UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-9148
THE BRINK'S COMPANY
--------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1317776
------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1801 Bayberry Court, Richmond, Virginia 23226-8100
--------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (804) 289-9600
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Former Name of Registrant: The Pittston Company
---------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No ___
As of May 1, 2003, 54,253,423 shares of $1 par value common stock were
outstanding.
PART I - FINANCIAL INFORMATION
THE BRINK'S COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
March 31 December 31
2003 2002
- ------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 117.1 102.3
Accounts receivable, net 526.3 540.0
Prepaid expenses and other 64.4 58.4
Deferred income taxes 78.3 81.3
- ------------------------------------------------------------------------------------------------
Total current assets 786.1 782.0
Property and equipment, net 877.3 871.2
Goodwill, net 230.3 227.9
Deferred income taxes 354.1 349.3
Other assets 226.9 229.5
- ------------------------------------------------------------------------------------------------
Total assets $ 2,474.7 2,459.9
================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 68.8 41.8
Current maturities of long-term debt 14.6 13.3
Accounts payable 271.2 261.9
Accrued liabilities 435.2 476.3
- ------------------------------------------------------------------------------------------------
Total current liabilities 789.8 793.3
Long-term debt 296.6 304.2
Accrued pension costs 129.1 122.6
Postretirement benefits other than pensions 467.2 471.7
Deferred revenue 127.9 127.0
Deferred income taxes 28.1 28.4
Other liabilities 245.9 231.5
- ------------------------------------------------------------------------------------------------
Total liabilities 2,084.6 2,078.7
Commitments and contingent liabilities (Note 6)
Shareholders' equity:
Common stock, par value $1 per share:
Authorized: 100.0 shares;
Issued and outstanding: 2003 and 2002 - 54.3 shares 54.3 54.3
Capital in excess of par value 375.1 383.0
Retained earnings 210.0 213.1
Accumulated other comprehensive loss (228.7) (236.2)
Employee benefits trust, at market value (20.6) (33.0)
- ------------------------------------------------------------------------------------------------
Total shareholders' equity 390.1 381.2
- ------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,474.7 2,459.9
================================================================================================
See accompanying notes to consolidated financial statements.
2
THE BRINK'S COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
Three Months
Ended March 31
2003 2002
- -------------------------------------------------------------------------------------------
REVENUES $ 941.3 899.5
EXPENSES:
Operating expenses 818.7 759.9
Selling, general and administrative expenses 124.0 106.4
- -------------------------------------------------------------------------------------------
Total expenses 942.7 866.3
Other operating income, net 4.5 3.9
- -------------------------------------------------------------------------------------------
OPERATING PROFIT 3.1 37.1
Interest expense (6.2) (6.0)
Interest and other income (expense), net 1.8 (0.4)
Minority interest, net (0.8) (1.1)
- -------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
income taxes (2.1) 29.6
Provision (benefit) for income taxes (0.8) 10.5
- -------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (1.3) 19.1
Loss from discontinued operations, net of tax (0.4) (11.0)
- -------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (1.7) 8.1
===========================================================================================
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE:
Continuing operations $ (0.02) 0.37
Discontinued operations (0.01) (0.22)
- -------------------------------------------------------------------------------------------
$ (0.03) 0.15
===========================================================================================
See accompanying notes to consolidated financial statements.
3
THE BRINK'S COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(Unaudited)
Three Months
Ended March 31
2003 2002
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1.7) 8.1
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Loss from discontinued operations, net of tax 0.4 11.0
Depreciation and amortization 41.5 36.6
Impairment charges from subscriber disconnects 7.5 7.3
Amortization of deferred revenue (5.8) (5.7)
Aircraft heavy maintenance expense 5.4 8.1
Deferred income taxes (4.5) 4.2
Provision for uncollectible accounts receivable - 2.4
Other operating, net 3.7 5.9
Pension expense, net of contributions 7.1 3.9
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable 9.9 (30.1)
Accounts payable and accrued liabilities (19.6) (4.4)
Deferred subscriber acquisition costs (4.3) (4.1)
Deferred revenue from new subscribers 6.5 6.7
Other, net 3.2 (1.2)
Net cash used by discontinued operations - (16.6)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 49.3 32.1
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (47.4) (41.1)
Aircraft heavy maintenance expenditures (3.9) (6.5)
Proceeds from disposal of property and equipment 1.3 1.1
Acquisitions (4.5) -
Discontinued operations, net - (10.9)
Collections on notes receivable for former coal operations 6.2 -
Other, net (1.0) (0.6)
- -------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (49.3) (58.0)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long term debt:
Additions 8.0 37.2
Repayments (17.1) (15.1)
Short-term borrowings (repayments), net 24.9 10.0
Dividends (1.3) (1.4)
Other, net 0.1 0.4
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 14.6 31.1
- -------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 0.2 (0.7)
- -------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 14.8 4.5
Cash and cash equivalents at beginning of period 102.3 86.7
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 117.1 91.2
===================================================================================================================
See accompanying notes to consolidated financial statements.
4
THE BRINK'S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION AND ACCOUNTING CHANGES
On May 2, 2003, the shareholders of The Pittston Company approved a
proposal to change the Company's name to The Brink's Company. The name
change became effective on May 5, 2003. Prior to May 5, 2003, The
Pittston Company traded on the New York Stock Exchange under the symbol
"PZB." Beginning on May 5, 2003, The Brink's Company trades on the New
York Stock Exchange under the symbol "BCO."
The Brink's Company and its subsidiaries are referred to herein as the
"Company." The Company has three 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 the Company'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.
The Company's unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in
the United States of America ("GAAP") for interim financial reporting
and applicable quarterly reporting regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the
information and notes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair
presentation have been included. Certain prior period amounts have been
reclassified to conform to the current period's financial statement
presentation. Operating results for the interim periods of 2003 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2003. For further information, refer to the
Company's Annual Report on Form 10-K for the year ended December 31,
2002.
Statement of Financial Accounting Standards ("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 assessed the effects of
SFAS No. 143 in the first quarter of 2003. SFAS No. 143 did not have a
material impact on the Company's results of operations or financial
position.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities," was issued in May 2003 and amends and clarifies
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. This Statement is effective for contracts entered
into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 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.
5
2. EARNINGS PER SHARE
Three Months
Ended March 31
(In millions) 2003 2002
---------------------------------------------------------------------------------
NUMERATOR:
Income (loss) from continuing operations $ (1.3) 19.1
Preferred stock dividends - (0.1)
---------------------------------------------------------------------------------
Basic and diluted income (loss) from continuing
operations per share numerator $ (1.3) 19.0
=================================================================================
DENOMINATOR:
Basic weighted average
common shares outstanding 52.6 51.7
Effect of dilutive stock options - 0.3
---------------------------------------------------------------------------------
Diluted weighted average
common shares outstanding 52.6 52.0
=================================================================================
Unallocated shares of Company common stock held by The Brink's 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 (loss) per common
share calculations. As of March 31, 2003 and 2002, shares held by the
Trust were 1.5 million and 2.3 million shares, respectively.
The Company excludes the effect of antidilutive securities from the
computations of diluted income (loss) from continuing operations per
share. The equivalent weighted average shares of common stock that were
excluded in the period ended March 31, 2003 and 2002 were 4.0 million
shares and 1.3 million shares, respectively.
The Company accounts for its stock-based compensation plans using the
intrinsic value method prescribed in Accounting Principles Board
Opinion 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 options plans for the three months ended March 31, 2003
and 2002, respectively.
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) per share
would be the pro forma amounts indicated below:
6
Three Months
(In millions, except Ended March 31
per share amounts) 2003 2002
-----------------------------------------------------------------------
Net income (loss):
As reported $ (1.7) 8.1
Less: stock-based compensation expense
determined under fair value method, net
of related tax effects (1.1) (0.7)
-----------------------------------------------------------------------
Pro forma $ (2.8) 7.4
-----------------------------------------------------------------------
Net income (loss) per common share:
Basic, as reported $ (0.03) 0.15
Basic, pro forma (0.05) 0.14
Diluted, as reported $ (0.03) 0.15
Diluted, pro forma (0.05) 0.14
=======================================================================
3. SUPPLEMENTAL CASH FLOW INFORMATION
Three Months
Ended March 31
(In millions) 2003 2002
-----------------------------------------------------------------------
Cash paid (received) for:
Interest $ 5.6 7.8
Income taxes, net of refunds $ 7.6 (3.2)
-----------------------------------------------------------------------
Depreciation of
property and equipment $ 39.7 35.1
Amortization of BHS deferred subscriber
acquisition costs 1.8 1.5
-----------------------------------------------------------------------
Total depreciation and amortization $ 41.5 36.6
=======================================================================
4. COMPREHENSIVE INCOME
Three Months
Ended March 31
(In millions) 2003 2002
-----------------------------------------------------------------------
Net income (loss) $ (1.7) 8.1
Other comprehensive income (loss),
net of reclasses and taxes:
Foreign currency translation adjustments 4.4 (4.6)
Deferred benefit (expense) on cash flow hedges 3.1 (0.5)
Unrealized losses on marketable securities - (0.1)
-----------------------------------------------------------------------
Comprehensive income $ 5.8 2.9
=======================================================================
7
5. FORMER COAL OPERATIONS
During the fourth quarter of 2002, the Company completed its planned
exit of the coal business by selling or shutting down its remaining
coal operations. In the first quarter of 2003, the Company began
recognizing certain expenses related to its former coal operations as
part of the Company's continuing operations. Prior to 2003, these
expenses were classified as part of the Company's loss from
discontinued operations. Expenses included in continuing operations in
the first quarter of 2003 related to the Company's former coal
operations were as follows:
Three Months
Ended March 31
(In millions) 2003
-----------------------------------------------------------------------
Former coal operations:
Company-sponsored postretirement
benefits other than pensions $ 12.2
Black lung obligations 1.5
Pension 0.1
Administrative, legal and other expenses, net 3.5
-----------------------------------------------------------------------
$ 17.3
-----------------------------------------------------------------------
6. CONTINGENCIES
The Company will continue to record adjustments to coal-related
contingent assets and liabilities within discontinued operations. In
the first quarter of 2003, the Company recorded a charge of $0.4
million (after tax) in discontinued operations reflecting its current
estimate of the value of certain contingent liabilities of the former
coal operations.
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, it is
possible 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 $30 million.
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. At
March 31, 2003, the amount of the Company's obligations that are
expected to be assumed by purchasers was approximately $25 million. To
the extent that obligations are not assumed by purchasers as expected,
the Company's liabilities associated with advance minimum royalty
obligations could potentially increase.
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 March 31, 2003, the
Company's estimated withdrawal liability was $35.0 million, unchanged
from the amount as reported at December 31, 2002. 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.
8
At March 31, 2003, the liability recorded for the Company's UMWA
Combined Benefit Fund obligations under the Coal Industry Retiree
Health Benefit Act of 1992 was $171.8 million. This liability will be
adjusted as new historical data is received and assumptions used to
estimate the liability change. Such adjustments typically occur in the
fourth quarter each year.
In 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 Federal Black Lung Excise Tax ("FBLET")
is unconstitutional as applied to export coal sales. Through 2001, the
Company has received refunds of $24.2 million (including interest).
During the fourth quarter of 2002, the Company reached a settlement
under which the government agreed to pay additional refunds of $3.2
million, of which $1.0 million was received during the first quarter of
2003. The Company continues to pursue the refund of other FBLET
payments. Due to uncertainty as to the ultimate receipt of additional
amounts, 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.
7. SUBSEQUENT EVENTS
In April 2003, the Company accepted $19.8 million in full settlement of
the notes receivable and royalty obligations received as part of the
consideration in the sale of its former Virginia coal operations. The
Company will recognize a $2.6 million pretax gain on the settlement in
the second quarter of 2003.
The balance in the Company's Voluntary Employees' Beneficiary
Association ("VEBA") as of March 31, 2003 was $17.7 million. In April
2003, the Company contributed $32 million to its VEBA. The VEBA is
intended to tax efficiently fund certain retiree medical liabilities
primarily for retired coal miners and their dependents.
9
THE BRINK'S COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
SUMMARY
On May 2, 2003, the shareholders of The Pittston Company approved a proposal to
change the Company's name to The Brink's Company. The name change became
effective on May 5, 2003. Prior to May 5, 2003, The Pittston Company traded on
the New York Stock Exchange under the symbol "PZB." Beginning on May 5, 2003,
The Brink's Company trades on the New York Stock Exchange under the symbol
"BCO."
The Brink's Company and its subsidiaries are referred to herein as the
"Company." The Company has three 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 major services offered by Brink's include armored car transportation,
automated teller machine ("ATM") servicing, currency and deposit processing,
coin sorting and wrapping, arranging the secure air transportation of valuables
("Global Services") and the deploying and servicing of safes and safe control
devices, including its patented CompuSafe(R) service. BHS is primarily engaged
in the business of marketing, selling, installing, monitoring and servicing
electronic security systems in owner-occupied, single-family residences. BAX
Global provides transportation and supply chain management services on a global
basis, specializing in the heavy freight market for business to business
shipping.
The Company's fourth operating segment is Other Operations, which consists of
the Company'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.
The Company's loss from continuing operations was $1.3 million in the first
three months of 2003 compared to income of $19.1 million in the prior year
period. Results from continuing operations were lower in the 2003 quarter due,
in part, to lower operating profits at Brink's, partially offset by improved
results at BHS and BAX Global. Operating profit at Brink's in the 2002 quarter
included the benefit of special euro currency-related distribution projects. In
addition, the first quarter of 2003 included $17.3 million (pretax) of expenses,
associated with the former coal operations, which are recorded within continuing
operations beginning in 2003.
10
RESULTS OF OPERATIONS
Three Months
Ended March 31
(Dollars in millions) 2003 2002 % Change
- -------------------------------------------------------------------------------------
Revenues:
Brink's $ 391.4 406.7 (4)
BHS 73.9 67.2 10
BAX Global 463.6 415.6 12
- -------------------------------------------------------------------------------------
Business and Security Services 928.9 889.5 4
Other Operations 12.4 10.0 24
- -------------------------------------------------------------------------------------
Revenues $ 941.3 899.5 5
=====================================================================================
Operating profit (loss):
Brink's $ 13.1 31.7 (59)
BHS 16.7 15.2 10
BAX Global (5.5) (6.7) 18
- -------------------------------------------------------------------------------------
Business and Security Services 24.3 40.2 (40)
Other Operations 3.3 2.4 38
Former coal operations (17.3) - NM
General corporate expense (7.2) (5.5) (31)
- -------------------------------------------------------------------------------------
Operating profit $ 3.1 37.1 (92)
=====================================================================================
BRINK'S
Three Months
Ended March 31
(Dollars in millions) 2003 2002 % Change
- -------------------------------------------------------------------------------------
Revenues:
North America (a) $ 175.8 168.3 4
International 215.6 238.4 (10)
- -------------------------------------------------------------------------------------
Revenues $ 391.4 406.7 (4)
=====================================================================================
Operating profit:
North America (a) $ 10.8 10.7 1
International 2.3 21.0 (89)
- -------------------------------------------------------------------------------------
Segment operating profit $ 13.1 31.7 (59)
=====================================================================================
Operating margin: (%) (%)
North America (a) 6.1 6.4
International 1.1 8.8
Total 3.3 7.8
=====================================================================================
Depreciation and amortization $ 15.6 14.4 8
Capital expenditures 16.4 14.8 11
=====================================================================================
<FN>
(a) Comprises U.S. and Canada.
</FN>
Brink's worldwide revenues were $391.4 million in the first quarter of 2003, a
4% decrease compared with the first quarter of 2002, while operating profit was
59% lower than in the prior year's quarter. The lower results were primarily
related to International operations, which in 2002 were positively impacted by
special euro-related processing and transportation work, and negatively impacted
in 2003 by the effects of weak economies in Europe and South America.
11
Revenue
North American revenues were higher in the first quarter of 2003 compared to the
2002 period primarily due to higher revenues from armored car operations (which
include ATM services) and U.S. cash logistics (currency processing).
The decrease in International revenues was largely attributable to Brink's
operations in South America, and to a lesser extent, Europe, partially offset by
increases in Asia Pacific. The positive effect on revenue of the stronger euro
(relative to the U.S. dollar) was more than offset by the effect of the decline
of currency values in South America. In the first quarter of 2002, revenues in
Europe benefited from the transportation and processing work associated with the
issuance of the euro and the return of the legacy currencies of the countries
adopting the euro.
Operating profit
North American operating profit in the first quarter of 2003 was about the same
as the 2002 period, although the margin declined slightly. Improved results for
U.S. cash logistics were partially offset by lower results from Canadian
operations. Operating profit in North America was also negatively impacted by
increased employee benefit expenses, including higher pension expense for the
Company's primary U.S. pension plan and higher health care costs for active
employees. Operating results in North America are expected to be adversely
affected by approximately $7 million higher pension expense associated with the
Company's primary U.S. pension plan for the full year 2003 as compared to 2002
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.
The estimated increase in expense for the full year has been reduced from the
amount disclosed in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002 primarily as the result of amendments to the Company's pension
plan.
During the first quarter of 2003, management initiated a plan to close Brink's
corporate headquarters in Darien, Connecticut and relocate employees to either
Brink's U.S. headquarters in Coppell, Texas, or The Brink's Company headquarters
in Richmond, Virginia. As a result, approximately $5 million of severance and
other costs are expected to be recognized in the U.S. during the remainder of
2003, primarily during the second and third quarters.
International operating profit and margins were significantly lower for the
first quarter of 2003 as compared to the same period of 2002 due to
substantially lower operating profit in Europe and, to a lesser extent, South
America, partially offset by an increase in operating profit in Asia Pacific. In
Europe, operating profit in 2003 was lower primarily due to the absence of the
euro work done in the first quarter of 2002, a weak European economy, the
effects of the conflict in the Middle East, approximately $2 million in
severance expense associated with European work force reductions and lower
volumes in the United Kingdom. European operating results for the remainder of
2003 are expected to benefit from management changes and work force reductions
made to align resources to meet business needs. European operating performance
in 2002 was positively impacted by stronger volumes primarily due to
transportation and processing work associated with the issuance of the euro and
the return of legacy currencies.
In South America, operating profit during the first quarter of 2003 was lower
than the same quarter last year primarily due to lower operating performance in
Venezuela, Brazil and Argentina as a result of the continuing difficult economic
and operating conditions in the region. These conditions are expected to
continue to impact operating profit in the second quarter of 2003; however,
Brink's does not expect operating results to deteriorate significantly further
in the near term. Asia Pacific results were higher than the prior year primarily
due to improved results in Australia.
12
Severe Acute Respiratory Syndrome ("SARS") is affecting general business
conditions in the Asia Pacific region. Any impact of SARS on Brink's or its
customers may negatively affect Brink's revenues and operating profit
(particularly Global Services) in Asia Pacific and other regions beginning with
the second quarter of 2003.
BRINK'S HOME SECURITY
Three Months
Ended March 31
(Dollars in millions, subscriber data in thousands) 2003 2002 % Change
- -------------------------------------------------------------------------------------------
Revenues $ 73.9 67.2 10
- -------------------------------------------------------------------------------------------
Operating profit:
Recurring services (a) $ 30.3 26.9 13
Investment in new subscribers (b) (13.6) (11.7) (16)
- -------------------------------------------------------------------------------------------
Segment operating profit $ 16.7 15.2 10
===========================================================================================
Operating margin 22.6% 22.6%
Monthly recurring revenues (c) $ 21.6 19.6 10
===========================================================================================
Annualized disconnect rate 6.5% 6.7%
===========================================================================================
Number of subscribers:
Beginning of period 766.7 713.5
Installations 27.4 25.1 9
Disconnects (12.6) (12.1) (4)
- -------------------------------------------------------------------------------------------
End of period 781.5 726.5
===========================================================================================
Average number of subscribers 774.0 719.6 8
Depreciation and amortization (d) $ 11.6 10.2 14
Impairment charges from subscriber disconnects 7.5 7.3 3
Amortization of deferred revenue (e) (5.8) (5.7) 2
Net cash deferrals on new subscribers (f) 2.2 2.6 (15)
Capital expenditures 23.1 20.1 15
===========================================================================================
<FN>
(a) Reflects 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 $1.8
million and $1.5 million in 2003 and 2002, respectively.
(e) Includes amortization of deferred revenue related to active subscriber
accounts as well as acceleration of amortization of deferred revenue
related to subscriber disconnects.
(f) Nonrefundable payments received from customers for new installations for
which revenue recognition has been deferred, net of payments for direct
selling expenses 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
Statement of Cash Flows.
</FN>
13
Revenue
Revenues increased 10% in the first quarter of 2003 as compared to the same
period of 2002 primarily due to an 8% larger average subscriber base as well as
higher average monitoring rates. These factors also contributed to a 10%
increase in monthly recurring revenues for March 2003 as compared to March 2002.
Installations were 9% higher than in the first quarter of 2002 and disconnects
were 4% higher in number, though lower as a percentage of the subscriber base,
than in the prior year's period. BHS believes that its 6.5% annualized
disconnect rate for the quarter, a 20 basis point improvement from the first
quarter of 2002, is due in large part to the effect of having increased minimum
acceptable credit scores for new subscribers in prior years as well as its high
quality customer service. The disconnect rate for the second and third quarters
of 2003 is expected to be seasonally higher than in the first quarter of 2003.
Operating profit
Segment operating profit for the first quarter of 2003 increased 10% from the
same period of 2002 as subscriber volume-related growth in recurring services
and improved service margins were only partially offset by an increase in the
cost of obtaining new subscribers.
Reconciliation of non-GAAP measures
Three Months Ended March 31
(In millions) 2003 2002
- --------------------------------------------------------------------------------
March:
Monthly recurring revenues ("MRR") $ 21.6 19.6
Amounts excluded from MRR:
Amortization of deferred revenue 2.0 1.9
Other revenues (a) 1.3 1.2
- --------------------------------------------------------------------------------
Revenues on a GAAP basis $ 24.9 22.7
================================================================================
Revenues on a GAAP basis:
March $ 24.9 22.7
January - February 49.0 44.5
- --------------------------------------------------------------------------------
January - March $ 73.9 67.2
================================================================================
(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 widely used in the industry to assess the amount of recurring
revenues a home security business produces.
14
BAX GLOBAL
Three Months
Ended March 31
(In millions, except percentages) 2003 2002 % Change
- -------------------------------------------------------------------------------
Revenues:
Americas $ 236.6 232.0 2
International 244.3 199.0 23
Eliminations/other (17.3) (15.4) (12)
- --------------------------------------------------------------------------------
Revenues $ 463.6 415.6 12
================================================================================
Operating profit (loss):
Americas $ (9.7) (10.5) 8
International 7.1 6.5 9
Other (2.9) (2.7) (7)
- --------------------------------------------------------------------------------
Segment operating loss $ (5.5) (6.7) 18
================================================================================
Operating margin (%) (%)
Americas (4.1) (4.5)
International 2.9 3.2
Total (1.2) (1.6)
================================================================================
Depreciation and amortization $ 12.2 10.8 13
Capital expenditures 5.8 4.6 26
================================================================================
Intra-U.S. revenue $ 110.9 108.7 2
Worldwide expedited freight services:
Revenues $ 354.0 320.4 10
Weight in pounds 374.4 348.7 7
================================================================================
Revenue
Worldwide revenues increased 12% in the first quarter of 2003 compared to the
same period of 2002 primarily due to increased air export volumes in Asia
Pacific as well as increased activity in supply chain management operations in
Asia Pacific and the Americas.
Americas revenues increased 2% in the first quarter of 2003 over the 2002
quarter, reflecting growth in the U.S. supply chain management business. An
increase in volumes for freight with deferred delivery, which generally uses
ground transportation, more than offset a decrease in volumes for
higher-yielding overnight and second day air freight.
International revenues for the first quarter of 2003 increased $45.3 million
from the same period of 2002 including approximately $19 million due to the
strengthening of certain currencies relative to the U.S. dollar, primarily in
Europe. Excluding the effect of changes in currency rates, International
revenues for the first quarter of 2003 were 13% higher than the same period of
2002. This increase was attributable to Asia Pacific due to an increase in air
export volumes to the U.S. for existing customers and growth in supply chain
management operations. Asia Pacific revenues in the first quarter of 2003
reflected the benefit of a portion of the surcharges imposed by airlines being
passed to customers. Supply chain management activity was positively impacted by
an expansion of operations in China as well as increased activity from existing
customers. The positive impact of currency exchange rates in the Atlantic region
more than offset the effects of a decline in volumes in the region. Activity in
the region continues to be negatively impacted by the weak European economy
which was further affected during the first quarter of 2003 due to concerns over
the conflict in the Middle East.
15
Operating profit (loss)
Worldwide operating results improved slightly in the first quarter of 2003
compared to the same period of 2002. Higher transportation costs in the first
quarter of 2003 compared to the 2002 quarter were primarily attributable to the
increase in air export volumes between Asia Pacific and the U.S and higher costs
per shipment due to surcharges charged by third-party air carriers.
Operating results in the Americas for the first quarter of 2003 improved 8% over
the same period of 2002 and were negatively affected by the weak U.S. economy,
the effects of which are expected to continue into at least the second quarter
of 2003. Heavy maintenance expense decreased $2.7 million from the 2002 period
primarily due to a reduction in the cost of turnback obligations related to the
return of a leased aircraft. A decrease in U.S. transportation costs for the
first quarter of 2003 over the prior year quarter reflected continuing
cost-alignment efforts, including reduced leasing cost for aircraft, while
customer service levels remained high. Operating results in the Americas in the
first quarter of 2003 included an increase of $0.9 million over the same period
of 2002 associated with the Company's primary U.S. pension plan. Operating
results in the America's are expected to be adversely affected by approximately
$3 million higher pension expense for the Company's primary U.S. pension plan
for the full year 2003 as compared to 2002, 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. The estimated increase in expense
for the full year has been reduced from the amount disclosed in the Company's
Annual Report on Form 10-K for the year ended December 31, 2002 primarily as a
result of amendments to the Company's pension plan.
International operating profit for the first quarter of 2003 as compared to the
same period of 2002 increased 9% due to the increase in volumes of air export
freight from Asia Pacific, partially offset by the effects of lower demand for
air freight services in the Atlantic region. Margins on Asia Pacific air export
shipments were lower as the effects of capacity constraints and surcharges
charged by third-party air carriers resulted in higher airline transportation
costs. In the Atlantic region, the continuing weak European economy negatively
affected pricing and volumes. The Company expects the effects of the weak
European economy on Atlantic revenues and operating profit to continue into the
second quarter of 2003.
SARS has resulted in reduced capacity in the Asia Pacific region due to flight
cancellations and reduced travel within the region. Any reduction in freight
volumes as a result of the impact of SARS on BAX Global or its customers may
negatively affect BAX Global's future revenues and operating profit. Surcharges,
if any, related to security or fuel imposed in the future by third party
airlines BAX Global uses to provide its services may reduce BAX Global's
operating results if such surcharges cannot be passed on to customers.
OTHER OPERATIONS
In the fourth quarter of 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, when and if agreed to, will be contingent upon
various factors. The Company does not presently control MPI and does not expect
to control MPI after the exchange. In April 2003, MPI issued an additional 25.0
million shares in a secondary offering in which the Company did not participate.
The Company's interest in MPI after the offering is 23.3%. The Company expects
to exit the timber and natural gas businesses in order to focus resources on its
core Business and Security Services segments. The nature and timing of the exit
could materially affect the Company's results of operations and cash flows in
one or more periods.
Net sales from the Company's gold operations during the first quarter of 2003
increased 39% from the 2002 period to $5.4 million, primarily as a result of
higher average realizations. Operating profit at the Company's gold operations
was $0.2 million in the first quarter of 2003 versus $0.4 million in the 2002
period. The decrease in operating profit reflects higher costs per ounce sold.
16
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 of
$5.1 million were $0.5 million higher in the first quarter of 2003 than in the
same period of 2002 primarily due to an increase in the volume of wood chips and
lumber sold, partially offset by a reduction in the volume of logs sold. In
addition, the first quarter of 2003 reflected increases in the sales prices for
logs and lumber as compared to the prior year quarter. The operating profit of
$0.2 million for the first quarter of 2003 improved from a loss of $0.4 million
in the prior year quarter, reflecting the higher sales volume as well as lower
production costs.
Net sales from the Company's natural gas operations were $1.9 million, or $0.4
million higher than the 2002 period, primarily due to higher natural gas prices.
Operating profit for the natural gas operations, including royalty income,
increased $0.6 million from the 2002 period to $2.9 million primarily due to
higher natural gas prices.
FORMER COAL OPERATIONS
During December 2002, the Company concluded its plan to sell or shut down it
coal mining operations by selling or shutting down its remaining coal
operations. Residual assets have been classified by the Company as held and
used.
In the first quarter of 2003, the Company began recognizing certain expenses
related to its former coal operations as part of the Company's continuing
operations. Prior to 2003, these expenses were classified as part of the
Company's loss from discontinued operations. Expenses included in continuing
operations in the first quarter of 2003 related to the Company's former coal
operations were as follows:
Three Months
Ended March 31
(In millions) 2003
- --------------------------------------------------------------------------------
Former coal operations:
Company-sponsored postretirement
benefits other than pensions $ 12.2
Black lung obligations 1.5
Pension 0.1
Administrative, legal and other expenses, net 3.5
- --------------------------------------------------------------------------------
$ 17.3
================================================================================
Quarterly administrative, legal and other expenses, net, are expected to decline
during 2003 as administrative functions are reduced and residual assets sold.
Expenses related to residual assets include property taxes, insurance and lease
payments.
The Company will continue to record adjustments to coal-related contingent
assets and liabilities within discontinued operations. In the first quarter of
2003, the Company recorded a charge of $0.4 million (after tax) in discontinued
operations reflecting its current estimate of the value of certain contingent
liabilities of the former coal operations.
In April 2003, the Company accepted $19.8 million in full settlement of the
notes receivable and royalty obligations received as part of the consideration
in the sale of its former Virginia coal operations. The Company will recognize a
$2.6 million pretax gain on the settlement in the second quarter of 2003.
CORPORATE EXPENSES
Corporate expenses were $1.7 million higher during the first quarter of 2003 as
compared to the same period of 2002, primarily due to higher benefit-related
expenses. In addition, payroll costs during the 2003 period were higher than in
the same period of 2002 due to increased headcount. Corporate expenses for the
last nine months of 2003 will include additional costs associated with actions
to comply with Section 404 of the Sarbanes-Oxley Act of 2002.
17
FOREIGN OPERATIONS
The Company operates 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 may have in any one
country on the translated results. The Company, from time to time, uses foreign
currency forward contracts to hedge transactional risks associated with foreign
currencies. Translation adjustments of net monetary assets and liabilities
denominated in the local currency relating to operations in countries with
highly inflationary economies are included in net income, along with all
transaction gains or losses for the period.
Brink's Venezuelan subsidiary was considered to be operating in a highly
inflationary economy during 2002. However Venezuela was no longer treated as
having a highly inflationary economy effective January 1, 2003. It is possible
that the economy in Venezuela may be considered highly inflationary again at
some time in the future.
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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses is a component of each segment's
previously discussed operating profit. The $17.6 million increase in selling,
general and administrative expenses for the first quarter of 2003 as compared to
the same period of 2002 was primarily due to higher benefit-related costs and
the negative effect of the strengthening of certain currencies relative to the
U.S. dollar, primarily in Europe. Higher pension expense for the Company's
primary U.S. pension plan resulted from unfavorable returns on plan assets over
the last three years and a lower discount rate used to determine projected
benefit obligations. In addition, during the first quarter of 2002, expenses
associated with the Company's former coal operations were recorded within
discontinued operations. Beginning in 2003, expenses associated with the former
coal operations are recorded in continuing operations.
OTHER OPERATING INCOME, NET
Other operating income, net, which is a component of each operating segment's
previously discussed operating profit, includes the Company's share of net
earnings or losses of unconsolidated affiliates, royalty income and gains and
losses from foreign currency exchange. Other operating income, net for the
quarter ended March 31, 2003 was $4.5 million, compared to $3.9 million in the
quarter ended March 31, 2002. The increase in other operating income was
primarily attributable to an increase in gas royalty income, partially offset by
lower gains from foreign currency exchange in the first quarter of 2003.
INTEREST EXPENSE
Interest expense increased $0.2 million in the first quarter of 2003 as compared
to the same period of 2002, primarily due to higher average borrowings partially
offset by lower average borrowing costs.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net, increased $2.2 million for the first
quarter of 2003 as compared to the same period of 2002. Interest and other
income, net, for the first quarter of 2003 included approximately $0.2 million
of interest income associated with the Company's Voluntary Employees'
Beneficiary Association ("VEBA"). Interest income on the VEBA was recorded
within discontinued operations during 2002.
18
INCOME TAXES
The effective tax rate for continuing operations for the first three months of
2003 was 37.5% compared to 35.5% in the same period of 2002. The provision for
income taxes exceeded the 35% statutory federal income tax rate in each of the
2003 and 2002 periods presented primarily due to state income taxes, partially
offset by lower taxes on certain foreign earnings. The Company's effective tax
rate may change from period to period due to changes in the expected
geographical mix of earnings and other factors.
19
LIQUIDITY AND CAPITAL RESOURCES
Three Months
Ended March 31
(In millions) 2003 2002
- --------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Before changes in operating assets and liabilities $ 53.6 81.8
Changes in assets and liabilities, including working capital (4.3) (33.1)
Discontinued operations - (16.6)
- --------------------------------------------------------------------------------------------
Operating activities 49.3 32.1
- --------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital and aircraft heavy maintenance expenditures (51.3) (47.6)
Other 2.0 (10.4)
- --------------------------------------------------------------------------------------------
Investing activities (49.3) (58.0)
- --------------------------------------------------------------------------------------------
Cash flows before financing activities $ - (25.9)
============================================================================================
OPERATING ACTIVITIES
Cash provided by operating activities was higher in the first quarter of 2003
compared to the 2002 period primarily due to a decrease in cash used for working
capital needs and by former coal operations in the 2003 quarter, partially
offset by lower income from continuing operations in 2003. Cash used in working
capital in 2003 primarily reflected fluctuations in receivable and payable
levels at Brink's and BAX Global as well as a net $2.8 million impact of
payments of accounts payable in excess of receivables collections at the
Company's former coal operations.
Through BAX Funding Corporation ("BAX Funding"), a wholly-owned, consolidated
special-purpose subsidiary, BAX Global converts a majority of its U.S.
receivables into cash by selling an undivided interest in a pool of the
receivables to a third party. This reduces the amount that the Company is
required to borrow under its credit lines for working capital. During the first
quarter of 2003, BAX Funding decreased the net amount of revolving interest sold
by $7 million to $65 million. During the first quarter of 2002, BAX Funding
decreased the net amount of revolving interest sold by $16 million to $53
million.
Based on its preliminary tax planning, the Company expects to make a voluntary
contribution to its primary U.S. pension plan during 2003.
INVESTING ACTIVITIES
Capital expenditures for the first quarter of 2003 of $47.4 million were $6.3
million higher than for the same period in 2002, primarily due to an increase in
subscriber installations at BHS.
Three Months
Ended March 31
2003 2002
- ---------------------------------------------------------------------------
Capital expenditures:
Brink's $ 16.4 14.8
Brink's Home Security 23.1 20.1
BAX Global 5.8 4.6
- ---------------------------------------------------------------------------
Business and Security Services 45.3 39.5
- ---------------------------------------------------------------------------
Other Operations 2.0 1.6
General corporate 0.1 -
- ---------------------------------------------------------------------------
Capital expenditures $ 47.4 41.1
===========================================================================
20
Aircraft heavy maintenance expenditures decreased $2.6 million in 2003 to $3.9
million as compared to 2002 as a result of the timing of regularly scheduled
maintenance for aircraft. The Company expects to spend between $25 million and
$30 million on aircraft heavy maintenance in 2003.
Capital expenditures for continuing operations in 2003 are currently expected to
range from $200 million to $220 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.
As previously discussed, in April 2003, the Company received $19.8 million in
cash associated with the prepayment of obligations arising from the sale of its
former coal operations.
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. As of March
31, 2003, the balance in the VEBA was $17.7 million and was included in other
non current assets. In April 2003, the Company contributed $32 million to the
VEBA and expects to make additional contributions using a portion of the
proceeds from future asset sales and of the cash generated from operations.
BUSINESS SEGMENT CASH FLOWS
The Company's consolidated cash flows before financing activities depend on each
of the operating segments' cash flows.
Three Months
Ended March 31
(In millions) 2003 2002
- --------------------------------------------------------------------------------
Cash flows before financing activities:
Brink's $ (11.2) 14.0
BHS 12.7 13.8
BAX Global 1.6 (22.8)
Corporate, other operations and former coal operations (3.1) (3.4)
Discontinued operations - (27.5)
- --------------------------------------------------------------------------------
Cash flows before financing activities $ - (25.9)
===============================================================================-
Cash flows before financing activities at Brink's decreased $25.2 million
primarily due to lower operating results, an increase in cash used to cover
working capital needs and the impact of an acquisition in Belgium. Cash used for
working capital reflected an increase in accounts receivable at Brink's
subsidiary in France due to a temporary delay in billing needed to reflect
recently negotiated price increases.
The $24.4 million increase in cash flows before financing activities at BAX
Global was primarily due to lower cash used for increases in working capital,
reflecting lower receivables levels in the 2003 period, reflecting improved
collections and higher accounts payable due to increased activity in Asia
Pacific.
In the first quarter of 2002, cash flows before financing activities for the
discontinued operations reflected an operating loss resulting from weak coal
market conditions and mine development spending.
FINANCING ACTIVITIES
Net cash flows provided by financing activities were $14.6 million for the first
quarter of 2003 compared with $31.1 million in the same period of 2002.
The Company has an unsecured $350 million credit agreement with a syndicate of
banks under which it may borrow on a revolving basis over a three-year term
ending September 2005. Approximately $188.3 million was available for borrowing
under this facility at March 31, 2003.
21
The Company has three unsecured multi-currency revolving bank credit facilities
that total $110 million in available credit, of which $44.2 million was
available at March 31, 2003 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. The Company is currently negotiating a
replacement for a $30 million multi-currency bank facility (included in the $110
million noted above) that expires in June 2003.
The U.S. bank credit agreement, the agreements 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 March 31, 2003, 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 March 31, 2003, the Company had the remaining authority to purchase up to
1.0 million shares of the Company's common stock under a share repurchase
program authorized by the Board of Directors (the "Board"), with an aggregate
purchase price limitation of $19.1 million. No purchases were made under the
authority in the first quarter of 2003.
During the first quarter of 2003 and 2002, the Company paid cash dividends of
$1.3 million in each period on the Company's common stock. Future dividends, if
any, on the Company's common stock are dependent on the earnings, financial
condition, cash flow and business requirements of the Company, as determined by
the Board. On May 2, 2003, the Board declared its regular quarterly dividend of
$0.025 per share on its common stock.
CONTINGENCIES
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, it is possible 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 $30 million.
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. At March 31, 2003, the amount of the Company's
obligations that are expected to be assumed by purchasers was approximately $25
million. To the extent that obligations are not assumed by purchasers as
expected, the Company's liabilities associated with advance minimum royalty
obligations could potentially increase.
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 March 31, 2003, the Company's estimated withdrawal
liability was $35.0 million, unchanged from the amount as reported at December
31, 2002. 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.
At March 31, 2003 the liability recorded for the Company's UMWA Combined Benefit
Fund obligations under the Coal Industry Retiree Health Benefit Act of 1992 was
$171.8 million. This liability will be adjusted as new historical data is
received and assumptions used to estimate the liability change. Such adjustments
typically occur in the fourth quarter each year.
22
In 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 Federal Black Lung Excise Tax ("FBLET") is unconstitutional as applied to
export coal sales. Through 2001, the Company has received refunds of $24.2
million (including interest). During the fourth quarter of 2002, the Company
reached a settlement under which the government agreed to pay additional refunds
of $3.2 million, of which $1.0 million was received during the first quarter of
2003. The Company continues to pursue the refund of other FBLET payments. Due to
uncertainty as to the ultimate receipt of additional amounts, 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.
OTHER
Each of the Company's business segments and its former coal operations expects
to report higher pension expense in 2003 as compared to 2002. On a consolidated
basis, using current assumptions, the increase in pension expense for the
Company's primary U.S. pension plan in 2003 is expected to be approximately $13
million, including $2 million related to former coal operations.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("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 assessed the effects
of SFAS No. 143 in the first quarter of 2003. SFAS No. 143 did not have a
material impact on the Company's results of operations or financial position.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities," was issued in May 2003 and amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS No. 133. This Statement
is effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 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.
MARKET RISKS AND HEDGING AND DERIVATIVE ACTIVITIES
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
diversity of foreign operations helps to mitigate a portion of the impact that
foreign currency rate fluctuations may have in any one country on the
consolidated translated results. The Company's risk management program considers
this favorable diversification effect as it measures the Company's exposure to
financial markets and as appropriate, seeks to reduce the potentially adverse
effects that the volatility of certain markets may have on its operating
results. The Company has not had any material change in its market risk
exposures since December 31, 2002.
23
CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, the Company
performed an evaluation under the supervision and with the participation of the
Company's management, including the Chief Executive Officer and the Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, concluded that the Company's disclosure controls and procedures were
effective in ensuring that material information relating to the Company was made
known to them, particularly with respect to the period covered by this report.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of the evaluation.
FORWARD-LOOKING INFORMATION
Certain of the matters discussed herein, including statements regarding the
expectation of significant ongoing expenses and cash outflows related to former
coal operations, expected increases in pension expenses and the impact of the
increases on the operating results of the Company and its subsidiaries, the
timing and amount of costs associated with the closing of Brink's corporate
headquarters in Connecticut, the benefits to Brink's European operating results
during the remainder of 2003 of management changes and work force reductions,
economic conditions in South America and their impact on Brink's operating
results, the impact of SARS on Brink's and BAX Global's revenues and operating
profits, seasonal increases in BHS' disconnect rate in the second and third
quarters of 2003, the continuing effects of the weak U.S. and European economies
on BAX Global's financial condition, the impact of surcharges imposed by
airlines in the future on BAX Global's operating results, the potential sale of
the Company's gold mining joint ventures to MPI, control of MPI following the
Company's exchange of its interest in gold mining joint ventures for additional
shares of MPI and other consideration, the Company's expectation that it will
exit the timber and natural gas businesses and the impact that the exit could
have on results of operations and cash flows, the anticipated decline of
administrative, legal and other expenses, net, associated with the former coal
operations, the possibility that the Venezuelan economy might be considered
highly inflationary again, the expectation that the Company will elect to make a
voluntary contribution to its primary U.S. pension plan trust during 2003,
expenditures in 2003 for aircraft heavy maintenance, anticipated capital
expenditures in 2003, possible contributions to the VEBA using a portion of the
proceeds from future asset sales and cash generated from operations, the
adequacy of sources of liquidity to meet the Company's near-term requirements,
the amount and timing of additional FBLET refunds, if any, potential losses
arising out of civil suits relating to the former coal business, sales of
residual assets of the former coal business and the assumption by purchasers of
various obligations associated with those assets, potential increases in royalty
obligations if obligations are not assumed as expected by purchasers of residual
coal assets, the timing of and liability for withdrawal from pension plans
associated with the exit from the coal business, the replacement of some of the
Company's surety bonds 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 and the impact of SFAS No. 149 on
the Company's results of operations and financial position, involve
forward-looking information which is subject to known and unknown risks,
uncertainties and contingencies with could cause actual results, performance or
achievements to differ materially from those which are anticipated.
Such risks, uncertainties and contingencies, many of which are beyond the
control of the Company, include, but are not limited to, the timing of the
pass-through of costs relating to the disposal of coal assets by third parties
and governmental authorities, actual retirement experience of coal employees,
black lung claims incidence, the number of dependents of coal employees for whom
benefits are provided, coal industry employee 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, the
ultimate amount of pension expense, performance of the investments held by the
pension plan trust, staffing decisions relating to the closure of Brink's
Connecticut office, decisions by Brink's employees in Connecticut with respect
to relocation, ongoing contractual obligations relating to the Connecticut
office, costs associated with transitioning the Connecticut workforce to Texas
and Virginia, government reforms and initiatives in South America, the ability
of Brink's management to effectively
24
address economic and other pressures in Europe, the costs associated with
Brink's European work force reductions, strategic decisions by Brink's
competitors with respect to their South American operations, the timing and
effect of SARS containment efforts and the impact of SARS on global economies,
reductions in the availability of cargo space on aircraft due to a decrease in
the number of flights resulting from SARS, the number of BHS customers who move
during the second and third quarters, changes in the economies of the U.S. and
Europe, the ability of BAX Global to pass airline surcharges on to its
customers, the size and timing of rate and cost increases, if any, 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 or its other shareholders that reduces the number of its outstanding
shares, the market for the Company's gold, timber and natural gas businesses and
the ability to negotiate and conclude sales of those operations on mutually
agreeable terms, the consideration received in any sale of the timber and
natural gas businesses, the timing of sales of the residual coal assets, the
ability of purchasers of those assets to assume various liabilities, the timing
and extent of coal mining by purchasers of residual coal assets, costs
associated with reducing the administrative functions supporting the former coal
operations, the willingness of lessors to consent to lease assignments, the mix
of investments held by the VEBA and the performance of those investments, the
Company's tax planning, the funding level of the Company's primary U.S. pension
plan trust, changes in strategy or the allocation of resources, the ability of
the Company to capitalize on tax advantages as a result of providing additional
funding to the VEBA, market performance, the Company's credit ratings, positions
taken by various governmental entities with respect to the claims for FBLET
refunds, discovery of new facts relating to the civil suits, the addition of
claims or changes in damages sought by the adverse parties, decisions by the
courts, whether interim or final, during the course of the suits, acceptance of
replacement bonds by governmental authorities, borrowing capacity under the
Company's U.S. credit facility, the sizing and timing of the Company's hedging
relationships, interpretations of SFAS No. 149 by third parties, overall
economic and business conditions, 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, including initiatives with respect to medicare coverage
of prescription drugs, judicial decisions, variations in costs or expenses and
the ability of counterparties to perform.
25
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits:
Exhibit
Number
3 (i) Articles of Amendment to the Registrant's Articles of
Incorporation, dated as of May 2, 2003.
(ii) The Registrant's Bylaws, as amended through May 2, 2003.
99 (i) Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
(i) Report on Form 8-K, filed on April 30, 2003, furnishing the
Registrant's earnings press release for the first quarter of 2003
pursuant to Item 12 of Form 8-K in accordance with SEC Release
Nos. 33-8216; 34-47583.
(ii) Report on Form 8-K, filed on May 5, 2003, announcing the change of
the Registrant's name to The Brink's Company.
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE BRINK'S COMPANY
May 12, 2003 By: /s/ Robert T. Ritter
--------------------------------------
Robert T. Ritter
(Vice President -
Chief Financial Officer)
27
CERTIFICATIONS
I, Michael T. Dan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Brink's
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/ Michael T. Dan
-----------------------
Michael T. Dan
Chief Executive Officer
28
CERTIFICATIONS (CONTINUED)
I, Robert T. Ritter, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Brink's
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/ Robert T. Ritter
-------------------------------------------
Robert T. Ritter
Vice President and Chief Financial Officer
29