stock options exercised - - 0.1 - - - 0.1
Other - - (0.1) (0.1) - - (0.2)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2001 0.2 54.3 400.1 193.3 (58.9) (112.9) 476.1
Net income - - - 26.1 - - 26.1
Other comprehensive loss - - - - - (123.3) (123.3)
Dividends:
Common stock - - - (5.2) - - (5.2)
Preferred stock - - - (0.5) - - (0.5)
Repurchase shares of:
Common stock - - (0.3) - - - (0.3)
Preferred stock (0.2) - (10.0) (0.6) - - (10.8)
Employee benefits trust:
Remeasurement - - (5.3) - 5.3 - -
Shares used for employee benefit programs - - (1.7) - 20.6 - 18.9
Tax benefit of stock options exercised - - 0.2 - - - 0.2
- ---------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2002 $ - 54.3 383.0 213.1 (33.0) (236.2) 381.2
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Includes Brink's Group Common Stock - 40.9 shares; BAX Group Common Stock -
20.8 shares and Minerals Group Common Stock - 10.1 shares.
(b) On January 14, 2000, the Company eliminated its tracking stock capital
structure by an exchange of all outstanding shares of Minerals Group Common
Stock and BAX Group Common Stock for shares of Brink's Group Common Stock.
</FN>
See Accompanying Notes to Consolidated Financial Statements.
-43-
THE PITTSTON COMPANY AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Years Ended December 31
(In millions) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 26.1 16.6 (256.6)
Adjustments to reconcile net income (loss) to net cash provided by continuing operations:
Loss from discontinued operations, net of tax 42.9 29.2 207.3
Cumulative effect of change in accounting principle, net of tax - - 52.0
Depreciation and amortization 154.8 160.6 158.8
Impairment charges from subscriber disconnects 32.3 33.8 30.1
Amortization of deferred revenue (23.9) (23.9) (20.6)
Impairment of other long-lived assets 21.5 1.6 47.8
Aircraft heavy maintenance expense 30.6 32.4 40.2
Deferred income taxes (0.8) (6.7) (28.1)
Provision for uncollectible accounts receivable 3.2 12.0 22.9
Other operating, net 23.7 10.9 12.4
Pension expense, net of contributions (23.8) 8.5 9.3
Change in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (14.2) 41.8 40.5
Accounts payable and accrued liabilities 17.4 (21.3) 11.9
Deferred subscriber acquisition cost (17.7) (14.9) (14.0)
Deferred revenue from new subscribers 27.1 27.0 27.1
Other, net 8.7 5.6 (1.6)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations 307.9 313.2 339.4
Net cash provided (used) by discontinued operations (66.6) 6.9 30.4
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 241.3 320.1 369.8
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (204.2) (193.1) (214.4)
Aircraft heavy maintenance expenditures (31.0) (15.5) (50.5)
Cash proceeds from disposal of:
Former coal operations 42.3 - -
Other property and equipment 5.7 2.0 4.1
Other assets and investments - 7.3 -
Acquisitions (0.1) (8.4) (3.9)
Discontinued operations, net (19.7) (11.1) (7.4)
Other, net (1.4) (6.3) (1.6)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (208.4) (225.1) (273.7)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt:
Additions 294.7 107.7 332.0
Repayments (304.1) (185.8) (410.1)
Short-term borrowings (repayments), net 9.1 (23.0) (39.2)
Repurchase of stock (11.1) - (2.2)
Dividends (5.3) (5.4) (5.6)
Other, net - 4.8 0.6
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (16.7) (101.7) (124.5)
- ---------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (0.6) (4.4) (5.0)
Net increase (decrease) in cash and cash equivalents 15.6 (11.1) (33.4)
Cash and cash equivalents at beginning of year 86.7 97.8 131.2
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 102.3 86.7 97.8
- ---------------------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements.
-44-
THE PITTSTON COMPANY AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
BASIS OF PRESENTATION
The Pittston Company, a Virginia corporation, has three primary operating
segments within its "Business and Security Services" businesses: Brink's,
Incorporated ("Brink's"); Brink's Home Security, Inc. ("BHS"); and BAX Global
Inc. ("BAX Global").
The fourth operating segment is Other Operations, which consists of gold, timber
and natural gas operations. The Company also has significant assets and
liabilities associated with its former coal operations and expects to have
significant ongoing expenses and cash outflows related to former coal operations
in the future.
The Pittston Company and its subsidiaries are referred to herein as the
"Company." The Company's common stock trades on the New York Stock Exchange
under the symbol "PZB."
Prior to January 14, 2000, the Company had three classes of common stock, each
designed to track a segment of the Company's businesses: Pittston Brink's Group
Common Stock ("Brink's Stock"), Pittston BAX Group Common Stock ("BAX Stock")
and Pittston Minerals Group Common Stock ("Minerals Stock").
The Company eliminated its tracking stock capital structure on January 14, 2000
by exchanging all outstanding shares of Minerals Stock and BAX Stock for shares
of Brink's Stock (the "Exchange"). See Note 3 for additional information
concerning the Exchange.
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of The Pittston
Company and the subsidiaries it controls, including all subsidiaries that are
majority owned. The Company's interest in 20% to 50% owned companies are
accounted for using the equity method ("equity affiliates") unless control
exists, in which case, consolidation accounting is used. Undistributed earnings
of equity affiliates included in consolidated retained earnings approximated
$33.1 million at December 31, 2002. All material intercompany items and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Brink's - Revenue is recognized when services are performed. Services related to
armored car transportation, including ATM servicing, cash logistics, coin
sorting and wrapping are performed in accordance with the terms of customer
contracts, which contract prices are fixed and determinable. Brink's assesses
the customer's ability to meet the terms of the contract, including payment
terms, before entering into contracts.
BHS - Monitoring revenues are recognized monthly as services are provided
pursuant to the terms of customer contracts, which contract prices are fixed and
determinable. BHS assesses the customer's ability to meet the terms of the
contract, including payment terms, before entering into contracts. Amounts
collected in advance as deposits from customers are deferred and recognized as
income over the applicable monitoring period, which is generally one year or
less. Beginning in 2000, nonrefundable installation revenues and a portion of
the related direct costs of acquiring new subscribers (primarily sales
commissions) are deferred and recognized over the estimated term of the
subscriber relationship, which is generally 15 years.
-45-
When an installation is identified for disconnection, any unamortized deferred
revenues and deferred costs related to that installation are recognized at that
time. Prior to 2000, BHS charged against earnings as incurred, all marketing and
selling costs associated with obtaining new subscribers and recognized as
revenue all nonrefundable payments received from such subscribers to the extent
that costs exceeded such revenues.
BAX Global - Revenues related to transportation services are recognized,
together with related transportation costs, on the date shipments physically
depart from facilities en route to destination locations. BAX Global and its
customer agree to the terms of the shipment, including pricing, prior to
shipment. Pricing terms are fixed and determinable, and BAX Global only agrees
to shipments when it believes that collectibility is reasonably assured.
Revenues and operating results determined under existing recognition policies do
not materially differ from those which would result from an allocation of
revenue between reporting periods based on relative transit times in each
reporting period with expenses recognized as incurred.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposits and investments
with original maturities of three months or less.
TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts is the Company's best estimate of
the amount of probable credit losses in the Company's existing accounts
receivable. The Company determines the allowance based on historical write-off
experience by industry and customer specific data. The Company reviews its
allowance for doubtful accounts quarterly. Account balances are charged off
against the allowance after all means of collection have been exhausted and the
potential for recovery is considered remote. The Company has an accounts
receivable securitization program described in Note 13.
PROPERTY AND EQUIPMENT
Property and equipment is accounted for at cost. Depreciation is calculated
principally on the straight-line method. Amortization of capitalized software is
calculated principally on the straight-line method.
Estimated Useful Lives Years
- -------------------------------------------------------------------------
Buildings 10 to 40
Home security systems 15
Vehicles 3 to 12
Capitalized software 3 to 7
Other machinery and equipment 3 to 20
- -------------------------------------------------------------------------
Expenditures for routine maintenance and repairs on property and equipment,
including aircraft, are charged to expense. Major renewals, betterments and
modifications are capitalized and amortized over the lesser of the remaining
life of the asset or, if applicable, lease term. Scheduled airframe and periodic
engine overhaul costs are capitalized, and reported within other assets, when
incurred and amortized over the flying time to the next scheduled major
maintenance or overhaul date, respectively.
BHS retains ownership of most home security systems installed at subscriber
locations. Costs for those systems are capitalized and depreciated over the
estimated lives of the assets. Costs capitalized as part of home security
systems include equipment and materials used in the installation process, direct
labor required to install the equipment at customer sites, and other costs
associated with the installation process. These other costs include the cost of
vehicles used for installation purposes and the portion of telecommunication,
facilities and administrative costs incurred primarily at BHS' branches that are
associated with the installation process. Direct labor and other costs represent
approximately 70% of the amounts capitalized, while equipment and materials
represent approximately 30% of amounts capitalized. In addition to regular
straight line depreciation expense each period, the Company charges to expense
the carrying value of security systems estimated to be permanently disconnected
based on each period's actual disconnects and historical reconnection
experience.
-46-
The costs of computer software developed or obtained for internal use are
accounted for in accordance with AICPA Statement of Position ("SOP") No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP No. 98-1 requires that certain costs related to the
development or purchase of internal-use software be capitalized and amortized
over the estimated useful life of the software. Costs that are capitalized
include external direct costs of materials and services to develop or obtain the
software, and internal costs for employees directly associated with a software
development project, including payroll and other employee benefits. Amortization
of capitalized software costs was $19.8 million, $15.1 million and $14.6 million
in 2002, 2001 and 2000, respectively.
GOODWILL
Goodwill is recognized for the excess of the purchase price over the fair value
of tangible and identifiable intangible net assets of businesses acquired. Prior
to the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" in January 2002, goodwill was amortized
over the estimated period of benefit on a straight-line basis up to a maximum of
40 years, and was reviewed for impairment under the provisions of SFAS No. 121
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed Of," for other long-lived assets. Since the adoption of SFAS No.
142, amortization of goodwill has been discontinued and goodwill is reviewed at
least annually for impairment. The Company completed the transitional and annual
goodwill impairment tests during 2002 with no impairment charges required. The
Company's goodwill amortization in each of 2001 and 2000 was approximately $9.5
million.
A reconciliation of net income (loss) and net income (loss) per share for the
three years ended December 31, 2002 as reported in the Company's Consolidated
Statements of Operations, to net income (loss) and net income (loss) per share
for the same periods, as adjusted to exclude goodwill amortization expense (net
of tax effects), is presented below:
(In millions, except Years Ended December 31
per share amounts) 2002 2001 2000
- ------------------------------------------------------------
Reported net income (loss) $ 26.1 16.6 (256.6)
Goodwill amortization,
net of tax effects - 8.3 8.2
- ------------------------------------------------------------
Net income (loss) as adjusted $ 26.1 24.9 (248.4)
- ------------------------------------------------------------
Reported diluted
net income (loss) per share $ 0.48 0.31 (5.12)
Goodwill amortization, net
of tax effects - 0.16 0.16
- ------------------------------------------------------------
Diluted net income (loss)
per share as adjusted $ 0.48 0.47 (4.96)
- ------------------------------------------------------------
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets that are deemed impaired are recorded at the lower of the
carrying amount or fair value in accordance with SFAS No. 142 for goodwill, as
noted above, and SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" for long-lived assets besides goodwill. Long-lived assets
besides goodwill are reviewed for impairment when circumstances indicate the
carrying value of an asset may not be recoverable. For assets that are to be
held and used, an impairment is recognized when the estimated undiscounted cash
flows associated with the asset or group of assets is less than their carrying
value. If impairment exists, an adjustment is made to write the asset down to
its fair value, and a loss is recorded as the difference between the carrying
value and fair value. Fair values are determined based on quoted market values,
discounted cash flows or internal and external appraisals, as applicable. Assets
held for sale are carried at the lower of carrying value or estimated net
realizable value. See Note 8.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans using the intrinsic
value method prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, since options are granted with an exercise price equal to the
market price of the stock on the date of grant, the Company has not recognized
any compensation expense related to its stock option plans for the years ended
December 31, 2002, 2001 and 2000. See Note 16.
-47-
Had compensation costs for the Company's stock-based compensation plans been
determined based on the fair value of awards at the grant dates consistent with
the optional recognition provision of SFAS No. 123, "Accounting for Stock Based
Compensation," net income (loss) and net income (loss) per share would be the
pro forma amounts indicated below:
(In millions, except Years Ended December 31
per share amounts) 2002 2001 2000
- ------------------------------------------------------------------------
NET INCOME (LOSS)
As reported $ 26.1 16.6 (256.6)
Less stock-based compensation
expense determined under
fair value method (4.4) (5.0) (4.4)
- ------------------------------------------------------------------------
Pro forma $ 21.7 11.6 (261.0)
- ------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE
Basic, as reported $ 0.48 0.31 (5.11)
Basic, pro forma 0.40 0.21 (5.21)
Diluted, as reported $ 0.48 0.31 (5.12)
Diluted, pro forma 0.39 0.21 (5.21)
- ------------------------------------------------------------------------
The fair value of each stock option grant is estimated at the time of the grant
using the Black-Scholes option-pricing model. Pro forma net income (loss) and
net income (loss) per share disclosures are computed by amortizing the estimated
fair value of the grants over respective vesting periods. The weighted-average
assumptions used in the model for Pittston Common Stock and the resulting
weighted-average grant-date estimates of fair value are as follows:
Years Ended December 31
2002 2001 2000
- ---------------------------------------------------------------------
Assumptions:
Expected dividend yield 0.5% 0.5% 0.4%
Expected volatility 37% 38% 31%
Risk-free interest rate 3.7% 4.8% 6.0%
Expected term (in years) 4.0 4.6 4.5
Fair value estimates:
In millions $ 6.6 9.6 5.5
Per share $ 6.97 8.10 5.21
- ---------------------------------------------------------------------
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Postretirement benefits other than pensions, except for those established
pursuant to the Coal Industry Retiree Health Benefit Act of 1992 (the "Health
Benefit Act"), are accounted for in accordance with SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which requires
employers to accrue the cost of such retirement benefits during the employees'
service with the Company. Actuarial gains and losses are deferred. The portion
of the deferred gains or losses that exceeds 10% of the accumulated
postretirement benefit obligation at the beginning of the year is amortized into
earnings generally over the average remaining life expectancy for inactive
participants.
Postretirement benefit obligations established by the Health Benefit Act are
recorded as a liability when they are probable and estimable in accordance with
Emerging Issues Task Force ("EITF") No. 92-13, "Accounting for Estimated
Payments in Connection with the Coal Industry Retiree Health Benefit Act of
1992." Prior to the Company's formal plan to exit the coal business in December
2000, the Company recognized expense when payments were made, similar to the
accounting for multi-employer plans, as provided in EITF 92-13.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which these items
are expected to reverse.
-48-
FOREIGN CURRENCY TRANSLATION
The Company's Consolidated Financial Statements are reported in U.S. dollars.
Assets and liabilities of foreign subsidiaries are translated using rates of
exchange at the balance sheet date and resulting cumulative translation
adjustments have been recorded as a separate component of accumulated other
comprehensive loss. Revenues and expenses are translated at rates of exchange in
effect during the year. Translation adjustments relating to subsidiaries in
countries with highly inflationary economies are included in net income, along
with all transaction gains and losses.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
All derivative instruments are recorded in the Consolidated Balance Sheet at
fair value. If the derivative has been designated as a cash flow hedge, changes
in the fair value of derivatives are recognized in other comprehensive loss
until the hedged transaction is recognized in earnings.
FORMER COAL OPERATIONS
The following accounting policies of the Company's former coal operations were
in effect through December 2002, at which point the Company completed its exit
of the coal business by either selling or shutting down its active coal
operations.
Revenue Recognition
Coal sales are generally recognized when coal is loaded onto transportation
vehicles for shipment to customers. For domestic sales, this generally occurs
when coal is loaded onto railcars at mine locations. For export sales, this
generally occurs when coal is loaded onto marine vessels at terminal facilities.
Coal sales are included as a component of the Company's loss from discontinued
operations in the Company's Consolidated Statements of Operations.
Property, Plant and Equipment
Depletion of bituminous coal lands is provided on the basis of tonnage mined in
relation to the estimated total of recoverable tonnage in the ground and is
included as a component of the Company's loss from discontinued operations in
the Company's Consolidated Statements of Operations.
Mine development costs are capitalized and amortized over the estimated useful
life of the mine. These costs include expenses incurred for site preparation and
development at the mines during the development stage. A mine is considered
under development until management determines that all planned production units
are in place and the mine is available for commercial operation and the mining
of coal. Capitalized mine development costs are included within noncurrent
assets (classified as part of discontinued operations at December 31, 2001) on
the Company's Consolidated Balance Sheets. The associated amortization is
included as a component of the Company's loss from discontinued operations in
the Company's Consolidated Statements of Operations.
Reclamation Costs
Expenditures relating to environmental regulatory requirements and reclamation
costs undertaken during mine operations are expensed as incurred. Estimated site
restoration and post closure reclamation costs are expensed using the units of
production method over the estimated recoverable tonnage at each mine. In each
case, such charges are included as a component of the Company's loss from
discontinued operations in the Company's Consolidated Statements of Operations.
Accrued reclamation costs are subject to review by management on a regular basis
and are revised when appropriate for changes in future estimated costs and/or
regulatory requirements. Accrued reclamation costs for mines are included in
either current or noncurrent liabilities (amounts expected to be assumed by
purchasers were classified as part of discontinued operations at December 31,
2001) in the Company's Consolidated Balance Sheets.
Inventories
Inventories are stated at cost (determined under the first-in, first-out or
average cost method) or market, whichever is lower. Inventory is recorded within
current assets (classified as part of discontinued operations at December 31,
2001) in the Company's Consolidated Balance Sheets.
-49-
USE OF ESTIMATES
In accordance with accounting principles generally accepted in the U.S.,
management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these Consolidated Financial
Statements. Actual results could differ materially from those estimates. The
most significant estimates used by management are related to the accounting for
goodwill and property and equipment valuations, employee and retiree benefit
obligations, discontinued operations, and deferred tax assets.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year's financial statement presentation.
ACCOUNTING CHANGE - 2000
Pursuant to guidance issued in Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements," by the Securities and Exchange
Commission in December 1999, and a related interpretation issued in October
2000, BHS changed its method of accounting for nonrefundable installation
revenues and a portion of the related direct costs of obtaining new subscribers
(primarily sales commissions). Under the new method, all of the nonrefundable
installation revenues and a portion of the new installation costs deemed to be
direct costs of subscriber acquisition are deferred and recognized in income
over the estimated term of the subscriber relationship. Prior to 2000, BHS
charged against earnings as incurred, all marketing and selling costs associated
with obtaining new subscribers and recognized as revenue all nonrefundable
payments received from such subscribers to the extent that costs exceeded such
revenues.
The accounting change was implemented in 2000 and the Company reported a noncash
after-tax charge of $52.0 million ($84.7 million pretax), to reflect the
cumulative effect of the accounting change on years prior to 2000. The pretax
cumulative effect charge of $84.7 million comprised a net deferral of $121.1
million of revenues partially offset by $36.4 million of customer acquisition
costs. The change in accounting principle decreased operating profit for 2000 by
$2.3 million, reflecting a net decrease in revenues of $6.4 million and a net
decrease in operating expenses of $4.1 million. Net income for 2000 was reduced
by $1.4 million ($0.03 per diluted share).
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 143, "Accounting for Asset Retirement Obligations," was issued in June
2001 and addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS No. 143 requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it becomes
an obligation, if a reasonable estimate of fair value can be made. The Company
will adopt SFAS No. 143 in the first quarter of 2003. The implementation of the
new standard is not expected to have a material effect on the Company's results
of operations or financial position.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued in June 2002 and applies to costs associated with an
exit activity (including restructuring) or with a disposal of long-lived assets.
This statement nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." Under SFAS No.
146, a commitment to a plan to exit an activity or dispose of long-lived assets
will no longer be sufficient to record a charge for most anticipated costs.
Instead, a liability for costs associated with an exit or disposal activity will
be recorded when that liability is incurred and can be measured at fair value.
SFAS No. 146 also revises accounting for specified employee and contract
terminations that are part of restructuring activities. SFAS No. 146 is
effective for exit or disposal activities initiated after December 31, 2002.
-50-
SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and
Disclosure," was issued in December 2002 and provides alternative methods of
transition for a voluntary change to the fair value-based method of accounting
for stock-based compensation. It also amends the disclosure provisions of SFAS
No. 123 to require prominent disclosure in the "Summary of Significant
Accounting Policies" about the effects on reported net income of an entity's
accounting policy decisions with respect to stock-based employee compensation.
SFAS No. 148 requires disclosure as to the pro forma effects on interim
financial statements if stock-based compensation is accounted for under the
intrinsic value method prescribed in APB No. 25. The amendments to SFAS No. 123
as to transition alternatives and as to prominent disclosure are effective for
fiscal years ending after December 15, 2002. The amendment is effective for
interim periods beginning after December 15, 2002.
In November 2002, the Financial Accounting Standards Board (the "FASB") issued
FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 requires that upon issuance of a guarantee, the guarantor must
recognize a liability for the fair value of the obligation it assumes under that
guarantee. FIN 45 also requires additional disclosures by a guarantor in its
interim and annual financial statements about the obligations associated with
guarantees issued. The required disclosures have been included in Notes 12, 14
and 21. The recognition and measurement provisions are effective on a
prospective basis to guarantees issued or modified after December 31, 2002. The
adoption of this interpretation is not expected to have a material effect on the
Company's Consolidated Financial Statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 provides guidance on the
identification of entities for which control is achieved through means other
than through voting rights ("variable interest entities") and how to determine
when and which business enterprises should consolidate variable interest
entities. Variable interest entities created after January 31, 2003, if any,
will be assessed for consolidation using the new interpretation beginning in the
first quarter of 2003. Variable interest entities in which the Company holds a
variable interest that it acquired before February 1, 2003 will be assessed for
consolidation beginning in the third quarter of 2003. The adoption of this
interpretation is not expected to have a material effect on the Company's
Consolidated Financial Statements.
-51-
NOTE 2
SEGMENT INFORMATION
The Company conducts business in four different operating segments: Brink's,
BHS, and BAX Global (collectively "Business and Security Services") and Other
Operations. These reportable segments are identified by the Company based on how
resources are allocated and how operating decisions are made. Management
evaluates performance and allocates resources based on operating profit or loss
excluding corporate allocations.
Brink's operates in the U.S. and 49 international countries. Services offered by
Brink's include contract-carrier armored car, ATM servicing, air courier (global
services), coin wrapping and cash logistics.
BHS is engaged in the business of marketing, selling, installing, monitoring and
servicing electronic security systems, primarily in owner-occupied,
single-family residences.
BAX Global is a worldwide transportation and supply chain management company
offering multi-modal freight forwarding to business-to-business shippers through
a global network. In North America, BAX Global provides overnight, second day
and deferred freight delivery as well as supply chain management services.
Internationally, BAX Global is engaged in time-definite air and sea delivery,
freight forwarding, supply chain management services and international customs
brokerage.
The Company has no single customer that represents more than 10% of its total
revenue.
Other Operations consists of the Company's gold, timber and natural gas
businesses. The Company expects to ultimately exit these activities to focus
resources on its core Business and Security Services segments.
The Company also has significant assets and liabilities associated with its
former coal operations and expects to have significant ongoing expenses and cash
outflows related to former coal operations in the future.
- ---------------------------------------------------------------------------------------------------------------------------------
Assets Revenues Operating Profit (Loss)
- ---------------------------------------------------------------------------------------------------------------------------------
December 31 Years Ended December 31 Years Ended December 31
(In millions) 2002 2001 2000 2002 2001 2000 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
BUSINESS SEGMENTS
Brink's $ 851.4 801.7 764.9 $ 1,579.9 1,536.3 1,462.9 $ 96.1 92.0 108.5
BHS 418.9 386.4 365.6 282.4 257.6 238.1 60.9 54.9 54.3
BAX Global (a) 764.5 696.8 798.6 1,871.5 1,790.1 2,097.6 17.6 (27.6) (99.6)
- ---------------------------------------------------------------------------------------------------------------------------------
Business and Security
Services 2,034.8 1,884.9 1,929.1 3,733.8 3,584.0 3,798.6 174.6 119.3 63.2
Other Operations (b) 51.1 46.2 50.1 42.9 40.2 35.5 0.4 7.6 5.7
General corporate 27.7 70.3 67.2 - - - (23.1) (19.3) (21.2)
Former coal operations:
Deferred tax assets 238.7 244.4 231.6 - - - - - -
Other (c) 107.6 177.4 200.7 - - - (19.2) - -
- ---------------------------------------------------------------------------------------------------------------------------------
$ 2,459.9 2,423.2 2,478.7 $ 3,776.7 3,624.2 3,834.1 $132.7 107.6 47.7
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) BAX Global's operating loss in 2000 includes restructuring charges of $57.5 million (see Note 20).
(b) Other Operations operating profit in 2002 includes a $7.1 million of impairment and other charges.
(c) Former coal operations operating loss in 2002 represents impairment and other charges.
</FN>
-52-
- ---------------------------------------------------------------------------------------------------------------------------------
Capital Expenditures Depreciation and Amortization
- ---------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31 Years Ended December 31
(In millions) 2002 2001 2000 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
BUSINESS SEGMENTS
Brink's $ 79.3 71.3 73.9 $ 61.3 60.1 58.2
BHS 86.9 81.3 74.5 37.3 31.0 26.7
BAX Global (a) 27.1 33.1 60.1 44.4 49.4 53.8
- --------------------------------------------------------------------------------------------------------------------------------
Business and Security Services 193.3 185.7 208.5 143.0 140.5 138.7
Other Operations 10.8 7.2 5.1 4.9 4.3 4.9
General corporate 0.1 0.2 0.8 0.3 0.5 0.4
- --------------------------------------------------------------------------------------------------------------------------------
Property and equipment 204.2 193.1 214.4 148.2 145.3 144.0
Amortization of BHS deferred subscriber acquisition costs - - - 6.6 5.8 5.3
Goodwill amortization:
Brink's - - - - 2.1 2.0
BAX Global - - - - 7.4 7.5
- ---------------------------------------------------------------------------------------------------------------------------------
- - - - 9.5 9.5
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 204.2 193.1 214.4 $ 154.8 160.6 158.8
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Excludes aircraft heavy maintenance expenditures and amortization.
</FN>
- ---------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31
(In millions) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER BHS INFORMATION
Impairment charges from subscriber disconnects $ 32.3 33.8 30.1
Amortization of deferred revenue (23.9) (23.9) (20.6)
Deferred subscriber acquisition costs (current year payments) (17.7) (14.9) (14.0)
Deferred revenue from new subscribers (current year receipts) 27.1 27.0 27.1
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Long-Lived Assets Revenues Operating Profit (Loss)
- ---------------------------------------------------------------------------------------------------------------------------------
December 31 Years Ended December 31 Years Ended December 31
(In millions) 2002 2001 2000 2002 2001 2000 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
GEOGRAPHIC
United States (a) $ 773.3 762.7 745.0 $ 1,796.1 1,775.4 1,932.1 $ 82.6 39.0 (28.3)
France 134.7 102.7 101.3 375.6 326.0 297.0 21.3 25.3 20.9
Other international (a) 241.3 248.2 252.1 1,605.0 1,522.8 1,605.0 71.1 62.6 76.3
General corporate (b) 0.8 1.1 1.4 - - - (23.1) (19.3) (21.2)
Former coal operations (b)31.5 113.4 119.4 - - - (19.2) - -
- ---------------------------------------------------------------------------------------------------------------------------------
$ 1,181.6 1,228.1 1,219.2 $ 3,776.7 3,624.2 3,834.1 $ 132.7 107.6 47.7
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Operating profit (loss) in 2000 includes restructuring charges of $54.6
million and $2.9 million in the U.S. and Other international, respectively,
(see Note 20).
(b) U.S. based assets and expense.
</FN>
-53-
Brink's has investments in unconsolidated equity affiliates of $23.8 million,
$26.0 million and $22.1 million in 2002, 2001 and 2000, respectively. Brink's
equity interest in net income of unconsolidated equity affiliates was $1.3
million in 2002, $5.5 million in 2001 and $4.3 million in 2000.
Other operations has investments in unconsolidated equity affiliates of $3.4
million, $3.4 million and $4.4 million in 2002, 2001 and 2000, respectively.
Other operation's equity interest in net income (loss) of unconsolidated equity
affiliates was $0.1 million in 2002, ($0.6) million in 2001 and $0.4 million in
2000. The Company has an additional investment in an unconsolidated equity
affiliate of $8.3 million in 2002, $7.1 million in 2001 and $6.2 million in
2000.
Revenues are recorded in the country where the service is initiated/performed
with the exception of most of BAX Global's export freight service where revenue
is shared among the origin and destination countries. The Company's net assets
in non-U.S. subsidiaries were $377.8 million and $318.1 million at December 31,
2002 and 2001, respectively.
NOTE 3
CAPITAL STOCK
COMMON STOCK
On January 14, 2000, the Company eliminated its tracking stock capital structure
by exchanging all outstanding shares of Minerals Stock and BAX Stock for 10.9
million shares of Brink's Stock. The holders of Minerals Stock received 0.0817
share of Brink's Stock for each share of their Minerals Stock; and holders of
BAX Stock received 0.4848 share of Brink's Stock for each share of their BAX
Stock. The exchange ratios were derived using a shareholder-approved formula
that was based on the relative fair market values of each stock, as defined in
the Company's Articles of Incorporation.
After January 14, 2000, Brink's Stock became the only outstanding class of
common stock of the Company and is hereinafter referred to as "Pittston Common
Stock."
CONVERTIBLE PREFERRED STOCK
On August 15, 2002 the Company redeemed all 21,433 outstanding shares of the
$31.25 Series C Cumulative Preferred Stock (the "Convertible Preferred Stock")
for $10.8 million, or $506.25 per share.
At December 31, 2002, the Company has authority to issue up to 2.0 million
shares of preferred stock, par value $10 per share.
REPURCHASE PROGRAM
The Company has the remaining authority to purchase up to 1.0 million shares of
Pittston Common Stock under a share repurchase program authorized by the Board
of Directors, with an aggregate purchase price limitation of $19.1 million.
(Dollars in millions, Years Ended December 31
shares in thousands) 2002 2001 2000
- -------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK
Shares repurchased 21.4 - 8.1
Cash paid to repurchase $ 10.8 - 2.2
Premium on redemption of
preferred stock (a) (0.6) - -
Discount on repurchase of
preferred stock (b) - - 1.7
- -------------------------------------------------------------------
(a) Represents the excess of cash paid to holders over the carrying value of the
shares redeemed and is included within preferred dividends in the Company's
Consolidated Statements of Operations.
(b) Represents the excess of carrying value over cash paid to holders of the
shares repurchased and is included within preferred dividends in the
Company's Consolidated Statements of Operations.
DIVIDENDS
During 2002, 2001 and 2000, the Company paid dividends of $5.2 million, $5.1
million and $5.0 million, respectively, on Pittston Common Stock. In 2002, 2001
and 2000, dividends paid on the Convertible Preferred Stock amounted to $0.5
million, $0.7 million, and $0.9 million, respectively.
Dividends distributed to employee benefit plans in the form of common stock were
$0.4 million, $0.4 million and $0.3 million for the years ended December 31,
2002, 2001 and 2000, respectively.
-54-
In February 2003, the Board declared a cash dividend of $0.025 per share on
Pittston Common Stock payable on March 3, 2003 to shareholders of record on
February 18, 2003.
SERIES A PREFERRED STOCK RIGHTS AGREEMENT
Under the Amended and Restated Rights Agreement dated as of January 14, 2000, as
amended effective November 30, 2001, holders of Pittston Common Stock have
rights to purchase a new Series A Participating Cumulative Preferred Stock (the
"Series A Preferred Stock") of the Company at the rate of one right for each
share of Pittston Common Stock. Each right, if and when it becomes exercisable,
will entitle the holder to purchase one-thousandth of a share of Series A
Preferred Stock at a purchase price of $60.00, subject to adjustment.
Each fractional share of Series A Preferred Stock will be entitled to
participate in dividends and to vote on an equivalent basis with one whole share
of Pittston Common Stock. Each right will not be exercisable until after a third
party acquires more than 15% of the total voting rights of all outstanding
Pittston Common Stock or on such date as may be designated by the Board after
commencement of a tender offer or exchange offer by a third party for more than
15% of the total voting rights of all outstanding Pittston Common Stock.
If after the rights become exercisable, the Company is acquired in a merger or
other business combination, each right will entitle the holder to purchase, for
the purchase price, common stock of the surviving or acquiring company having a
market value of twice the purchase price. In the event a third party acquires
more than 15% of all outstanding Pittston Common Stock, the rights will entitle
each holder to purchase, at the purchase price, that number of fractional shares
of Series A Preferred Stock equivalent to the number of shares of common stock
which at the time of the triggering event would have a market value of twice the
purchase price. As an alternative to the purchase described in the previous
sentence, the Board may elect to exchange the rights for other forms of
consideration, including that number of shares of common stock obtained by
dividing the purchase price by the market price of the common stock at the time
of the exchange or for cash equal to the purchase price. The rights may be
redeemed by the Company at a price of $0.01 per right and expire on September
25, 2007.
EMPLOYEE BENEFITS TRUST
The Pittston Company Employee Benefits Trust (the "Trust") holds shares of
Pittston Common Stock to fund obligations under certain compensation and
employee benefit programs that provide for the issuance of stock. In 2001, the
Company issued an additional 2.5 million shares of Pittston Common Stock to the
Trust. In 2000, the Trust exchanged its BAX Stock and Minerals Stock for 0.7
million shares of Pittston Common Stock in the Exchange. As of December 31,
2002, 2001 and 2000, 1.8 million, 2.7 million and 1.3 million shares,
respectively, of Pittston Common Stock were held by the Trust. The fair value as
of the balance sheet date of the shares owned by the Trust are accounted for as
a reduction of shareholders' equity. Shares of Pittston Common Stock will be
voted by the trustee in the same proportion as those voted by the Company's
employees participating in the Company's Savings Investment Plan.
-55-
NOTE 4
EARNINGS PER SHARE
The following is a reconciliation between the calculations of basic and diluted
income from continuing operations per common share:
Years Ended December 31
(In millions) 2002 2001 2000
- ------------------------------------------------------------------------
NUMERATOR
Income from continuing operations $ 69.0 45.8 2.7
Preferred stock dividends (0.5) (0.7) (0.9)
(Premium) discount on repurchase of
preferred stock (a) (0.6) - 1.7
- ------------------------------------------------------------------------
Basic income from continuing
operations 67.9 45.1 3.5
Preferred stock dividends - - 0.9
Discount on repurchase of
preferred stock - - (1.7)
- ------------------------------------------------------------------------
Diluted income from
continuing operations $ 67.9 45.1 2.7
- ------------------------------------------------------------------------
DENOMINATOR
Basic weighted average
common shares outstanding 52.1 51.2 50.1
Effect of dilutive
stock options 0.3 0.2 -
- ------------------------------------------------------------------------
Diluted weighted average
common shares outstanding 52.4 51.4 50.1
- ------------------------------------------------------------------------
(a) See "Repurchase Program" in Note 3.
Unallocated shares of Pittston Common Stock held in the Pittston Company
Employee Benefits Trust (the "Trust"), a grantor trust, are treated as treasury
shares for earnings per share purposes. Accordingly, such shares are excluded
from the basic and diluted income per common share calculations. Shares held by
the Trust that were excluded were 1.8 million, 2.7 million and 1.3 million in
2002, 2001 and 2000, respectively.
The Company excludes the effect of antidilutive securities from the computations
of diluted income from continuing operations per common share. The equivalent
weighted average shares of common stock that were excluded were 1.2 million, 2.0
million and 2.8 million in 2002, 2001 and 2000, respectively.
NOTE 5
DISCONTINUED OPERATIONS
After completing the disposal of its coal business, the Company has retained
certain coal-related liabilities and related expenses. Retained liabilities
include obligations related to postretirement benefits for Company-sponsored
plans, black lung benefits, reclamation and other costs related to idle
(shut-down) mines which have been retained, Health Benefit Act, workers'
compensation claims and costs of withdrawal from multi-employer pension plans.
Expenses related to these liabilities have been reflected in the loss from
discontinued operations through the disposal date. Subsequent to the completion
of the disposal process (for the period beginning January 1, 2003), adjustments
to coal-related contingent liabilities will be reflected in discontinued
operations, and expenses related to Company-sponsored pension and postretirement
benefit obligations and black lung obligations will be reflected in continuing
operations. In addition, subsequent to the disposal date, the Company expects to
have certain ongoing costs related to the administration of the retained
liabilities and will report those costs in continuing operations.
The amounts to be recorded in future years will be dependent on many factors,
including inflation in health care and other costs, discount rates, the market
value of pension plan assets, the number of participants in various benefit
programs, the number of idle mine sites ultimately transferred and the timing of
such transfers, and the amount of administrative costs needed to manage the
retained liabilities.
Proceeds received from the sales transactions in 2002 approximated $88 million
including cash of $42 million, notes receivable of $8 million (six-month term),
$16 million representing the present value of royalties (five-year term, $20
million total payments), and liabilities assumed by the purchasers of
approximately $22 million.
The assets disposed of primarily included operations including coal reserves,
property, plant and equipment, the Company's economic interest in Dominion
Terminal Associates ("DTA") and inventory. Certain liabilities, primarily
reclamation costs related to properties disposed of, were assumed by the
purchasers.
-56-
The losses from discontinued operations in the Company's Consolidated Statements
of Operations were as follows:
Years Ended December 31
(In millions) 2002 2001 2000
- ------------------------------------------------------------------------
Pretax loss from the operations of
the discontinued segment $ - - (32.4)
Income tax benefit - - (14.2)
- ------------------------------------------------------------------------
Loss from the operations of the
discontinued segment, after tax - - (18.2)
- ------------------------------------------------------------------------
Loss on the disposal 13.2 (15.9) (85.9)
Operating losses during
the disposal period (28.1) (22.2) (45.0)
Health Benefit Act liabilities and
curtailment of benefit plans (24.0) (8.0) (163.3)
Withdrawal liability (26.8) (8.2) -
- ------------------------------------------------------------------------
Pretax loss on the disposal
of the discontinued segment (65.7) (54.3) (294.2)
Income tax benefit (22.8) (25.1) (105.1)
- ------------------------------------------------------------------------
Loss on the disposal of the
discontinued segment, after tax (42.9) (29.2) (189.1)
- ------------------------------------------------------------------------
Loss from discontinued
operations $ (42.9) (29.2) (207.3)
- ------------------------------------------------------------------------
LOSS ON THE DISPOSAL
During 2000, an estimated loss of $85.9 million was recorded to reflect the
difference between expected proceeds and the carrying value of assets to be
sold. During 2001, an estimated additional net loss of $15.9 million was
recorded to reflect changes in expected proceeds to be received and changes in
the expected values of assets and liabilities through the anticipated dates of
sale or shutdown. A $13.2 million reversal of the previously estimated loss on
sale was recorded during 2002 to reflect the final adjustment based on the
actual proceeds and values of assets and liabilities at the dates of sale.
OPERATING LOSSES
Discontinued Operations accounting required the accrual of expenses expected to
be incurred through the end of the disposal period. Accordingly, operating
losses (including significant expenses the Company expects to retain and
classify in continuing operations subsequent to the disposal date related to
Company-sponsored pension and postretirement benefit obligations and black lung
obligations) were recognized within discontinued operations in different periods
than they would have been recorded if coal were a continuing operation. Total
recorded charges for Company-sponsored pension and postretirement benefit
obligations and black lung obligations, were approximately $2 million, $53
million and $48 million in 2002, 2001 and 2000, respectively. The year 2000
included expenses incurred in 2000 and those expected to be incurred in 2001,
while 2001 (which included expenses expected to be incurred in 2002) included
only one year of expenses. The amount in 2002 represents the difference between
the estimated amount of expenses relating to 2002 that were accrued in 2001 and
the amount actually incurred in 2002. The increase in the average amount of
annual expense for 2002 (recorded in 2001) versus prior years primarily resulted
from the effects of actuarial assumption changes on postretirement medical and
pension benefits.
Estimated operating losses, including the above employee expenses, through the
originally anticipated period of disposal of $45.0 million were recorded in
2000.
The Company increased the estimated operating losses in 2001 by $22.2 million.
The $22.2 million increase included the effect of extending the anticipated
period of disposal through the end of 2002, which resulted in $53 million of
additional postretirement, pension, and black lung benefit expenses. Also
included in the $22.2 million increase was a refund of $23.4 million (including
interest) of Federal Black Lung Excise Tax ("FBLET") received during 2001 and an
accrual of $9.5 million for litigation settlements that were paid during early
2002.
The Company recorded an additional $28.1 million of operating losses during
2002, primarily reflecting worse-than-expected price, volume and costs per ton
of coal as a result of adverse coal market conditions during the year, and the
sale of coal operations and reserves in 2002.
No interest expense has been allocated to discontinued operations.
-57-
HEALTH BENEFIT ACT LIABILITIES AND CURTAILMENT OF BENEFIT PLANS
In 2000, the Company recorded a $161.7 million liability for its obligations
under the Coal Industry Retiree Health Benefit Act of 1992 (the "Health Benefit
Act"). In 2002 and 2001, the Company recorded additional charges of $24.0
million and $8.0 million, respectively, to reflect changes in the estimates of
the undiscounted liability. This liability will be adjusted in future periods as
assumptions change. See Note 15.
During 2000, the Company also recorded a net curtailment loss of $1.6 million,
comprising a $6.0 million net curtailment loss on the Company's medical benefit
plans and a $4.4 million net curtailment gain on the Company's pension plans.
WITHDRAWAL LIABILITY
The Company participates in the United Mine Workers of America ("UMWA") 1950 and
1974 pension plans at defined contribution rates, but expects to ultimately
withdraw from these plans. At December 31, 2001, the Company recorded $8.2
million of estimated withdrawal liabilities for these multi-employer pension
plans associated with its planned exit from the coal business. At December 31,
2002, the Company increased the estimated liabilities by $26.8 million to $35.0
million. The Company's estimate of the obligation in each year is based on the
funded status of the multi-employer plans at the most recent measurement date.
The actual withdrawal liability, if any, is subject to several factors,
including funding and benefit levels of the plans and the date that the Company
is determined to have completely withdrawn from the plans. Accordingly, the
ultimate obligation could change materially.
INCOME TAXES
Income tax benefits attributable to the loss on the disposal of the discontinued
segment include the benefits of percentage depletion generated from the active
operations during the sale period.
OPERATING PERFORMANCE OF FORMER COAL OPERATIONS
Since estimated operating losses from the measurement date to the date of
disposal of the former coal operations were recorded as part of the estimated
loss on the disposal, actual results of operations during the disposal period
are not included in Consolidated Statements of Operations in the period that
they are earned.
The following table shows selected financial information for former coal
operations during 2002, 2001 and 2000.
(In millions) 2002 2001 2000
- ------------------------------------------------------------------------
Sales $ 266.5 384.0 401.0
Operating loss (77.5) (31.7) (37.0)
Loss before income taxes (75.6) (29.5) (32.4)
- ------------------------------------------------------------------------
NOTE 6
SUPPLEMENTAL CASH FLOW INFORMATION
Years Ended December 31
(In millions) 2002 2001 2000
- ------------------------------------------------------------------------
Cash payments for:
Income taxes, net $ 14.8 20.1 28.2
Interest 22.7 31.1 44.8
- ------------------------------------------------------------------------
Noncash investing activities in connection with the disposal of the Company's
former coal operations were as follows:
Year Ended
December 31
(In millions) 2002
- ------------------------------------------------------------------------
Fair market value of coal assets disposed $ 88.4
Liabilities assumed by purchasers as consideration (22.1)
Notes receivable (8.3)
Present value of royalties (a) (15.7)
- ------------------------------------------------------------------------
Net cash received $ 42.3
- ------------------------------------------------------------------------
(a) Five-year maximum term, with $20 million of total payments.
-58-
NOTE 7
PROPERTY AND EQUIPMENT
The following table presents the Company's property and equipment that is
classified as held and used:
December 31
(In millions) 2002 2001
- ------------------------------------------------------------------------
Land $ 72.9 48.9
Buildings 140.4 123.3
Leasehold improvements 138.9 133.2
Vehicles 161.3 145.6
Aircraft and related assets 85.8 85.5
Home security systems 527.0 455.9
Capitalized software 131.7 111.7
Other machinery and equipment 456.1 395.9
- ------------------------------------------------------------------------
1,714.1 1,500.0
Accumulated depreciation
and amortization 842.9 681.9
- ------------------------------------------------------------------------
Property and equipment, net $ 871.2 818.1
- ------------------------------------------------------------------------
NOTE 8
IMPAIRMENT OF LONG-LIVED ASSETS
Each quarter, the Company records impairment charges at BHS related to
disconnected home security systems as described in Note 1. Other impairment
charges are as follows:
Years Ended December 31
(In millions) 2002 2001 2000
- ------------------------------------------------------------------------
Former coal operations $ 14.1 - -
Gold operations 5.7 - -
BAX Global restructuring - - 45.2
Other 1.7 1.6 2.6
- ------------------------------------------------------------------------
Total $ 21.5 1.6 47.8
- ------------------------------------------------------------------------
Approximately $43.3 million (original carrying value) of residual long-lived
coal assets were reclassified at December 31, 2002 from discontinued operations
to assets held and used. The assets held and used were reclassified individually
at the lower of their actual cost, adjusted for depreciation since the time
originally classified as held for sale, and their fair value at the date the
assets were reclassified to assets held and used. Fair value was estimated using
sales proceeds for similar assets during 2002 as well as estimates provided by
investment advisors. An impairment charge of $14.1 million was recognized as a
result of the reclassification.
In the fourth quarter of 2002, the Company entered into an agreement to
negotiate the transfer of its interests in its gold mining joint ventures to a
publicly traded equity affiliate in which it has a minority interest in exchange
for additional shares of the equity affiliate and other consideration. The
transfer is contingent upon various factors. The Company does not presently
control the equity affiliate and does not expect to control the affiliate after
the exchange.
The Company recognized a $5.7 million (pretax) impairment of its long-lived
assets and recognized $1.4 million (pretax) of previously deferred losses on
certain of its gold forward sales contracts that had been accounted for as
hedges now that the hedged transactions were no longer deemed probable as a
result of the potential transfer. See Note 19. Fair value was estimated using
projected weighted-average discounted cash flows.
In 2000, certain aircraft-related assets were written down to fair value
pursuant to BAX Global's restructuring plan (see Note 20).
NOTE 9
OTHER ASSETS
December 31
(In millions) 2002 2001
- ------------------------------------------------------------------------
Deferred subscriber acquisition costs $ 54.7 48.4
Long-term receivables 40.7 28.4
Investment in equity affiliates 35.5 36.5
Aircraft heavy maintenance
deferred charges 27.8 29.1
Voluntary Employees'
Beneficiary Association (see Note 15) 18.2 16.6
Other 28.8 25.9
- ------------------------------------------------------------------------
Other assets $ 205.7 184.9
- ------------------------------------------------------------------------
-59-
NOTE 10
ACCRUED LIABILITIES
December 31
(In millions) 2002 2001
- ------------------------------------------------------------------------
Payroll and other employee liabilities $ 107.5 104.0
Taxes 102.8 89.9
Workers' compensation and other claims 41.9 42.1
Postretirement benefits other than pensions 39.4 38.5
Reclamation and inactive mine costs 8.5 14.9
Accrued loss of discontinued operations - 46.0
Other 194.1 180.7
- ------------------------------------------------------------------------
Accrued liabilities $ 494.2 516.1
- ------------------------------------------------------------------------
NOTE 11
OTHER LIABILITIES
December 31
(In millions) 2002 2001
- ------------------------------------------------------------------------
Workers' compensation and other claims $ 52.7 38.7
Aircraft lease obligations 42.1 53.0
Minority interest 36.0 35.5
Withdrawal obligations for
coal-related multi-employer
pension plans (Note 5) 35.0 -
Liability for DTA financing guarantee - 43.2
Reclamation and inactive mine costs 13.0 9.8
Other 52.7 51.0
- ------------------------------------------------------------------------
Other liabilities $ 231.5 231.2
- ------------------------------------------------------------------------
During 2002, in conjunction with the disposal of its coal operations, the
Company transferred its economic interest in Dominion Terminal Associates
("DTA"), a partnership with three coal companies that operates a leased coal
port terminal in Newport News, Virginia (the "Terminal"). Since the Company no
longer has an economic interest in DTA, its related $43.2 million guarantee of
underlying debt was reclassified to long-term debt as of December 31, 2002. See
Note 12 for a description of the terms of the underlying debt.
NOTE 12
LONG-TERM DEBT
(In millions, denominated December 31
in U.S. dollars unless noted) 2002 2001
- ------------------------------------------------------------------------
Senior Notes:
Series A, 7.84%, due 2005-2007 $ 55.0 55.0
Series B, 8.02%, due 2008 20.0 20.0
Series C, 7.17%, due 2006-2008 20.0 -
- ------------------------------------------------------------------------
95.0 75.0
- ------------------------------------------------------------------------
Bank credit facilities:
U.S. Revolving Bank Credit Facility
(year-end weighted average rate
2.27% in 2002 and 3.43% in 2001) 129.0 136.2
Euro-denominated credit facilities of
French subsidiaries (year-end weighted
average rate 4.35% in 2002 and
5.28% in 2001) 12.4 14.4
Venezuelan bolivar-denominated term loan
(31.20% in 2001) - 6.6
Other various non-U.S. dollar denominated
facilities (year-end weighted average rate
9.88% in 2002 and 13.46% in 2001) 10.5 13.2
- ------------------------------------------------------------------------
151.9 170.4
- ------------------------------------------------------------------------
DTA 7.375% bonds, due 2020 43.2 -
Capital leases (average rates:
5.37% in 2002 and 5.72% in 2001) 27.4 24.7
- ------------------------------------------------------------------------
Total long-term debt 317.5 270.1
Current maturities of long-term debt:
Bank credit facilities 6.4 11.0
Capital leases 6.9 6.2
- ------------------------------------------------------------------------
Total current maturities of long-term debt 13.3 17.2
- ------------------------------------------------------------------------
Total long-term debt excluding
current maturities $ 304.2 252.9
- ------------------------------------------------------------------------
-60-
The Company has an unsecured $350 million syndicated bank credit facility (the
"Facility") from which it may borrow on a revolving basis over a three-year term
ending September 2005. At December 31, 2002, $199.8 million was available for
borrowing under the Facility. The Company has the option to borrow based on a
Libor-based rate plus a margin, a prime rate plus a margin or a competitive bid
among the individual banks.
The margin is 0.825% for LIBOR based borrowings. The credit agreement provides
for margin increases, but does not accelerate payments should the Company's
credit rating be reduced. When borrowings and letters of credit under the
Facility are in excess of $175 million, the applicable interest rate is
increased by 0.125%. The Company also pays an annual fee on the Facility based
on the Company's credit rating. The fee, which can range from 0.125% to 0.400%,
was 0.175% as of December 31, 2002.
The Company has $55 million of 7.84% Senior Notes, Series A due 2005-2007 and
$20 million of 8.02% Senior Notes, Series B due in 2008. In April 2002, the
Company completed a $20.0 million private placement of 7.17% Senior Notes due
2006-2008, referred to herein as the Series C Notes. Proceeds from the Series C
Notes were used to repay borrowings under the U.S. revolving bank credit
facility. Interest on each series of the Notes is payable semiannually, and the
Company has the option to prepay all or a portion of the Notes prior to maturity
with a prepayment penalty. The Notes are unsecured.
The Company has three unsecured multi-currency revolving bank credit facilities
that total $110 million in available credit, of which $43.5 million was
available at December 31, 2002 for additional borrowing. Various foreign
subsidiaries maintain other secured and unsecured lines of credit and overdraft
facilities with a number of banks. Amounts outstanding under these agreements
are included in short-term borrowings.
Minimum repayments of long-term debt for years 2004 through 2007 total $14.4
million, $156.1 million, $29.6 million and $28.1 million, respectively.
The Peninsula Ports Authority of Virginia (the "Peninsula Authority") issued tax
exempt bonds in 1992 to refund bonds related to DTA, a partnership in which the
Company no longer has an economic interest. The Company continues to guarantee
payment of $43.2 million of the Peninsula Authority's bonds and has concluded it
is probable that it will have to fund the guarantee. The bonds bear a fixed
interest rate of 7.375%, and the interest on the bonds is not taxable to the
holders. The bonds may be redeemed beginning in June 2002.
The Company's Brink's, BHS, and BAX Global subsidiaries have guaranteed the U.S.
bank credit facility and Notes. The U.S. revolving bank credit agreement, the
agreement under which the Notes were issued and the multi-currency revolving
bank credit facilities each contain various financial and other covenants. The
financial covenants, among other things, limit the Company's total indebtedness,
provide for minimum coverage of interest costs, and require the Company to
maintain a minimum level of net worth. If the Company were not to comply with
the terms of its various loan agreements, the repayment terms could be
accelerated. An acceleration of the repayment terms under one agreement could
trigger the acceleration of the repayment terms under the other loan agreements.
The Company was in compliance with all financial covenants at December 31, 2002.
The Company entered into capital lease obligations of $2.7 million in 2002 and
$7.5 million in 2001.
At December 31, 2002, the Company had undrawn unsecured letters of credit
totaling $62.4 million. These letters of credit primarily support the Company's
obligations under various self-insurance programs, credit facilities and
aircraft lease obligations.
-61-
NOTE 13
ACCOUNTS RECEIVABLE AND ASSET SECURITIZATION
December 31
(In millions) 2002 2001
- ------------------------------------------------------------------------
Trade $ 522.1 496.3
Other 53.4 38.8
- ------------------------------------------------------------------------
575.5 535.1
Estimated uncollectible amounts 35.5 41.8
- ------------------------------------------------------------------------
Accounts receivable, net $ 540.0 493.3
- ------------------------------------------------------------------------
In December 2000, the Company entered into a five-year agreement to sell a
revolving interest in BAX Global's U.S. domestic accounts receivable through a
commercial paper conduit program. The primary purpose of the agreement was to
obtain access to a lower cost source of funds.
Qualifying accounts receivable of BAX Global's U.S. operations are sold on a
monthly basis, without recourse, to BAX Funding Corporation ("BAX Funding"), a
wholly owned, consolidated special-purpose subsidiary of BAX Global. BAX Funding
then sells an undivided interest in the entire pool of accounts receivable to a
bank-sponsored conduit entity. The conduit issues commercial paper to finance
the purchase of its interest in the receivables. Under the program, BAX Funding
may sell up to a $90.0 million interest in the receivables pool to the conduit.
During the term of the agreement, the conduit's interest in daily collections of
accounts receivable is reinvested in newly originated receivables.
BAX Funding's sale of the undivided interest in the accounts receivable pool to
the conduit is accounted for as a sale under SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
BAX Funding's retained interest is reported as accounts receivable in the
Consolidated Balance Sheet.
At the end of the five-year term, or in the event certain circumstances cause an
early termination of the program, the daily reinvestment will be discontinued
and collections will be used to pay down the conduit's interest in the
receivables pool. Early termination of the program may occur if certain ratios,
including ratios of delinquent and defaulted accounts, are exceeded. Early
termination may also be triggered if other events occur as described in the
agreement, including the acceleration of debt repayments of the Company's $350
million U.S. revolving bank credit facility.
The conduit has a priority collection interest in the entire pool of receivables
and, as a result, BAX Funding has retained credit risk to the extent the pool
exceeds the amount sold. BAX Funding sells its receivables to the conduit at a
discount. The amount of the discount is based on the conduit's borrowing cost
plus incremental fees. BAX Global is the designated servicer of the receivables
pool and is responsible for collections, reinvestment, and periodic reporting to
the conduit. The Pittston Company has guaranteed the performance of BAX Global
with respect to the agreement.
December 31
(In millions) 2002 2001
- ------------------------------------------------------------------------
Accounts receivable purchased by BAX Funding:
Total pool $ 93.3 81.8
Revolving interest sold to conduit (72.0) (69.0)
- ------------------------------------------------------------------------
Amount included in Consolidated
Balance Sheets of the Company $ 21.3 12.8
- ------------------------------------------------------------------------
The fair value of the Company's retained interest in the receivables
approximates its carrying value. The discount and related expenses of $1.6
million in 2002, $4.0 million in 2001 and $0.6 million in 2000 are reported as
other expense, net, in the Consolidated Statement of Operations. The Company has
not recorded a servicing asset or liability because it believes the servicing
compensation BAX Global receives is representative of market rates and because
the average servicing period for accounts receivable approximates one month.
-62-
NOTE 14
OPERATING LEASES
The Company leases facilities, aircraft, vehicles, computers and other equipment
under long-term operating and capital leases with varying terms. Most of the
operating leases contain renewal and/or purchase options. Information relating
to capital leases is included in Note 12.
As of December 31, 2002, aggregate future minimum lease payments for continuing
operations under operating leases were as follows:
Equipment
(In millions) Facilities Aircraft and Other Total
- ------------------------------------------------------------------------
2003 $ 75.7 15.0 32.9 123.6
2004 56.4 12.7 25.8 94.9
2005 42.6 4.9 19.5 67.0
2006 32.5 0.5 12.7 45.7
2007 27.6 0.2 8.6 36.4
Later years 133.3 - 11.3 144.6
- ------------------------------------------------------------------------
$ 368.1 33.3 110.8 512.2
- ------------------------------------------------------------------------
The above table includes amounts due under noncancellable leases with initial or
remaining lease terms in excess of one year, and excludes operating leases
associated with the Company's former coal operations. See Note 21 for a
description of the leases related to former coal operations.
The above table includes lease payments for the initial accounting lease term
and all renewal periods for certain vehicles used in Brink's and BHS'
operations. If the Company were to not renew these leases, it would be subject
to a residual value guarantee. The Company's maximum residual value guarantee
was $53 million at December 31, 2002. If the Company continues to renew the
leases and pays all of the lease payments for the vehicles that have been
included in the above table (which aggregate lease payments decline over eight
years), this residual guarantee will reduce to zero at the end of the final
renewal period.
The Company has leases on four facilities under each of which it has the option
to either renew the lease, purchase the facility at original cost, or pay a
guaranteed residual. At December 31, 2002, the maximum guaranteed residuals on
these four leases totaled $15.5 million.
Net rent expense amounted to $149.0 million in 2002, $142.3 million in 2001 and
$146.9 million in 2000.
NOTE 15
EMPLOYEE BENEFITS
The employee benefit plans and other liabilities described below cover employees
and retirees of both the Company's continuing operating units and former coal
operations. Accordingly, a portion of these benefit expenses have been included
in the results of discontinued operations for the years presented.
PENSION PLANS
The Company has noncontributory defined benefit pension plans covering
substantially all U.S. nonunion employees who meet certain minimum requirements.
The Company also has other contributory and noncontributory defined benefit
plans for eligible non-U.S. employees. Benefits under most of the plans are
based on salary (including commissions, bonuses, overtime and premium pay) and
years of service. The Company's policy is to fund at least the minimum
actuarially determined amounts necessary in accordance with applicable
regulations.
The Company's U.S. defined benefit pension plans represent 82% of Projected
Benefit Obligation ("PBO") and 81% of plan assets at December 31, 2002. The
assumptions used in determining the net pension expense and funded status for
the Company's U.S. pension plans were as follows:
2002 2001 2000
- --------------------------------------------------------------
Discount rate:
Expense 7.25% 7.50% 7.50%
Funded status 6.75% 7.25% 7.50%
Expected long-term rate of
return on assets :
Expense 10.00% 10.00% 10.00%
Funded status 8.75% 10.00% 10.00%
Average rate of increase in salaries (a):
Expense 4.0% 4.0% 4.0%
Funded status 5.1% 4.0% 4.0%
- --------------------------------------------------------------
(a) Salary scale assumptions vary by age and industry.
-63-
The net pension expense (excluding curtailment gain) for 2002, 2001 and 2000 for
all plans is as follows:
Years Ended December 31
(In millions) 2002 2001 2000
- ------------------------------------------------------------------------
Service cost $ 30.5 26.0 23.6
Interest cost on PBO 42.3 38.5 35.0
Return on assets - expected (60.2) (58.6) (55.3)
Other amortization, net 1.4 0.5 (0.3)
- ------------------------------------------------------------------------
Net pension expense $ 14.0 6.4 3.0
- ------------------------------------------------------------------------
Pursuant to its formal plan to exit the coal business, the Company recorded a
curtailment gain during 2000 of $4.4 million comprising a $5.8 million reduction
in PBO, partially offset by reductions in unrecognized experience losses and
prior service costs.
Reconciliations of the PBO, plan assets, funded status and prepaid pension
expense at December 31, 2002 and 2001 for all of the Company's pension plans are
as follows:
December 31
(In millions) 2002 2001
- ------------------------------------------------------------------------
PBO at beginning of year $ 595.0 527.5
Service cost 30.5 26.0
Interest cost 42.3 38.5
Plan participants' contributions 1.6 1.0
Benefits paid (24.6) (24.0)
Actuarial loss 60.1 30.5
Foreign currency exchange rate changes 10.8 (4.5)
- ------------------------------------------------------------------------
PBO at end of year $ 715.7 595.0
- ------------------------------------------------------------------------
Fair value of plan assets at beginning
of year $ 554.3 621.3
Return on assets - actual (49.8) (40.9)
Plan participants' contributions 1.6 1.0
Employer contributions 40.0 2.3
Benefits paid (24.6) (24.0)
Foreign currency exchange rate changes 8.4 (5.4)
- ------------------------------------------------------------------------
Fair value of plan assets
at end of year $ 529.9 554.3
- ------------------------------------------------------------------------
Funded status $ (185.8) (40.7)
Unrecognized experience loss 294.9 135.3
Unrecognized prior service cost 1.6 1.7
Other 0.9 (0.5)
- ------------------------------------------------------------------------
Net pension assets 111.6 95.8
- ------------------------------------------------------------------------
Current pension liabilities 0.4 0.2
Noncurrent pension liabilities 122.6 22.9
Adjustments to minimum pension liabilities (210.8) (9.9)
- ------------------------------------------------------------------------
Prepaid pension assets $ 23.8 109.0
- ------------------------------------------------------------------------
Selected information for the above Company plans that have PBOs greater than
plan assets are aggregated below.
December 31
(In millions) 2002 2001
- ------------------------------------------------------------------------
Projected benefit obligations $ 683.0 555.0
Accumulated benefit obligations ("ABO") 610.2 489.4
Fair value of plan assets 495.8 498.9
- ------------------------------------------------------------------------
The Company's unrecognized experience loss increased significantly in the last
two years primarily due to lower discount rate assumptions (which increased the
PBO) and worse than expected returns on plan assets. At December 31, 2002 and
2001, the Company recognized additional minimum pension liabilities for plans
that had ABOs in excess of the fair value of plan assets.
Expense included in continuing operations in 2002, 2001 and 2000 for
multi-employer pension plans (excluding coal-related plans) was $1.8 million,
$1.2 million and $0.9 million, respectively.
SAVINGS PLANS
The Company sponsors a 401(k) Savings-Investment Plan to assist eligible U.S.
employees in providing for retirement. Employee contributions are matched at
rates of between 50% to 100% for up to 5% of compensation (subject to certain
limitations). Contribution expense in continuing operations under the plan
aggregated $10.9 million in 2002, $9.8 million in 2001 and $8.4 million in 2000.
Contribution expense included in discontinued operations was $0.6 million in
2002 and $0.7 million in 2001 and 2000.
The Company sponsors other defined contribution benefit plans based on hours
worked or other measurable factors. Contributions under all of these plans
aggregated $3.8 million in 2002, $3.2 million in 2001 and $2.8 million in 2000.
-64-
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Company-Sponsored Plans
The Company provides certain postretirement health care and life insurance
benefits (the "Company-sponsored plans") for eligible active and retired
employees in the U.S. and Canada of the Company's current and former businesses,
including eligible participants of the former coal operations (the
"coal-related" plans). The components of net periodic postretirement costs
(excluding curtailment loss) related to Company-sponsored plans were as follows:
(In millions) Coal-related plans Other plans
- ----------------------------------------------------------------------------------------------------------------------------
Years Ended December 31 Years Ended December 31
2002 2001 2000 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
Service cost $ 0.4 0.2 0.2 $ 0.8 0.7 0.6
Interest cost on accumulated
postretirement benefit obligations ("APBO") 31.7 24.9 22.3 1.4 1.5 1.5
Amortization of losses 9.7 3.7 3.6 - - -
- ----------------------------------------------------------------------------------------------------------------------------
Net periodic postretirement costs $ 41.8 28.8 26.1 $ 2.2 2.2 2.1
- ----------------------------------------------------------------------------------------------------------------------------
Pursuant to its formal plan to exit the coal business, the Company recorded a
curtailment loss during 2000 of $6.0 million.
Reconciliations of the APBO, funded status and accrued postretirement benefit
cost for Company-sponsored plans at December 31, 2002 and 2001 are as follows:
(In millions) Coal-related plans Other plans
- ---------------------------------------------------------------------------------------------------------------------------
December 31 December 31
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
APBO at beginning of year $ 442.0 355.9 $ 21.9 20.5
Service cost 0.4 0.2 0.8 0.7
Interest cost 31.7 24.9 1.4 1.5
Benefits paid (28.3) (26.0) (2.3) (1.2)
Actuarial loss, net 72.5 87.0 1.3 0.4
- ---------------------------------------------------------------------------------------------------------------------------
APBO and funded status at end of year 518.3 442.0 23.1 21.9
Unrecognized experience gain (loss) (250.6) (187.8) 0.8 2.1
- ---------------------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost at end of year $ 267.7 254.2 $ 23.9 24.0
- ---------------------------------------------------------------------------------------------------------------------------
-65-
The APBO for each of the plans was determined using the unit credit method and
an assumed discount rate of 6.75% in 2002 and 7.25% in 2001. For
Company-sponsored coal-related plans, the assumed health care cost trend rate
used in 2002 was 10% for 2003, declining 1% per year to 5% in 2008 and
thereafter. Other plans provide for fixed-dollar value coverage for eligible
participants and, accordingly, are not adjusted for inflation.
A one percentage point increase (decrease) each year in the assumed health care
cost trend rate used for 2002 would increase (decrease) the aggregate service
and interest components of expense for 2002, and increase (decrease) the APBO of
Company-sponsored plans at December 31, 2002 as follows:
Effect of 1% Change in
Health Care Trend Rates
--------------------------
(In millions) Increase Decrease
- ------------------------------------------------------------------------
Higher (lower):
Service and interest cost in 2002 $ 4.2 (3.5)
APBO at December 31, 2002 65.9 (54.6)
- ------------------------------------------------------------------------
Health Benefit Act
In October 1992, the Coal Industry Retiree Health Benefit Act of 1992 (the
"Health Benefit Act") was enacted as part of the Energy Policy Act of 1992. The
Health Benefit Act established rules for the payment of future health care
benefits for thousands of retired union mine workers and their dependents. The
Health Benefit Act established a trust fund, The United Mine Workers of America
Combined Benefit Fund (the "Combined Fund"), to which "signatory operators" and
"related persons", including The Pittston Company and certain of its
subsidiaries (collectively, the "Pittston Companies"), are jointly and severally
liable to pay annual premiums for those beneficiaries directly assigned to a
signatory operator and its related persons, on the basis set forth in the Health
Benefit Act. In October 1993 and on an annual basis in subsequent years, the
Pittston Companies have received notices from the Social Security Administration
(the "SSA") with regard to the current number of assigned beneficiaries for
which the Pittston Companies are deemed responsible under the Health Benefit
Act.
In addition, the Health Benefit Act provides that assigned companies, including
the Pittston Companies, are required to fund, pro rata according to the total
number of assigned beneficiaries, a portion of the health benefits for
unassigned beneficiaries if not funded from other designated sources. To date,
the funding for unassigned beneficiaries has been provided from transfers from
the Abandoned Mine Reclamation Fund.
The Company's liability for Health Benefit Act obligations to the Combined Fund
is equal to the undiscounted estimated amount of future annual premiums the
Company expects to pay to the Combined Fund. The Company's estimated annual
premium is generally equal to the total number of beneficiaries (including
assigned beneficiaries and an allocated percentage of the total unassigned
beneficiaries) at October 1, the beginning of the plan year, multiplied by the
premiums per beneficiary for that year. The Company expects to pay annual
premiums over the next 70 or more years, but it expects these annual premiums to
gradually decline over time as the number of beneficiaries decreases. The
estimated liability at December 31, 2002 and 2001 assumes that the Company will
not be required to pay premiums for its pro rata allocation of the unassigned
beneficiaries until 2005 because these benefits are assumed to be funded with
contributions from the Abandoned Mine Reclamation Fund in accordance with the
existing statute. The Company's estimate of its liability for premiums for
unassigned beneficiaries could be materially changed in future periods depending
on the amount of future funding by the Abandoned Mine Reclamation Fund or other
sources. Moreover, the Company's share of unassigned beneficiaries could be
increased on a pro rata basis in the future if other responsible coal operators
become insolvent.
Information provided by the Combined Fund is as follows:
December 31
2002 2001
- ------------------------------------------------------------------------
Number of assigned beneficiaries
at the beginning of the plan year 2,814 3,035
Health benefit premium per
beneficiary $2,853 2,725
- ------------------------------------------------------------------------
-66-
According to the Health Benefit Act, the rate of inflation for per-beneficiary
health care premiums is equal to the medical care component of the Consumer
Price Index. The U.S. Life 79-81 mortality table has been used to estimate a
gradual decline in the number of beneficiaries. The Company's estimate assumes
that there will be no additions to the Combined Fund unassigned beneficiary
group as a result of future coal operator insolvencies.
Other major assumptions used by the Company to estimate the liabilities at
December 31, 2002 and 2001 are described below.
December 31
2002 2001
- ------------------------------------------------------------------------
Percent of total unassigned beneficiaries
allocated to the Company 6.7% 6.7%
- ------------------------------------------------------------------------
At December 31, 2002, annual inflation rates for per-beneficiary health care
premiums was assumed to be 5% declining to 4.5% over five years. At December 31,
2001, annual inflation was assumed to be 4.5%.
Prior to December 31, 2000, the Company accounted for its obligations under the
Health Benefit Act as a participant in a multi-employer benefit plan and thus,
recognized the annual cost of these obligations on a pay-as-you-go basis.
Pursuant to its formal plan to exit the coal business, the Company recorded its
estimated undiscounted liability relating to such obligations at December 31,
2000 as a $161.7 million charge to the net loss from discontinued operations.
The obligations at December 31, 2002 and 2001 were $174.1 million and $159.9
million, respectively.
The Company recorded $24.0 million of expense in its 2002 loss from discontinued
operations to reflect an increase in the estimated liabilities for Health
Benefit Act obligations to the Combined Fund. The increase primarily resulted
from the Company's being able to obtain and use Company-specific information
regarding the age of its beneficiaries covered by the Health Benefit Act rather
than using averages relating to the entire population of beneficiaries covered,
slightly higher per-beneficiary health care premiums, and slightly lower
mortality than was estimated at the end of 2001 for the plan year ended
September 30, 2002.
The Company recorded $8.0 million of additional expense in its 2001 loss from
discontinued operations related to changes in the estimated liabilities for
Health Benefit Act obligations to the Combined Fund. The higher amount of
expense was primarily the result of a 1.7% higher number of assigned
beneficiaries as of October 1, 2001 than was estimated at the end of 2000,
partially offset by a 0.5% lower number of total unassigned beneficiaries as of
October 1, 2001 than was estimated at the end of 2000. The Combined Fund premium
per beneficiary for the plan year beginning October 1, 2001 was essentially
equal to that estimated at the end of 2000.
For 2002, 2001 and 2000, annual cash payments under the Health Benefit Act were
approximately $9.8 million, $9.7 million and $9.0 million, respectively. The
Company currently estimates that the annual cash funding under the Health
Benefit Act for the Pittston Companies' assigned beneficiaries will continue at
about the same annual level for the next several years and should begin to
decline thereafter as the number of such assigned beneficiaries decreases.
Pneumoconiosis (Black Lung) Expense
December 31
(In millions) 2002 2001
- ------------------------------------------------------------------------
Actuarial present value of
self-insured black lung benefits $ 60.0 58.7
Unrecognized loss (14.6) (13.3)
- ------------------------------------------------------------------------
Accrued liabilities $ 45.4 45.4
- ------------------------------------------------------------------------
The Company acts as self-insurer with respect to almost all black lung benefits.
Provision is made for estimated benefits based on annual reports prepared by
independent actuaries. Unrecognized losses, representing the excess of the
present value of expected future benefits over existing accrued liabilities, are
amortized over the average remaining life expectancy of participants
(approximately 10 years). Prior to December 31, 2000, assumptions used in the
calculation of the actuarial present value of black lung benefits were based on
actual retirement experience of the Company's coal employees, black lung claims
incidence, actual dependent information, industry turnover rates, actual medical
and legal cost experience and projected inflation rates.
-67-
As of December 31, 2000, certain assumptions were modified to reflect the
planned sale of the Company's coal business. The amount of expense incurred for
annual black lung benefits was $7.3 million in 2002, $5.2 million for 2001 and
$5.3 million for 2000.
The following are the other key actuarial assumptions for the black lung
obligations:
December 31
2002 2001
- ------------------------------------------------------------------------
Discount rate:
Expense 7.25% 7.50%
Liability valuation 6.75% 7.25%
Medical cost inflation 8.0% 8.0%
- ------------------------------------------------------------------------
The 1959-1961 Mortality Table for U.S. White Males and Females is used.
The U.S. Department of Labor issued regulations in 2000 that are intended to
expand entitlement provisions and that may have the effect of limiting an
employer's ability to rebut claims. The regulation is being disputed by
companies in the coal industry. Due to the dispute and to the Company's judgment
that any additional amounts owed are not reasonably estimable, the Company has
not included any additional amounts related to the new regulations in the
actuarial present value of self-insured black lung benefits.
VEBA
The Company has established a Voluntary Employees' Beneficiary Association
("VEBA") which is intended to tax efficiently fund certain retiree medical
liabilities primarily for retired coal miners and their dependents. The Company
contributed $1.5 million to the VEBA in 2002. As of December 31, 2002, the
balance in the VEBA was $18.2 million and was included in other noncurrent
assets.
NOTE 16
STOCK-BASED COMPENSATION PLANS
The Company has stock and incentive plans related to employees which allow for
stock options, performance unit awards, stock appreciation rights and stock
awards.
STOCK OPTION PLANS
The Company grants options under its 1988 Stock Option Plan (the "1988 Plan") to
executives and key employees and under its Non-Employee Directors' Stock Option
Plan (the "Non-Employee Plan") to outside directors, to purchase common stock at
a price not less than the average quoted market value at the date of grant. All
grants under the 1988 Plan made in the last three years have a maximum term of
six years and substantially all of these grants either vest over three years
from the date of grant or vest 100% at the end of the third year. The
Non-Employee Plan options are granted with a maximum term of ten years vesting
in full at the end of six months. There are 1.3 million shares underlying
options for both plans that are authorized, but not yet granted.
As of January 14, 2000, with the elimination of the Company's tracking stock
capital structure, the 1988 Plan and Non-Employee Plan were amended to provide
that all future grants would be made solely in Pittston Common Stock and that
all outstanding options related to BAX Stock and Minerals Stock would be
converted into options to purchase Pittston Common Stock. On January 14, 2000,
options to purchase a total of 2.0 million shares of BAX Stock with an average
exercise price of $15.03 per share and 0.6 million shares of Minerals Stock with
an average exercise price of $7.77 per share were converted into options to
purchase 1.0 million shares of Pittston Common Stock.
-68-
The table below summarizes the activity in all plans for options of Pittston
Common Stock for 2002, 2001 and 2000.
Per
Share
Weighted
Average
Exercise
(Shares in millions) Shares Price
- ------------------------------------------------------------------------
Outstanding at December 31, 1999 1.8 $ 27.01
Options converted in the Exchange 1.0 33.97
Granted 1.1 15.12
Exercised (0.1) 10.68
Forfeited or expired (0.4) 26.07
- ------------------------------------------------------------------------
Outstanding at December 31, 2000 3.4 25.83
Granted 1.2 21.03
Exercised (0.3) 16.15
Forfeited or expired (0.6) 32.88
- ------------------------------------------------------------------------
Outstanding at December 31, 2001 3.7 23.96
Granted 1.0 21.50
Exercised (0.1) 17.17
Forfeited or expired (0.5) 25.80
- ------------------------------------------------------------------------
Outstanding at December 31, 2002 4.1 $ 23.29
- ------------------------------------------------------------------------
Options exercisable at the end of 2002, 2001 and 2000 for Pittston Common Stock
were 2.1 million, 1.7 million, and 1.9 million, respectively.
The following table summarizes information about stock options outstanding as of
December 31, 2002.
Stock Stock
Options Options
(Shares in millions) Outstanding Exercisable
- -------------------------------------------------------------------------
Weighted Per Per
Average Share Share
Remaining Weighted Weighted
Contractual Average Average
Range of Life Exercise Exercise
Exercise Prices Shares (Years) Price Shares Price
- -------------------------------------------------------------------------
$ 10.55 to 14.13 0.6 3.6 $ 13.64 0.3 $ 13.63
16.77 to 19.76 0.5 3.4 18.56 0.3 18.52
20.05 to 21.48 1.0 5.1 21.36 0.1 20.42
21.60 to 23.78 0.9 4.7 21.76 0.3 21.87
26.69 to 30.60 0.4 2.8 27.21 0.4 27.21
31.21 to 35.19 0.3 0.5 31.60 0.3 31.60
37.47 to 315.06 0.4 1.4 43.06 0.4 43.06
- -------------------------------------------------------------------------
Total 4.1 3.7 $ 23.29 2.1 $ 26.40
- -------------------------------------------------------------------------
EMPLOYEE STOCK PURCHASE PLAN
Under the 1994 Employee Stock Purchase Plan (the "ESPP"), as amended, the
Company is authorized to issue up to 1.0 million shares of Pittston Common Stock
(of which 0.7 million shares had been issued as of December 31, 2002) to
eligible employees. The ESPP is a noncompensatory plan that allows eligible
employees to buy the Company's common stock at below market value. Under the
ESPP, the Company sold 0.1 million shares of Pittston Common Stock to employees
during each of 2002, 2001, and 2000.
-69-
NOTE 17
INCOME TAXES
The provision (benefit) for income taxes from continuing operations consists of
the following:
(In millions) U.S. Federal Foreign State Total
- ------------------------------------------------------------------------
2002:
Current $ 13.5 25.4 3.1 42.0
Deferred 3.0 0.3 (4.1) (0.8)
- ------------------------------------------------------------------------
Total $ 16.5 25.7 (1.0) 41.2
- ------------------------------------------------------------------------
2001:
Current $ 6.7 23.9 3.5 34.1
Deferred 3.3 (5.9) (4.1) (6.7)
- ------------------------------------------------------------------------
Total $ 10.0 18.0 (0.6) 27.4
- ------------------------------------------------------------------------
2000:
Current $ 0.6 25.7 3.7 30.0
Deferred (14.2) (8.9) (5.0) (28.1)
- ------------------------------------------------------------------------
Total $ (13.6) 16.8 (1.3) 1.9
- ------------------------------------------------------------------------
The U.S. current federal income tax provision on continuing operations in all
years shown is offset by current tax benefits included in the loss from
discontinued operations.
The tax benefit for compensation expense related to the exercise of certain
employee stock options for tax purposes in excess of compensation expense for
financial reporting purposes is recognized as an adjustment to shareholders'
equity.
The components of the net deferred tax asset are as follows:
December 31
(In millions) 2002 2001
- ------------------------------------------------------------------------
DEFERRED TAX ASSETS
Accounts receivable $ 10.9 11.2
Postretirement benefits other than pensions 164.3 153.0
Pension liabilities 49.4 3.5
Multi-employer pension plans
withdrawal liabilities 12.2 2.9
Workers' compensation and other claims 45.9 41.2
Deferred revenue 54.4 55.4
Other assets and liabilities 138.8 121.6
Estimated loss on coal operations - 30.3
Net operating loss carryforwards 54.1 52.0
Alternative minimum tax credits 52.5 40.1
Valuation allowance (9.8) (10.3)
- ------------------------------------------------------------------------
Total deferred tax assets 572.7 500.9
- ------------------------------------------------------------------------
DEFERRED TAX LIABILITIES
Property and equipment, net 80.0 70.0
Prepaid assets 17.9 17.7
Prepaid pension assets 3.8 35.9
Other assets 31.3 26.4
Investments in equity affiliates 6.0 6.0
Miscellaneous 32.3 29.3
- ------------------------------------------------------------------------
Total deferred tax liabilities 171.3 185.3
- ------------------------------------------------------------------------
Net deferred tax asset $ 401.4 315.6
- ------------------------------------------------------------------------
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Approximately $0.8 million of deferred tax liabilities at December 31, 2002 were
recorded in accrued liabilities.
The valuation allowance relates to deferred tax assets in certain foreign
jurisdictions. Based on the Company's historical and expected future taxable
earnings, management believes it is more likely than not that the Company will
realize the benefit of the existing deferred tax assets, net of the valuation
allowance, at December 31, 2002.
The following table accounts for the difference between the actual tax provision
from continuing operations and the amounts obtained by applying the statutory
U.S. federal income tax rate of 35% in 2002, 2001 and 2000 to the income (loss)
from continuing operations before income taxes and cumulative effect of change
in accounting principle.
Years Ended December 31
(In millions) 2002 2001 2000
- --------------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes
and accounting change:
United States $ 54.7 3.2 (65.1)
Foreign 55.5 70.0 69.7
- --------------------------------------------------------------------------------
Total $ 110.2 73.2 4.6
- --------------------------------------------------------------------------------
Tax provision computed at
statutory rate $ 38.6 25.6 1.6
Increases (reductions) in taxes due to:
State income taxes (net of federal
tax benefit) (0.7) (0.4) (0.8)
Resolution of prior year
tax contingencies (3.4) - -
Goodwill amortization - 2.1 2.1
Difference between total taxes on
foreign income and the U.S.
federal statutory rate 3.1 (1.5) (2.7)
Adjustments to the valuation allowance
for deferred tax assets 1.5 1.3 1.8
Miscellaneous 2.1 0.3 (0.1)
- --------------------------------------------------------------------------------
Actual tax provision from
continuing operations $ 41.2 27.4 1.9
- --------------------------------------------------------------------------------
As of December 31, 2002, the Company has not recorded U.S. deferred income taxes
on $142.3 million of undistributed earnings of its foreign subsidiaries and
equity affiliates. It is expected that these earnings will either be permanently
reinvested in operations outside the U.S. or, if repatriated, will be
substantially offset by tax credits. If such earnings were remitted to the U.S.
and no credits were available, additional U.S. tax expense of $49.8 million
would be recognized.
The Company's U.S. entities file a consolidated U.S. federal income tax return.
As of December 31, 2002, the Company had $52.5 million of alternative minimum
tax credits available to offset future U.S. federal income taxes and, under
current tax law, the carryforward period for such credits is unlimited.
The tax benefit of net operating loss carryforwards as of December 31, 2002 was
$54.1 million and related to U.S. federal and various state and foreign taxing
jurisdictions. The gross amount of such net operating losses was $227.6 million
as of December 31, 2002. The expiration periods primarily range from 5 years to
an unlimited period.
The Company and its subsidiaries are subject to tax examinations in various U.S.
and foreign jurisdictions. The Company believes that it has adequately provided
for all income tax liabilities and interest thereon and that final resolution of
any examinations will not have a material effect on the Company's financial
position or results of operations.
NOTE 18
OTHER EXPENSE, NET
Years Ended December 31
(In millions) 2002 2001 2000
- ------------------------------------------------------------------------
Minority interest $ (3.3) (6.9) (3.7)
Discounts and other fees of
accounts receivable
securitization program (1.6) (4.0) (0.6)
Stabilization Act compensation 5.9 - -
Gain on sale of marketable
securities - 3.9 -
Other (3.6) 0.3 0.4
- -------------------------------------------------------------------------
Total $ (2.6) (6.7) (3.9)
- ------------------------------------------------------------------------
-71-
NOTE 19
RISK MANAGEMENT
The Company has risk management policies designed to manage, among other things,
its currency, commodity and interest rate risks. The Company's policies are
intended to reduce the effect of short-term market variability on the Company's
results of operations and cash flow.
The Company utilizes various hedging instruments to hedge a portion of its
foreign currency, interest rate, and commodity exposures. The Company does not
use derivative instruments for purposes other than hedging. The risk that
counterparties to such instruments may be unable to perform is minimized by
limiting the counterparties to major financial institutions with investment
grade credit ratings. The Company does not expect any losses due to counterparty
default.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Interest Rate Risk Management
The Company's risk management policy requires a balance to be maintained within
certain ranges between fixed and floating rate debt and the Company uses
interest rate swaps to assist in meeting this objective. The Company has
designated its interest rate hedges as cash flow hedges for accounting purposes.
The Company has entered into interest rate swaps that effectively change the
variable cash flows on a portion of the $350.0 million revolving credit
facility, to fixed cash flows. The swaps outstanding at December 31, 2002 fix
the interest rate on $65.0 million of debt at 5.5%, including the margin on the
revolving credit facility through September 2003 and fix the interest rate on
$50 million of debt at 4%, including the margin on the revolving credit
facility, from September 2003 through August 2005.
Changes in fair value on interest rate swaps are recorded in other comprehensive
loss and are subsequently reclassified to interest expense in the same period in
which the interest on the floating-rate debt obligations affects earnings.
During each of the three years ended December 31, 2002, the Company's interest
rate swaps were completely effective as defined under SFAS No. 133 and no
amounts were included in earnings as a result of the interest rate swaps being
ineffective, nor were any amounts excluded from the assessment of effectiveness.
At December 31, 2002, $1.9 million of unrecognized pretax loss was included in
accumulated other comprehensive loss and of this amount, $1.6 million is
expected to be recognized in earnings in 2003.
Commodities Risk Management
The Company consumes or sells various commodities in the normal course of its
business and utilizes derivative instruments to minimize the variability in
forecasted cash flows due to price movements in certain of these commodities.
Transactions involving commodities that are the subject of the Company's risk
management policy include:
o purchases of jet fuel for BAX Global's North American fleet operations;
and
o revenues of the Company's gold and natural gas operations.
The Company enters into swap contracts and collars to hedge a portion of its
forecasted jet fuel purchases for use in the BAX Global aircraft operation.
Depending on market conditions, the Company has charged its customers a fuel
surcharge to offset the effects of high jet fuel prices. At December 31, 2002,
the outstanding notional amount of hedges for jet fuel totaled 19 million
gallons.
The Company enters into forward gold sales contracts to fix the Australian
dollar selling price on a portion of forecasted gold sales. At December 31,
2002, the notional amount of gold under forward sales contracts (excluding
hedges entered into by equity affiliates) was approximately 89,000 ounces,
representing approximately 57% of the Company's share of the gold operations'
proven and probable reserves.
The Company enters into swap contracts and collars to hedge a portion of its
forecasted natural gas sales. At December 31, 2002, the outstanding notional
amount of hedges was 0.6 million MMbtu.
The Company has designated its commodity hedges as cash flow hedges for
accounting purposes. Effectiveness is assessed based on the total changes in the
estimated
-72-
present value of cash flows for its jet fuel and natural gas hedges. The
effectiveness of gold hedges is assessed based on changes in the spot rate of
gold and the Australian dollar exchange rate and other changes in expected cash
flows are excluded from the assessment.
For jet fuel, the changes in fair value are recorded in other comprehensive loss
and subsequently reclassified to earnings, as a component of operating expenses,
in the same period as the jet fuel is used. For gold contracts, the changes in
fair value are recorded in other accumulated comprehensive loss and subsequently
reclassified to earnings, as a component of either revenue or, if related to its
equity affiliate, other operating income, net in the same period as the gold is
sold. Amounts excluded in the assessment of effectiveness are included as a
component of other operating income, net. For natural gas contracts, the changes
in fair value are recorded in accumulated other comprehensive loss and
subsequently reclassified to earnings, as a component of either revenue or, if
related to royalty income, other operating income, net.
(In millions, except) Jet Natural
number of months) Fuel Gas Gold
- ------------------------------------------------------------------------
Amounts recognized in 2002 pretax earnings:
Ineffective amounts $ 0.1 - -
Amounts excluded in
assessment of effectiveness - - 0.8
Amounts for which the forecasted
transaction is not
expected to occur (a) - - (1.4)
Net gain (loss) in other comprehensive
loss at December 31, 2002
expected to be reclassified to
earnings in 2003 $ 1.4 (0.5) (0.8)
Maximum number of months
hedges outstanding 12 3 42
- ------------------------------------------------------------------------
(a) See Note 8.
Foreign Currency Risk Management
The Company is exposed to foreign currency exchange fluctuations due to certain
transactions to which the Company is a party. Certain customers are billed for
BAX Global's services in currencies that are different than the functional
currency of the subsidiary that recognizes the sale. Certain transportation
costs incurred by BAX Global's non-U.S. subsidiaries are denominated in
currencies that are different than the subsidiaries' functional currency. The
Company's BAX Global operation has a wholly owned international subsidiary that
serves as a finance coordination center. The subsidiary has the U.S. dollar as
its functional currency, and has intercompany receivables and payables that are
not denominated in U.S. dollars.
The Company utilizes foreign currency forward contracts to minimize the
variability in cash flows due to foreign currency risks. The contracts have not
been designated for accounting purposes as hedges in accordance with SFAS No.
133 due to their short-term nature. Because the contracts are settled shortly
after they are entered into, any gains and losses that would be deferred at any
balance sheet date if the Company designated the instruments as hedges, would be
small. Accordingly, changes in the fair value of foreign currency forward
contracts are reported in earnings. The Company's foreign currency forward
contracts provide an economic hedge of the risk associated with the changes in
currency rates on the related assets and liabilities.
As of December 31, 2002, the maximum length of time over which the Company is
hedging its exposure to the variability in future cash flows associated with
foreign currency forecasted transactions is 18 months.
NON-DERIVATIVE FINANCIAL INSTRUMENTS
Non-derivative financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and cash equivalents
and trade receivables. The Company places its cash and cash equivalents with
high credit quality financial institutions and the Company limits the amount of
credit exposure to any one financial institution. Concentrations of credit risk
with respect to trade receivables are reduced as a result of the diversification
benefit provided by the large number of customers comprising the Company's
customer base, and their dispersion across many different industries and
geographic areas. Credit limits, ongoing credit evaluation and
account-monitoring procedures are utilized to minimize the risk of loss from
nonperformance on trade receivables.
-73-
The carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximate fair value because of the short-term
nature of these instruments.
The fair value of the Company's floating-rate short-term and long-term debt
approximates the carrying amount. The fair value of the Company's significant
fixed rate long-term debt is described below. Fair value is estimated by
discounting the future cash flows using rates for similar debt instruments at
the valuation date.
December 31
2002 2001
Fair Carrying Fair Carrying
Value Values Value Values
- ------------------------------------------------------------------------
Senior Notes $ 107.3 95.0 76.3 75.0
DTA bonds (a) 53.1 43.2 N/A N/A
- ------------------------------------------------------------------------
(a) DTA was included in Other liabilities in 2001.
NOTE 20
RESTRUCTURING - 2000
During 2000, BAX Global finalized a restructuring plan aimed at reducing the
capacity and cost of its airlift capabilities in the U.S. as well as reducing
station operating expenses, sales, general and administrative expense in the
Americas and Atlantic regions. The actions taken included:
o The removal of ten planes from the fleet, nine of which were dedicated to
providing lift capacity in BAX Global's commercial cargo system.
o The closure of nine operating stations and realignment of domestic
operations.
o The reduction of employee-related costs through the elimination of
approximately 300 full-time positions including aircraft crew and station
operating, sales and business unit overhead positions.
In addition, certain Atlantic region operations were streamlined in order to
reduce overhead costs and improve overall performance in that region. The
Atlantic region planned restructuring efforts involved severance costs and
station closing costs in the UK, Denmark, Italy and South Africa. Approximately
50 positions were eliminated, most of which were positions at or above manager
level.
The following is a summary of the 2000 restructuring charges:
Americas Atlantic Total
(In millions) Region Region BAX Global
- ------------------------------------------------------------------------
Fleet related charges $ 49.7 - 49.7
Severance costs 1.1 1.2 2.3
Station and other closure costs 3.8 1.7 5.5
- ------------------------------------------------------------------------
Total restructuring charge $ 54.6 2.9 57.5
- ------------------------------------------------------------------------
Approximately $45.2 million of the restructuring charge was noncash and
approximately $0.3 million of the charge was paid in 2000. The following
analyzes the changes in the remaining liabilities for such costs:
Station
Fleet and
(In millions) Charges Severance Other Total
- ------------------------------------------------------------------------
December 31, 2000 $ 6.6 2.0 3.4 12.0
Adjustments 0.6 (0.4) (0.4) (0.2)
Payments (5.1) (1.5) (0.9) (7.5)
- ------------------------------------------------------------------------
December 31, 2001 2.1 0.1 2.1 4.3
Payments (2.1) (0.1) (0.6) (2.8)
- ------------------------------------------------------------------------
December 31, 2002 $ - - 1.5 1.5
- ------------------------------------------------------------------------
The remaining accrual includes contractual commitments for facilities and is
expected to be paid by the end of 2007. The Company decreased its accrual for
restructuring in 2001 by a net $0.2 million as a result of changes in the
estimate of certain liabilities.
-74-
NOTE 21
COMMITMENTS AND CONTINGENCIES
ACMI AGREEMENTS
At December 31, 2002, the Company had aircraft, crew, maintenance and insurance
("ACMI") agreements with third parties to provide aircraft usage and services to
BAX Global, which expire in 2003 through 2004. The fixed and determinable
portion of the obligations under ACMI agreements aggregate approximately $32.5
million in 2003 and $6.6 million in 2004. Amounts purchased under these
arrangements, including any variable component based on hours of usage, were
$49.4 million in 2002, $63.4 million in 2001 and $84.2 million in 2000.
FORMER COAL OPERATIONS
The Company is continuing to market the residual assets of its former coal
operations, and expects purchasers to assume a portion of the Company's coal
equipment operating leases and advance minimum royalty obligations. Advance
royalty payments relate to the right to access and mine coal properties. These
advance royalty payments are recoverable against future production by purchasers
of the residual coal assets. Amounts paid by the Company's former coal
operations under these arrangements, including any variable component, were $6.6
million in 2002, $9.8 million in 2001, and $9.5 million in 2000. The variable
component is based on coal produced pursuant to the mineral lease agreements.
The Company has recorded a $14.7 million liability for the present value of
obligations (including $5.1 million accrued in continuing operations in 2002)
that are not expected to be assumed by purchasers.
Future minimum lease and royalty payments due under the agreements at December
31, 2002 were as follows:
Advance Minimum
Operating Leases Royalty Agreements
(In millions) Expected to Be Expected to Be
- ------------------------------------------------------------------
Assumed Retained Assumed Retained
- ------------------------------------------------------------------
2003 $ 0.5 1.2 $ 0.7 2.2
2004 0.2 - 1.1 2.9
2005 0.1 - 0.8 2.3
2006 - - 0.8 1.1
2007 - - 0.7 1.0
Later years - - 21.0 19.6
- ------------------------------------------------------------------
$ 0.8 1.2 $ 25.1 29.1
- ------------------------------------------------------------------
In connection with the sale of certain assets and businesses of the former coal
operations, the Company subleased to Alpha Natural Resources, LLC, coal mining
equipment that has $2.6 million of remaining lease payments. The sublease has
substantially the same terms and conditions as the Company's leases. If Alpha
does not meet its sublease obligations, the Company would be required to pay any
remaining lease payments.
PURCHASE AGREEMENTS
At December 31, 2002, the Company had noncancelable commitments to purchase
$13.2 million of equipment and $12.0 million of computer processing and
consulting services.
FEDERAL BLACK LUNG EXCISE TAX ("FBLET")
On February 10, 1999, the U.S. District Court of the Eastern District of
Virginia entered a final judgment in favor of certain of the Company's
subsidiaries, ruling that the FBLET is unconstitutional as applied to export
coal sales. A total of $0.8 million (including interest) was
-75-
refunded in 1999 for the FBLET that those companies paid for the first quarter
of 1997. The Company sought refunds of the FBLET it paid on export coal sales
for all open statutory periods and received refunds of $23.4 million (including
interest) during the fourth quarter of 2001. During the fourth quarter of 2002,
the Company reached a settlement under which it will collect additional refunds
of $3.2 million.
The Company continues to pursue the refund of other FBLET payments. Due to
uncertainty as to the ultimate additional future amounts to be received, if any,
which could amount to as much as $18 million (before income taxes), as well as
the timing of any additional FBLET refunds, the Company has not currently
recorded receivables for such additional FBLET refunds.
ENVIRONMENTAL REMEDIATION
The Company has agreed to pay 80% of the remediation costs arising from
hydrocarbon contamination at a formerly owned petroleum terminal facility
("Tankport") in Jersey City, New Jersey, which was sold in 1983. The Company is
in the process of remediating the site under an approved plan. The Company
estimates its portion of the actual remaining clean-up and operational and
maintenance costs, on an undiscounted basis, to be between $2.2 million and $4.3
million. The Company is in discussions with another potentially responsible
party to recover a portion of the amount paid and to be paid by the Company
related to this matter.
LITIGATION
The Company is defending potentially significant civil suits relating to its
former coal business. Although the Company is defending these cases vigorously
and believes that its defenses have merit, there exists the possibility that one
or more of these suits ultimately may be decided in favor of the plaintiffs. If
so, the Company expects that the ultimate amount of unaccrued losses could range
from $0 to $25 million.
SURETY BONDS
The Company is required by various state and federal laws to provide security
with regard to its obligations to pay workers' compensation, to reclaim lands
used for mining by the Company's former coal operations and to satisfy other
benefits. As of December 31, 2002, the Company had outstanding surety bonds with
third parties totaling approximately $235 million that it has arranged in order
to satisfy the various security requirements. Most of these bonds provide
financial security for previously recorded liabilities. Because some of the
Company's reclamation obligations have been assumed by purchasers of the
Company's former coal operations, $67 million of the Company's surety bonds are
expected to be replaced by purchasers' surety bonds. These bonds are typically
renewable on a yearly basis, however there can be no assurance the bonds will be
renewed or that premiums in the future will not increase. If the surety bonds
are not renewed, the Company believes that it has adequate available borrowing
capacity under its U.S. credit facility to provide letters of credit or other
collateral to secure its obligations.
-76-
NOTE 22
SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
(In millions, except 2002 QUARTERS 2001 Quarters
per share amounts) 1ST 2ND 3RD 4TH 1st 2nd 3rd 4th
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 899.5 919.1 953.7 1,004.4 $ 908.3 884.5 884.3 947.1
Operating profit 37.1 35.6 35.5 24.5 24.8 15.9 20.0 46.9
Depreciation and amortization 36.6 37.8 39.0 41.4 39.2 39.5 40.5 41.4
Impairment charges for subscriber
disconnects 7.3 8.1 9.4 7.5 7.5 8.7 9.2 8.4
Income from continuing operations $ 19.1 19.1 22.1 8.7 $ 8.7 3.8 9.2 24.1
Loss from discontinued operations (11.0) - - (31.9) - - - (29.2)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 8.1 19.1 22.1 (23.2) $ 8.7 3.8 9.2 (5.1)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share:
Basic:
Continuing operations $ 0.37 0.36 0.41 0.17 $ 0.17 0.07 0.17 0.46
Discontinued operations (0.22) - - (0.61) - - - (0.56)
- ----------------------------------------------------------------------------------------------------------------------------------
Basic $ 0.15 0.36 0.41 (0.44) $ 0.17 0.07 0.17 (0.10)
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted:
Continuing operations $ 0.37 0.36 0.41 0.17 $ 0.17 0.07 0.17 0.46
Discontinued operations (0.22) - - (0.61) - - - (0.56)
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted $ 0.15 0.36 0.41 (0.44) $ 0.17 0.07 0.17 (0.10)
- ----------------------------------------------------------------------------------------------------------------------------------
Dividends declared per common share $ 0.025 0.025 0.025 0.025 $ 0.025 0.025 0.025 0.025
Stock prices:
High $ 25.90 28.92 25.00 23.70 $ 22.44 25.31 23.15 22.90
Low 20.50 22.20 18.60 17.50 17.86 19.35 15.75 17.20
- ----------------------------------------------------------------------------------------------------------------------------------
Pittston Brink's Group Common Stock ("Pittston Common Stock") is the only
outstanding class of common stock of the Company and trades on the New York
Stock Exchange as "PZB." As of March 1, 2003, there were approximately 3,800
shareholders of record of Pittston Common Stock.
-77-
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
FIVE YEARS IN REVIEW
(In millions, except per share amounts) 2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
REVENUES AND INCOME
Revenues $ 3,776.7 3,624.2 3,834.1 3,709.7 3,251.6
Income from continuing operations before
cumulative effect of change in accounting principle 69.0 45.8 2.7 108.0 61.2
Income (loss) from discontinued operations (a) (42.9) (29.2) (207.3) (73.3) 4.9
Cumulative effect of change in accounting principle (b) - - (52.0) - -
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 26.1 16.6 (256.6) 34.7 66.1
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Property and equipment, net $ 871.2 915.5 925.8 930.4 849.9
Total assets 2,459.9 2,423.2 2,478.7 2,459.7 2,331.1
Long-term debt, less current maturities 304.2 257.4 313.6 395.1 323.3
Shareholders' equity 381.2 476.1 475.8 749.6 736.0
- ---------------------------------------------------------------------------------------------------------------------------------
PER PITTSTON COMMON SHARE (c)
Basic, net income (loss):
Continuing operations $ 1.30 0.88 0.07 2.55 1.18
Discontinued operations (a) (0.82) (0.57) (4.14) (1.49) 0.10
Cumulative effect of change in accounting principle (b) - - (1.04) - -
- ---------------------------------------------------------------------------------------------------------------------------------
Total basic $ 0.48 0.31 (5.11) 1.06 1.28
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted, net income (loss):
Continuing operations $ 1.30 0.88 0.05 2.19 1.17
Discontinued operations (a) (0.82) (0.57) (4.13) (1.49) 0.10
Cumulative effect of change in accounting principle (b) - - (1.04) -
- ---------------------------------------------------------------------------------------------------------------------------------
Total diluted $ 0.48 0.31 (5.12) 0.70 1.27
- ---------------------------------------------------------------------------------------------------------------------------------
Cash dividends $ 0.10 0.10 0.10 N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
PER PITTSTON COMMON SHARE, PRO FORMA FOR ACCOUNTING CHANGE (d)
Basic, income (loss) from:
Continuing operations $ 1.30 0.88 0.07 2.46 1.04
Discontinued operations (0.82) (0.57) (4.14) (1.49) 0.10
- ---------------------------------------------------------------------------------------------------------------------------------
Total basic, pro forma $ 0.48 0.31 (4.07) 0.97 1.14
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted, income (loss) from:
Continuing operations $ 1.30 0.88 0.05 2.09 1.03
Discontinued operations (0.82) (0.57) (4.13) (1.49) 0.10
- ---------------------------------------------------------------------------------------------------------------------------------
Total diluted, pro forma $ 0.48 0.31 (4.08) 0.60 1.13
- ---------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE PITTSTON COMMON SHARES OUTSTANDING
Basic 52.1 51.2 50.1 49.1 48.8
Diluted 52.4 51.4 50.1 49.3 49.3
- ---------------------------------------------------------------------------------------------------------------------------------
-78-
SELECTED FINANCIAL DATA (CONTINUED)
- --------------------------------------------------------------------------------
FIVE YEARS IN REVIEW
(In millions, except per share amounts) 2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
PER PITTSTON BRINK'S GROUP COMMON SHARE (c)
Basic net income N/A N/A N/A 2.16 2.04
Diluted net income N/A N/A N/A 2.15 2.02
Pro forma basic (b) N/A N/A N/A 2.03 1.87
Pro forma diluted (b) N/A N/A N/A 2.03 1.85
Cash dividends N/A N/A N/A 0.10 0.10
- ---------------------------------------------------------------------------------------------------------------------------------
PER PITTSTON BAX GROUP COMMON SHARE (c)
Basic net income (loss) $ N/A N/A N/A 1.73 (0.68)
Diluted net income (loss) N/A N/A N/A 1.72 (0.68)
Cash dividends N/A N/A N/A 0.24 0.24
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PER PITTSTON MINERALS GROUP COMMON SHARE (c)
Basic net income (loss):
Continuing operations $ N/A N/A N/A 0.93 (1.01)
Discontinued operations (a) N/A N/A N/A (8.26) 0.59
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Total basic $ N/A N/A N/A (7.33) (0.42)
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Diluted net income (loss):
Continuing operations $ N/A N/A N/A (0.98) (1.01)
Discontinued operations (a) N/A N/A N/A (7.63) 0.59
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Total diluted $ N/A N/A N/A (8.61) (0.42)
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Cash dividends $ N/A N/A N/A 0.025 0.24
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<FN>
(a) Income (loss) from discontinued operations reflects the operations and
losses on disposal of the Company's former coal operations. Some of the
expenses recorded within discontinued operations will continue after the
disposition of the coal business is complete and will be recorded within
continuing operations. The expenses that are expected to continue primarily
consist of postretirement and other employee benefits associated with
Company-sponsored plans and black lung obligations; reclamation and other
costs for retained inactive operations, if any; and administrative and legal
expenses to oversee residual assets and retained benefit obligations. See
Note 5. In accordance with APB No. 30, the Company included these expenses
within discontinued operations for all periods presented above. Beginning in
2003, expenses related to our Company-sponsored pension and postretirement
benefit obligations, black lung obligations and related administrative costs
will be recorded as a component of continuing operations. The amount of
expenses related to postretirement and other employee benefits associated
with the Company-sponsored plans and black lung obligations that were
charged to discontinued operations were $2 million, $53 million, and $48
million for the years ended 2002, 2001, and 2000, respectively. As required
by APB No. 30, expenses recorded in 2000 include both the actual expenses
for that year plus an accrual of costs through the expected disposal period,
which at the time was expected to be the end of 2001. Expenses recorded in
2001 represent an estimate of costs for 2002 due to the extension of the
expected disposal period to the end of 2002. Future adjustments to
contingent liabilities will continue to be recorded within discontinued
operations.
(b) The Company's results for 2000 include a noncash after-tax charge of $52.0
million, or $1.04 per diluted share, to reflect the cumulative effect of a
change in accounting principle pursuant to guidance issued in Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
by the Securities and Exchange Commission in December 1999 and a related
interpretation issued in October 2000.
(c) Prior to January 14, 2000, the Company was comprised of three separate
groups - Pittston Brink's Group, Pittston BAX Group, and Pittston Minerals
Group. The Pittston Brink's Group included the Brink's and BHS operations of
the Company. The Pittston BAX Group included the BAX Global operations of
the Company. The Pittston Minerals Group included the Pittston Coal Company
and Mineral Ventures operations of the Company. Also, prior to January 14,
2000, the Company had three classes of common stock: Pittston Brink's Group
Common Stock ("Brink's Stock"), Pittston BAX Group Common Stock ("BAX
Stock") and Pittston Minerals Group Common Stock ("Minerals Stock"), which
were designed to provide shareholders with separate securities reflecting
the performance of the Brink's Group, the BAX Group and the Minerals Group,
respectively. On December 6, 1999, the Company announced that its Board of
Directors approved the elimination of the tracking stock capital structure
by an exchange of all outstanding shares of Minerals Stock and BAX Stock for
shares of Brink's Stock (the "Exchange"). The Exchange took place on January
14, 2000.
(d) Pro forma income per share amounts prior to 2000 have been adjusted to show
the effect of the change in accounting noted in (b) above as if it had been
in effect all periods.
</FN>
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