MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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OPERATIONS
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The Brink's Company
Executive Overview
The Brink's Company (along with its subsidiaries, the "Company") has three
operating segments within its "Business and Security Services" businesses:
o Brink's, Incorporated ("Brink's") Brink's offers services globally
including armored car transportation,
automated teller machine ("ATM")
replenishment and servicing, currency
and deposit processing including its
"Cash Logistics" operations, 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.
o Brink's Home Security, Inc. ("BHS") BHS offers monitored security services
in North America primarily for owner-
occupied, single-family residences. To
a lesser extent, BHS offers security
services for commercial and
multi-family properties. BHS typically
installs and owns the on-site security
systems, and charges fees to monitor
and service the systems.
o BAX Global Inc. ("BAX Global") BAX Global provides freight
transportation and supply chain
management services on a global basis,
specializing in the heavy freight
market for business-to-business
shipping.
Management's approach to its three businesses is similar, with a focus on
service, its brands, risk management and a patient and disciplined approach to
its markets. Each business strives to be a premium provider of services in the
markets that it serves. The Company's marketing and sales efforts are enhanced
by its brands so it seeks to protect their value. Since the Company's services
focus on the handling, transportation, and protection of valuables, its
employees strive to understand and manage risk. Overlaying all of this is an
understanding that the Company's employees must be disciplined and patient
enough to charge fair prices which reflect the value provided, the risk assumed
and the need for an adequate return for the Company's investors.
22
The business environments in which the Company's business units operate around
the world are constantly changing. Management must continually adapt to changes
in the competitive landscapes, economies in different parts of the world and
even the individual customer's level of business. To be successful, management
must be able to balance requirements of local laws and regulations, risk, and
the effect of changing demand on the utilization of its resources. As a result,
the Company operates largely on a decentralized basis so local management can
adjust operations to its unique circumstances.
For the same reasons that the Company operates on a decentralized basis, short
term forecasts of performance are difficult to make with precision. As a result,
the Company does not provide detailed forecasts of earnings.
The Company measures its financial performance on a long-term basis. The key
financial factors on which it focuses are:
o Growth in revenues and earnings
o Generation of cash flow
o Building of value through solid returns on capital
These and similar measures are critical components of incentive compensation
programs and performance evaluations.
The Company also has significant liabilities associated with its former coal
operations. Since these liabilities are expected to generate ongoing expense and
require significant cash outflows, the Company considers liability management
and funding to be an important activity along with the management of its three
businesses.
Information about the Company's liabilities and assets related to its former
coal business is contained in a number of sections of this report, including:
o Retained Liabilities and Assets of Former Natural Resource Operations
o Application of Critical Accounting Policies
Disclosures in the first section show five-year projections for estimated
ongoing payments and expense associated with the retained obligations of its
former coal business and reconcile a Company-defined measure of its retained
obligations, "Legacy Value," to corresponding measures under U.S. generally
accepted accounting principles ("GAAP"). The second section discusses critical
estimates used and provides a sensitivity analysis for these estimates.
23
RESULTS OF OPERATIONS
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Overview of Results
Years Ended December 31, % change
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(In millions) 2004 2003 2002 2004 2003
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Income (loss) from:
Continuing operations $ 100.6 18.2 69.4 200+ (74)
Discontinued operations 20.9 11.2 (43.3) 87 NM
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Net income $ 121.5 29.4 26.1 200+ 13
==========================================================================================================
The income (loss) items in the above table are reported after tax.
Continuing Operations
2004
Income from continuing operations in 2004 was higher than in 2003 primarily due
to a $90.1 million increase in operating profit as a result of improvements in
each of the business segments. In addition, $23.6 million of lower expenses
related to former coal operations, and the return to a more normal effective tax
rate in 2004 contributed to the improved results. The 2003 tax rate was higher
due primarily to the recording of valuation allowances related to deferred tax
assets for certain state and foreign tax jurisdictions.
Partially offsetting the effect of improved performance in each of the
businesses was an $18.1 million increase in corporate expenses primarily due to
costs related to the internal controls documentation and testing work mandated
by section 404 of the Sarbanes-Oxley Act of 2002. Costs related to incentive
compensation were also higher in 2004 than in 2003. In addition, 2003 included a
one-time $10.4 million pretax gain on the sale of an equity interest in a
natural resource business.
2003
Income from continuing operations in 2003 was lower than 2002 primarily due to
the inclusion within continuing operations of $50.3 million of higher expenses
related to former coal operations in 2003 (recorded in discontinued operations
through 2002) and a higher effective tax rate in 2003 as noted above. In
addition, BAX Global's operating profit declined by $14.6 million from 2002 to
2003.
Business Segments
Brink's and BHS reported improved operating profit in both 2004 and 2003 over
prior-year periods. Although profitable in each of the last three years, BAX
Global's operating profit has been more volatile and more affected by economic
cycles as compared to operating profits at Brink's and BHS.
Brink's. Revenues and operating profit in both 2004 and 2003 improved from the
prior-year periods on higher international earnings as a result of improving
economies and higher volumes. The effects of the weaker U.S. dollar also
benefited revenues and earnings. Staff reductions in various European countries
in late 2002 and the first half of 2003 improved profitability in the last half
of 2003 and in 2004. Staffing levels prior to this were higher due to special
euro currency processing and transportation work performed in 2001 and early
2002. Operating profit in South America was also stronger in 2004 and 2003
compared to the weak 2002 which resulted from economic and political turmoil in
several South American countries and some industry consolidation that occurred
in 2004.
BHS. Strong growth in operating profit in 2004 (13%) and 2003 (17%) resulted
primarily from the subscriber growth over the last two years and improving
efficiency. The average number of subscribers increased 10% in 2004 over 2003
and 8% in 2003 over 2002.
24
BAX Global. Operating profit in 2004 was much higher than in 2003 as a result of
much stronger volume through BAX Global's lntra-American transportation network.
Operating profit in 2003 was below 2002 primarily as a result of lower shipments
through the Intra-America transportation network due to soft demand for air
freight services in 2002 and in the first nine months of 2003 as a result of
slow economic growth.
Former Natural Resource Operations
Expenses related to former coal operations were $23.6 million lower in 2004
compared to 2003 due to the recording of a benefit from enactment of the
Medicare reform bill in December 2003, the benefit from the recording of
projected investment income from the Company's Voluntary Employees' Beneficiary
Association ("VEBA") trust after the assignment of the VEBA to pay certain
retiree medical benefit obligations, and a reduction in coal-related
administration and other expenses.
With the exit from the coal business in late 2002, the Company in 2004 and 2003
reported coal-related expenses within continuing operations. Coal-related
expenses include expenses for employee benefits, administration and other
charges related to retained liabilities. These types of costs were recorded
within discontinued operations in 2002. These costs will continue to affect
results of continuing operations in the future.
In 2002, the Company recorded a $19.2 million pretax charge within continuing
operations related to impairment and other charges associated with coal
properties which were shut down and prepared for sale. Most of these properties
were sold in 2003.
In 2003, the Company recorded a $10.4 million pretax gain on the sale of shares
that it held in an Australian gold and nickel exploration and mining company.
Income Taxes
The Company's effective tax rate was 38% in 2004, 75% in 2003 and 37% in 2002.
The effective tax rate varied from statutory rates in these periods primarily
due to changes in valuation allowances for deferred tax assets. The Company
assesses its ability to realize deferred tax assets for subsidiaries which have
a recent history of losses. If the Company concludes that the probability of
realizing tax assets for a particular tax jurisdiction does not meet the
more-likely-than-not threshold, a valuation allowance is recorded as tax
expense. Once an operation is identified for valuation allowances, valuation
allowances will continue to be recorded on subsequent year's tax losses unless
the operation returns to sustainable profitability. Valuation allowance
adjustments of approximately $10 million were recorded in 2004, primarily
related to certain European operations. Valuation allowance adjustments, net, of
$28 million were recorded in 2003 for deferred tax assets primarily related to
two international operations and certain states.
There could be further valuation allowances required in the future. On the other
hand, if operations in affected jurisdictions return to profitability, the
Company may reverse all or a portion of the valuation allowances in future
years.
The effective tax rate in future periods will not include the potential benefit
of any losses for entities that have a valuation allowance unless the Company
Fconcludes it is more likely than not these benefits will be realized. The
Company currently estimates its effective tax rate for 2005 will approximate
40%. The actual tax rate could be materially different from the Company's
estimate.
Discontinued Operations
The Company sold or otherwise disposed of its natural resource businesses in the
last several years, the biggest being its former coal operations. The Company
recognized a significant loss on the sale of its coal business, although most of
the loss was recognized in 2000, a period not presented in this report. In
addition to the loss on sale, the Company has accrued significant liabilities
related to benefits for former coal employees. Revisions to estimated amounts
related to some of these liabilities, including those related to obligations
under the Coal Industry Retiree Health Benefit Ac of 1992 ("the Health Benefit
Act") obligations and multi-employer pension plan withdrawal liabilities, are
recorded in discontinued operations and were significant in each of the last
three years. In 2002, significant coal operating losses were also included in
discontinued operations.
25
Besides the coal operations, the Company's income (loss) from discontinued
operations includes gains and losses from the sale of the Company's other former
natural resource businesses and their operating results through the date of the
sale.
o Natural gas business - sold in August 2003 for a $56.2 million pretax
gain
o Timber business - sold a small portion in December 2003 and completed
the sale in early 2004 for a $25.5 million pretax gain ($4.8 million
recognized in 2003 and $20.7 million in 2004)
o Gold business - sold in early 2004 for a pretax loss of $0.9 million.
Pretax impairment losses were recognized in 2003 ($1.7 million) and
2002 ($5.7 million).
Value-added taxes and customs duties
One of the Company's non-U.S. Brink's, Incorporated business units has not paid
foreign customs duties and value-added taxes with respect to the importation of
certain goods and services. The Company has been advised that there could be
civil and criminal penalties asserted for the non-payment of these custom duties
and value-added taxes. The business unit has commenced discussions with the
appropriate governmental authorities in the affected jurisdiction regarding this
matter. To date no penalties have been asserted.
As a result of its investigation, the Company recorded charges in 2004 of $1.1
million to operating profit and $0.7 million to interest expense. A summary of
the impact of this situation on earnings is provided below.
Year Ended
(In millions) December 31, 2004
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Penalties on unpaid value-added taxes $ 0.4
Duties 0.7
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Amount charged to operating expenses 1.1
Interest expense on unpaid value-added taxes and customs duties 0.7
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$ 1.8
================================================================================
The Company evaluates many factors to determine whether it should recognize or
disclose a loss contingency, including the probability of an unfavorable outcome
and the ability to make a reasonable estimate of the amount of loss. The Company
believes that the range of probable penalties related to unpaid value-added
taxes is between $0.4 million and $3 million and that no amount within that
range is a better estimate than any other amount within the range. Accordingly,
the Company has accrued $0.4 million for these penalties.
The Company has concluded that a loss related to penalties on unpaid customs
duties is not probable. The Company believes that the range of reasonably
possible losses related to customs duties penalties is between $0 and
approximately $35 million. The Company believes that the assertion of these
penalties would be excessive and would vigorously defend against any such
assertion.
The Company intends to diligently pursue the timely resolution of this matter
and, accordingly, the Company's estimate of the potential losses could change
materially in future periods. The assertion of potential penalties may be
material to the Company's financial position and results of operations. These
penalties could be asserted at any time. Although the Company has accrued $0.7
million of interest on the unpaid value-added taxes and customs duties, the
Company does not expect to be assessed interest charges in connection with any
penalties that may be asserted.
The Company has implemented measures designed to prevent similar situations in
the future. The Company believes that the circumstances giving rise to this
matter are isolated to this particular business unit.
26
Consolidated Review
Revenues Operating Profit
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Years Ended December 31, % change Years Ended December 31, % change
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(In millions) 2004 2003 2002 2004 2003 2004 2003 2002 2004 2003
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Business Segments
Brink's $ 1,931.9 1,689.0 1,579.9 14 7 $ 144.7 112.5 96.1 29 17
BHS 345.6 310.4 282.4 11 10 80.8 71.2 60.9 13 17
BAX Global 2,440.6 1,999.2 1,871.5 22 7 56.2 3.0 17.6 200+ (83)
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Business segments 4,718.1 3,998.6 3,733.8 18 7 281.7 186.7 174.6 51 7
Corporate - - - - (45.9) (27.8) (23.1) 65 20
Gain on sale of equity
interest - - - - - 10.4 - (100) NM
Former coal operations - - - - (45.9) (69.5) (19.2) 34 (200+)
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$ 4,718.1 3,998.6 3,733.8 18 7 $ 189.9 99.8 132.3 90 (25)
==============================================================================================================
Revenues in 2004 were 18% higher than 2003 because of growth in all segments and
changes in currency exchange rates. Operating profit increased 90% in 2004 due
to improved operating performance by the Company's business segments,
particularly at BAX Global, and lower expenses related to former coal
operations. These improvements were partially offset by higher corporate
expenses and the nonrecurrence of the 2003 gain on the sale of an equity
investment.
Revenues in 2003 were 7% higher than 2002 because of growth in all business
segments and changes in currency exchange rates. Operating profit in 2003 was
25% lower than in the prior year primarily because the cost of retiree and other
benefits and other costs related to the former coal business were classified
within former coal operations in continuing operations. Prior to 2003, these
expenses were recorded within discontinued operations. Operating profit was
stronger at Brink's and BHS on growth in these businesses, offset by lower
profits at BAX Global primarily due to the effects of soft demand for air
freight services for most of 2003. Demand for air freight services began to
improve in the fourth quarter of 2003. This trend has continued through 2004.
For subsidiaries outside the U.S., U.S. dollar revenue growth rates include the
effect of changes in currency exchange rates. On occasion in this report, the
change in revenue versus the prior year has been disclosed using constant
exchange rates in order to provide information about growth rates without the
impacts of changing foreign currency exchange rates. Relative to most other
currencies relevant to the Company, the U.S. dollar weakened in 2004 and 2003
compared to the respective prior-year periods, so growth at constant-currency
exchange rates was lower than growth computed using actual currency exchange
rates. Changes in currency exchange rates did not materially affect
period-to-period comparisons of segment operating profit for the periods
presented herein.
27
Brink's, Incorporated
Executive Overview
Brink's provides multiple services related to cash and other valuables to the
financial community, retailers and other businesses. These services vary from
secure transportation and handling of valuable assets to currency and deposit
processing to the increasingly important preparation and transmittal of related
information.
The Company believes that Brink's has significant competitive advantages
including:
o Brand name and reputation for high quality service
o Broad geographic coverage
o Proprietary processing and information systems
o Financial strength and risk management capabilities.
Because of the emphasis on managing the risks inherent in handling valuables and
the high level of service provided, Brink's believes that it spends more than
its competitors on training and retaining its people and on the facilities and
processes needed to provide quality services to its customers.
As a result of its emphasis on high-quality services and risk management,
Brink's focuses its marketing and selling efforts on customers who appreciate
the value and breadth of the services delivered, the information capabilities
and the financial strength underlying the Brink's approach to the business.
In order to earn an adequate return on the capital employed in the business,
Brink's focuses on the effective and efficient use of its resources and the
adequacy of pricing. First, Brink's attempts to maximize the amount of business
which flows through its branches, vehicles and systems in order to obtain the
lowest costs possible without compromising safety, security or service. Due to
its higher costs of people and processes, Brink's generally charges higher
prices than its competitors which may not provide the same level of service and
risk management. The Company believes that Brink's operations are capable of
generating profit margins above 7% on an annual basis. This level is necessary
to earn a reliable return on its cost of capital.
The industries to which Brink's provides services have been consolidating. As a
result, the strength of the customers in these industries has been increasing.
Customers are seeking suppliers with broader geographic solutions, more
sophisticated outsourcing capabilities and financial strength.
Operationally, Brink's performance may vary from period to period. Since
revenues are generated from charges per service performed as well as on an ad
valorem basis, revenues can be affected by the level of activity in an economy
and the level of business for specific customers. In addition, contracts
generally run for one or more years and there are costs which must be incurred
to prepare to service a new customer or to transition away from one. Further,
Brink's level of operation and related revenues are generally higher in the
second half of the year, and in particular in the fourth quarter, because of the
generally higher economic activity then. As a result, margins are typically
lower in the first half of the year than in the second half.
28
Years Ended December 31, % change
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(In millions) 2004 2003 2002 2004 2003
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Revenues
North America (a) $ 733.7 716.2 694.9 2 3
International 1,198.2 972.8 885.0 23 10
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$ 1,931.9 1,689.0 1,579.9 14 7
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Operating Profit
North America (a) $ 55.2 53.4 52.2 3 2
International 89.5 59.1 43.9 51 35
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$ 144.7 112.5 96.1 29 17
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Cash Flow Information
Depreciation and amortization $ 81.0 70.6 61.3 15 15
Capital expenditures 76.2 80.9 79.3 (6) 2
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(a) U.S. and Canada.
2004
Overview
Revenues and operating profit in 2004 increased modestly in North America and
more significantly in the International region compared to 2003.
Internationally, improvements occurred in both Europe and South America.
European operating profit in 2004 improved because of higher local currency
revenues as a result of improved economic performance and also as a result of
operational changes made last year. European operating profit in the first half
of 2003 reflected reduced volumes of business due to the effects of generally
slow economies and the buildup to the conflict in the Middle East along with
approximately $4.7 million in severance costs. Operating profit in South America
in the first half of 2003 was depressed due to poor economic and political
conditions. In 2004, operating performance benefited from improved conditions.
International operating profit in 2004 included approximately $3.1 million of
operating expenses related to adjustments to non-income tax accruals, including
$1.1 million of operating expenses related to unpaid value-added taxes and
customs duties. The Company anticipates an increase in expenses related to
safety and security costs in 2005.
North America
Revenue increased in North American operations in 2004 primarily due to
increased revenues from Global Services and Canadian armored transportation and
ATM services, offset by lower U.S. armored transportation and ATM revenue.
Operating profit increased in 2004 primarily due to improved performance in coin
wrapping services, cash logistics services, and Canadian armored transportation
operations, partially offset by a lower contribution from the U.S. armored car
transportation operations. In 2003, a $5.5 million gain on the sale of operating
assets was largely offset by severance and other costs related to the transfer
of its headquarters operation from Connecticut to Richmond, Virginia and Dallas,
Texas. Defined benefit plan costs will increase in 2005 over 2004.
International
Revenues in 2004 increased 23% over 2003 (16% on a constant currency basis). The
increase in International revenues and operating profit was primarily due to
better performance in South America and Europe.
29
Europe. Revenues increased 26% in 2004 (15% on a constant currency basis) due to
increased volumes in armored transportation, ATM servicing, currency processing
and Global Services operations. Operating profit improved due to higher volumes
as a result of improved business conditions and competitor difficulties,
particularly in France, and the impact of an acquisition of security operations
in Greece and the recently held Olympic Games. Revenues in 2003, particularly in
the first quarter, were adversely affected by a generally weak economy and
uncertainty related to the then-impending conflict in the Middle East. In
addition, European operating results began to improve in the last half of 2003
partially as a result of management changes and workforce reductions made to
align resources to business needs.
South America. South American revenues and operating profits in 2004 improved
due to better operating performance throughout the region and particularly in
Venezuela. This improved operating performance was primarily due to higher
volumes of armored transportation business, which was driven in part by the exit
of competitors from the market. Improved operating performance in Brazil was the
result of increased volumes as well as the benefit of cost reductions taken in
late 2003. However, the operating environment in Brazil remains highly
competitive.
Asia-Pacific. Asia-Pacific revenues and operating profits in 2004 were above the
prior year reflecting improved results, particularly in Australia and Hong Kong.
Other. As discussed in "Value-added taxes and customs duties" above and in note
23 to the consolidated financial statements, the Company recorded operating
expense of approximately $1.1 million in 2004 related to unpaid value-added
taxes and customs duties, including an estimate of the penalties. At any time,
the Company could be assessed penalties materially in excess of those accrued.
International operating profit in 2004 also included $2.0 million of higher
expense as a result of unfavorable determinations in Brazil and Mexico related
to non-income tax issues.
2003
Overview
Improved revenues and operating profit in 2003 over 2002 reflected much better
results in the International region. International operating profit increased
over 2002, despite the higher profit levels achieved in the first quarter of
2002 associated with special euro currency processing and transportation work.
Most of the improvement in the International region occurred in South America
where performance was weak in 2002.
North America
North American operating profit was 2% higher in 2003 over the prior year on a
3% increase in revenues (2% increase in revenues on a constant currency basis).
The slightly higher operating profit in North America was primarily due to
improved performance in the Cash Logistics operations and Global Services,
mostly offset by higher employee benefit expenses. A $5.5 million gain on the
sale of operating assets was largely offset by severance and other costs.
In 2003, management closed its Brink's corporate headquarters in Darien,
Connecticut and relocated employees to either Brink's U.S. headquarters in
Coppell, Texas, or to The Brink's Company headquarters in Richmond, Virginia. As
a result, approximately $5.4 million of severance and other costs were incurred
in the U.S. during 2003.
An increase in employee benefit costs in 2003 included $4.8 million higher
expense from the Company's primary U.S. pension plan and higher health care
costs for active employees.
30
International
International operating profit for 2003 was 35% higher than 2002 on a 10%
increase in revenues (3% increase in revenues on a constant currency basis).
Improvements in revenues and operating profit on a constant currency basis in
South America and Asia-Pacific were offset by lower European revenues and
operating profit, as discussed below.
Europe. European revenues and operating profit in the first quarter of 2002
benefited from the currency processing and transportation work associated with
the introduction of the euro on January 1, 2002. However, the cost of staffing
levels, which remained high after the euro work was completed, negatively
affected the last nine months of 2002 and, to a lesser degree, the first half of
2003.
Europe's revenues and operating profit in 2003 were below the prior year on a
constant currency basis primarily because of the absence of the euro work
performed in the first quarter of 2002. There was also approximately $4.7
million of higher severance expense associated with workforce reductions.
Revenues on a constant currency basis were higher in the second half of 2003
compared to the same 2002 period due to better performance and, to a lesser
extent, due to additional revenues associated with a first-quarter 2003
acquisition in Belgium. Operating profit in the second half of 2003 also
improved compared to the same period in 2002 reflecting improvements in a number
of countries, and the benefits of management and operational changes,
particularly in France.
South America. In South America, operating profit in 2003 was higher than the
prior year reflecting better performance in Venezuela, partially offset by lower
operating performance in Brazil. Favorable market conditions and lower labor
costs as a percentage of revenue benefited Venezuela's performance in 2003.
Venezuela is Brink's largest operation in South America. Brazil, Brink's second
largest operation in South America, did not perform as well in 2003 compared to
2002 as a result of the continuing difficult economic and operating conditions
there. Brazil's operating results improved in the fourth quarter of 2003 over
the same period a year earlier primarily due to improved profitability of ATM
and Cash Logistics services, partially offset by lower armored transportation
profitability.
Asia-Pacific. Asia-Pacific revenues and operating profit in 2003 was higher than
last year primarily due to improved results in Australia. In addition, Global
Services business improved in Hong Kong and Korea.
31
Brink's Home Security
Executive Overview
Brink's Home Security has reported strong growth in revenues and earnings over
the last few years. Key factors in this performance are continuing to attract
and retain customers through quality service and the reputation of the brand
while operating as efficiently as possible consistent with the desired level of
service.
In order to achieve higher efficiency and effectiveness, BHS focuses on
controlling initial marketing and installation costs by matching sales
representative staffing with the number of sales opportunities and the size of
the technician workforce with the available installation volume. BHS then
strives to keep customer service and monitoring costs as low as possible without
disturbing its high quality service levels.
The Company believes customer retention is driven by customer selection and high
customer service levels. In order to obtain customers who are less likely to
disconnect, the Company seeks to attract customers with solid credit scores and
the willingness to pay reasonable up-front fees. Once there is agreement to
install an alarm system, the Company strives to provide a high quality
installation followed up with continuing high quality customer service and alarm
monitoring. BHS believes its disconnect rate is helped by consistently following
the above policy.
The Company believes that the level of economic activity in the U.S. may affect
the performance of BHS. However, this effect is not as significant as it is for
industries with close ties to economic performance. In addition, there is some
seasonality in performance since disconnect expenses can impact operating
earnings. Since more household moves take place during the second and third
quarters of each year, the disconnect rate and related expenses are typically
higher in those quarters than in the first and fourth quarters.
Years Ended December 31, % change
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(In millions) 2004 2003 2002 2004 2003
- -----------------------------------------------------------------------------------------------------------
Revenues $ 345.6 310.4 282.4 11 10
===========================================================================================================
Operating Profit
Recurring services (a) 147.8 125.9 109.5 17 15
Investment in new subscribers (b) (67.0) (54.7) (48.6) (22) (13)
- -----------------------------------------------------------------------------------------------------------
$ 80.8 71.2 60.9 13 17
===========================================================================================================
Monthly recurring revenues (c) $ 26.1 23.3 21.1 12 10
===========================================================================================================
Cash Flow Information
Depreciation and amortization (d) $ 51.5 47.9 43.9 8 9
Impairment charges from subscriber
disconnects 38.4 34.3 32.3 12 6
Amortization of deferred revenue (e) (26.1) (25.0) (23.9) 4 5
Deferred subscriber acquisition costs
(current year payments) (19.5) (18.4) (17.7) 6 4
Deferred revenue from new subscribers
(current year receipts) 34.6 28.2 27.1 23 4
Capital expenditures 117.6 98.0 86.9 20 13
===========================================================================================================
(a) Reflects operating profit generated from the existing subscriber base
including the amortization of deferred revenues.
(b) Primarily marketing and selling expenses, net of the deferral of direct
selling expenses (primarily a portion of sales commissions), incurred in
the acquisition of new subscribers.
(c) This measure is reconciled below under the caption "Reconciliation of
Non-GAAP Measures."
(d) Includes amortization of deferred subscriber acquisition costs.
(e) Includes amortization of deferred revenue related to active subscriber
accounts as well as acceleration of amortization of deferred revenue
related to subscriber disconnects.
32
Overview
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, including the
amortization of deferred revenues. Impairment charges from subscriber
disconnects and depreciation and amortization expenses, including the
amortization of previously deferred direct costs from installations, are also
charged to recurring services. Recurring services is affected by the size of the
subscriber base, the amount of operational costs including depreciation, the
level of subscriber disconnect activity and changes in the average monitoring
fee per subscriber.
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 the investment in new subscribers 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.
Capital expenditures are primarily the equipment, labor and related overhead
costs associated with system installations for new subscribers.
Subscriber Activity
Years Ended December 31, % change
- ------------------------------------------------------------------------------------------
(Subscriber data in thousands) 2004 2003 2002 2004 2003
- ------------------------------------------------------------------------------------------
Number of subscribers:
Beginning of period 833.5 766.7 713.5
Installations 146.0 121.9 105.8 20 15
Disconnects (58.1) (55.1) (52.6) (5) (5)
- ------------------------------------------------------------------------------------------
End of period 921.4 833.5 766.7 11 9
==========================================================================================
Average number of subscribers 875.5 797.5 739.0 10 8
Disconnect rate (a) 6.6% 6.9% 7.1%
==========================================================================================
(a) The disconnect rate is a ratio, the numerator of which is the gross number
of customer cancellations during the period and the denominator of which is
the average number of customer subscribers for the period. The gross number
of customer cancellations is reduced for customers who cancel service at one
location but continue service at a new location, customer accounts acquired
from dealers that cancel during a specified contractual term that allows the
account to be charged back to the dealers, and inactive sites that return to
active service during the period.
Installations increased 20% for 2004 and 15% for 2003 as compared to the
prior-year periods primarily as a result of growth in Company-owned branches as
well as the growing dealer network. BHS believes its 2004 and 2003 disconnect
rates improved over the respective prior-year periods largely due to the
cumulative effect of having improved its subscriber selection and retention
processes in recent years and its high quality customer service. Since a certain
number of disconnects cannot be prevented, including, for example, disconnects
that occur because customers move, the disconnect rate may not materially
improve in the future.
2004
Revenues increased 11% in 2004 primarily due to a 10% larger average subscriber
base, as well as higher average monitoring rates, higher revenues from home
builders and higher service revenues. The slight increase in average monitoring
rates was primarily due to new customers initiating service at higher average
monitoring rates than the average rates being paid by existing customers. These
factors also contributed to a 12% increase in monthly recurring revenues as
measured at year end.
Operating profit for 2004 increased 13% as higher profit from recurring services
was partially offset by an increased investment in new subscribers. Higher
profit from recurring services was primarily due to increased monitoring and
service revenues resulting from a larger average subscriber base and to a lesser
extent from improved service margins. These increases were partially offset by
increased depreciation and other costs associated with the larger subscriber
base. Investment in new subscribers increased 22% on 20% higher installations
during 2004, reflecting an investment in additional sales and branch
infrastructure to support expansion of installation services offered across most
lines of business, partially offset by more cost-effective marketing efforts.
33
BHS intends to expand its presence in commercial alarm installation and
monitoring. As a result, the investment in new subscribers may continue to grow
faster than installations as BHS develops the resources needed to achieve its
objectives. BHS intends to add a second monitoring center which may slow the
growth in profit from recurring services in the near term. Both of these
initiatives are expected to have a positive impact on future growth and
productivity.
2003
The increase in BHS's revenues for 2003 versus 2002 was primarily due to an 8%
larger average subscriber base, as well as a higher average monitoring rate,
higher revenue from home builders and higher service revenues. The slight
increase in average monitoring rates was primarily due to higher average
monitoring rates for new customers initiating service compared to the average
rate being paid by existing customers. The above factors also contributed to a
10% increase in monthly recurring revenues as measured at year end.
Operating profit increased 17% in 2003 from 2002 as higher profit from recurring
services was partially offset by an increased investment in new subscribers.
Higher profit from recurring services was primarily due to increased monitoring
revenues from the larger average subscriber base as well as improved service
margins, partially offset by higher depreciation and other costs associated with
the larger subscriber base. Investment in new subscribers increased 13% on 15%
higher installations during 2003 reflecting more effective marketing and
installation efforts partially offset by an investment in additional sales
infrastructure to support expansion of installation services offered to home
builders.
Other
Police departments in several U.S. cities are not required to respond to calls
from alarm companies unless an emergency has been visually verified. If more
police departments in the future refuse to automatically respond to calls from
alarm companies without visual verification, this could have an adverse effect
on future results of operations for BHS. In cities that have stopped providing
police response to burglar alarms, BHS has offered its customers the option of
receiving private guard response from guard companies who in most cases have
contracted with BHS.
Reconciliation of Non-GAAP Measures - Monthly Recurring Revenues
The purpose of this table is to reconcile monthly recurring revenues, a non-GAAP
measure, to its closest GAAP counterpart, BHS' total revenues.
Years Ended December 31,
(In millions) 2004 2003 2002
- -------------------------------------------------------------------------------
Monthly recurring revenues ("MRR") (a) $ 26.1 23.3 21.1
Amounts excluded from MRR:
Amortization of deferred revenue 2.1 2.0 2.0
Other revenues (b) 1.8 2.4 1.2
- -------------------------------------------------------------------------------
Revenues on a GAAP basis:
December 30.0 27.7 24.3
January - November 315.6 282.7 258.1
- -------------------------------------------------------------------------------
January - December $ 345.6 310.4 282.4
===============================================================================
(a) MRR is 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 contracted monitoring and maintenance services.
(b) 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 from subscriber fees that a security business produces.
34
BAX Global
Executive Overview
BAX Global helps its customers move heavy weight freight and provides supply
chain management services. BAX Global's business model is different in the U.S.
than in the other countries in which it operates.
In the U.S., BAX Global operates as both an integrator and a freight
forwarder/supply chain management ("SCM") provider. As an integrator, BAX Global
operates its own network of planes and trucks with a freight sorting hub. This
network permits the Company to offer to its customers a full range of reliable
services ranging from expedited to deferred deliveries. Accordingly, management
focuses on the resources needed to ensure that the BAX Global network maintains
reliable service levels. The hub and planes commit BAX Global to a higher level
of fixed costs and capital than freight forwarders, making volume throughput and
pricing important to financial performance.
Freight forwarders and supply chain management companies arrange to use the
assets of others while providing services similar to those provided by
integrators. As a result, their level of fixed costs and capital employed are
usually lower than for integrators. However, since they do not control the
resources used, it is more difficult for freight forwarders to meet all
customers' needs with the same reliability as an integrator.
Since 1999, BAX Global has significantly reduced the resources employed in the
U.S. as an integrator by focusing only on areas where it expects to match
customer needs. At the same time, it has expanded its offering of less capital
intensive freight forwarding and SCM. Because this should make financial
performance in the U.S. less subject to fluctuation solely on the basis of
volume throughput, management expects to continue to expand its freight
forwarding and SCM operations.
In its non-U.S. operations, BAX Global functions as a SCM/freight forwarder.
Management believes its operations in Asia perform well and are well positioned
for growth there. In particular, BAX Global is focused on expanding its already
significant presence in China. Operations in Europe have not performed as well
so management is focused on growing revenue with acceptable margins and reducing
resources where they may not match up with customers' needs.
Performance at BAX Global has been and will continue to be affected by the
economy. Absent changes in market share, BAX Global will perform better in a
growing economy. In addition, the velocity of shipments and manufacturing will
affect the ability of shippers to choose deferred versus expedited freight. The
higher the velocity of an economy, usually the more expedited, higher-margined
freight is used. BAX Global's performance will also be affected by the relative
performance of the customers and industries it focuses its resources upon.
35
There is also a seasonal factor in BAX Global's performance. In a normal year,
demand for BAX Global's services is highest in the third and fourth quarters of
the year and weakest in the first and second quarters. Of course, trends in the
economy can impact normal seasonality.
Years Ended December 31, % change
- -----------------------------------------------------------------------------------------------------
(In millions) 2004 2003 2002 2004 2003
- -----------------------------------------------------------------------------------------------------
Revenues
Americas (a) $ 1,161.8 976.0 989.9 19 (1)
International (b) 1,366.6 1,098.3 951.7 24 15
Eliminations (87.8) (75.1) (70.1) (17) (7)
- -----------------------------------------------------------------------------------------------------
$ 2,440.6 1,999.2 1,871.5 22 7
=====================================================================================================
Operating Profit (Loss)
Americas (a) $ 22.6 (30.9) (15.1) NM (105)
International (b) 49.5 41.2 43.8 20 (6)
Corporate and other (15.9) (7.3) (11.1) (118) 34
- -----------------------------------------------------------------------------------------------------
$ 56.2 3.0 17.6 200+ (83)
=====================================================================================================
Cash Flow Information
Depreciation and amortization $ 41.8 47.0 44.4 (11) 6
Capital expenditures 25.4 23.6 27.1 8 (13)
=====================================================================================================
Operating Statistics
Intra-America revenue $ 554.5 464.6 468.6 19 (1)
Worldwide expedited freight services:
Revenues $ 1,847.4 1,501.0 1,452.4 23 3
Weight in pounds 1,805.3 1,568.0 1,530.3 15 2
=====================================================================================================
(a) U.S., Mexico, Latin America and Canada.
(b) Europe-Middle East-Africa ("EMEA") and Asia-Pacific.
Profits are shared among the origin and destination subsidiaries on most export
volumes. Performance in BAX Global's U.S. business, the region with the largest
domestic and export volume, significantly affects the results of worldwide
expedited freight services. Eliminations revenues primarily reflect intercompany
revenue eliminations on shared services.
BAX Global's revenues and operating profits are affected by the seasonal nature
of customers' businesses. BAX Global generally recognizes more revenue and
operating profit in the last half of the year compared to the first half. The
relative strength of the worldwide economies may have a larger effect on BAX
Global's results as compared to seasonal forces.
36
BAX Global operates throughout most of the world. Revenues in all regions
include both expedited and nonexpedited freight services.
BAX Global's Products
- ---------------------
Region offered
Heavy Freight Services: --------------
Expedited
---------
o Overnight delivery Worldwide
o Second-day delivery Worldwide
o Wholesale freight forwarding Americas
o Air import and export delivery Worldwide
Nonexpedited
------------
o BAXSaver Suite of deferred delivery products
(various deferred delivery terms) Americas
o Customs brokerage services Worldwide
o Aircraft charter services Worldwide
o Ocean delivery Worldwide
Supply Chain Management Services Worldwide
2004
Overview
Operating profit in 2004 was $53.2 million above last year on a 22% increase in
revenues (19% increase in revenues on a constant currency basis). Revenue was
significantly higher in the Americas, higher in Asia, and higher in Europe,
where it would have been slightly lower except for the effect of currency
changes. Operating profit increased as a result of higher volumes in the
Intra-America network. Volumes and revenue were higher in the Intra-America
network because of the effects of a strengthening U.S. economy and increased air
export volumes. Freight forwarding and supply chain management activity grew in
Asia-Pacific due to the strong economy there.
Americas
Americas revenues increased 19% in 2004 as compared to 2003 as the strengthening
economy led to higher volumes across the board. Revenues in the United States
were up about 19% due to the higher volume of both domestic and export freight.
The rest of the Americas benefited similarly. In addition, flying under contract
for the U.S. government and other charter activity for both the government and
commercial customers grew at a similar pace.
Operating profit in the Americas was over $53 million higher in 2004 as compared
to 2003. Performance was up largely as the result of the impact on resource
utilization and yields of the increase in volume. Operating profit in the
Americas for 2004 includes a $5.0 million impairment charge to cover the
abandonment of capitalized transportation logistics software.
The impact of higher market fuel costs in 2004 was not significant to the
performance of BAX Global primarily as a result of the Company's ability to pass
through a portion of higher fuel costs to customers through fuel surcharge
adjustments to billings. The fuel surcharge represents approximately 6.5% of
revenues in the Americas region for 2004. The Company is relying less on
financial derivatives to hedge fuel costs because fuel surcharges are widely
accepted within the industry and are reasonably effective at hedging increases
in fuel prices.
International
In 2004, International revenues increased 24% and operating profit increased 20%
as compared to 2003. On a constant currency basis, revenues were 19% higher than
2003, with a 30% increase in Asia-Pacific and a 1% decrease in Europe, Middle
East and Africa ("EMEA"). The increase in Asia-Pacific was primarily due to
improved economic conditions and new business in several Asia-Pacific countries,
primarily associated with the high technology industry. In the EMEA region, the
increase in operating profit for 2004 as compared to 2003 was the result of
improved air exports volumes.
37
BAX Global Corporate and Other
The increase in BAX Global's corporate and other expense in 2004 as compared to
2003 was primarily due to higher incentive-based compensation expense and
foreign currency translation losses.
2003
Overview
Operating profit in 2003 was $14.6 million below 2002 despite a 7% increase in
revenues (3% increase in revenues on a constant currency basis). Revenue was
lower in the Americas, higher in Asia, and higher in Europe, where it would have
been lower except for the effect of currency changes. Operating profit was lower
as a result of lower volumes in the Intra-America network. Volumes and revenue
were lower in the Intra-America network because of the effects of a weak U.S.
economy and a shift from expedited to deferred products. Partially offsetting
this were the effects on revenue and earnings of increased air export volumes
and supply chain management activity in Asia-Pacific.
Americas
BAX Global's 2003 operating loss in the Americas region was $15.8 million higher
than 2002 on a 1% decrease in revenues. A decrease in operating profit due to
lower Intra-America volumes of higher-yielding overnight and second-day
products, more than offset an increase in operating profit due to higher volumes
for deferred products and volumes related to BAX Global's new wholesale freight
forwarding product. Although volumes, in total, were lower in 2003 compared to
2002, volumes in the fourth quarter of 2003 were above the prior-year quarter.
U.S. air export revenues reflect the benefit of being able to pass through to
customers a portion of the surcharges charged by airlines for high fuel costs,
security and other reasons. U.S. air export volumes were slightly higher in 2003
over 2002, while revenue per pound, excluding surcharges, declined in 2003 as
compared to 2002. Growth in the U.S. supply chain management business increased
revenues by $14.4 million in 2003 as compared to 2002 due to the addition of new
customers as well as increased activity with existing customers. Revenues and
operating results in 2003 were adversely affected by lower third-party aircraft
charter activity compared to the prior year period.
The 2003 operating loss in the Americas includes higher expense from the
Company's primary U.S. pension plan as well as higher health care costs in the
2003 periods. Heavy maintenance expense was $9.3 million lower in 2003 compared
to 2002 primarily due to a reduction in flight hours as a result of a decrease
in third-party aircraft charter activity. Adjustments made in the first half of
2003 in conjunction with the renegotiation of certain return provisions of its
aircraft lease agreements and the completion of a study of the lease agreements
also reduced heavy maintenance expense.
International
International operating profits decreased 6% in 2003 compared to 2002 on a 15%
increase in revenues (7% increase in revenues on a constant currency basis). A
decrease in operating profits in the EMEA region was partially offset by
improved profits in Asia-Pacific. Reduced demand and competitive market
pressures in the EMEA region continued due to the combined effect of the
strengthening currencies and the weak European economy resulting in lower export
volumes and flat import volumes compared with 2002. Revenues and operating
profit for 2003 benefited from an increase in air export volumes within the
Asia-Pacific region and from Asia-Pacific to the U.S. In addition,
Asia-Pacific's results benefited from growth in supply chain management
operations, including the effects of an expansion of operations in China during
2003, as well as increased activity from existing customers.
BAX Global Corporate and Other
BAX Global's corporate and other expense decreased $3.8 million in 2003 versus
the prior-year period due to foreign currency exchange transaction gains and
lower administrative costs.
38
Corporate Expense - The Brink's Company
Years Ended December 31, % change
- ------------------------------------------------------------------------------
(In millions) 2004 2003 2002 2004 2003
- ------------------------------------------------------------------------------
Corporate expense $ 45.9 27.8 23.1 65 20
==============================================================================
Corporate expenses were $18.1 million higher in 2004 primarily as a result of
approximately $9 million higher professional fees related to the Company's
documentation and testing of its internal controls as required by Section 404 of
the Sarbanes-Oxley Act of 2002, and due to approximately $4 million higher long
term incentive-based compensation expense. The Section 404 costs are expected to
be lower in 2005 compared to 2004. The increase in corporate expense in 2003
primarily reflected increases in benefit-related expenses as well as additional
costs related to the implementation of Section 404.
Retained Liabilities and Assets of Former Natural Resource Operations
Executive Overview
The Company retains obligations which arose during its long history of operating
within the coal industry. Since these obligations require significant annual
cash outflows and the recording of significant annual expenses, management
believes it is important to closely monitor and manage these obligations and
address the related financial effects.
Of the various obligations, several have shorter terms and lesser values
(reclamation, advance minimum royalties, workers' compensation and the
multi-employer pension plan withdrawal liability). The Company expects the cash
payments for these to be concentrated over the next few years and then end or
decline significantly.
The other three obligations (retiree medical benefit plan, Health Benefit Act
and Black Lung) are longer in term and higher in estimated cost. Payments
associated with each liability are projected to be made over the next 60 years
or more. Each liability is largely medical benefits-related, so medical
inflation is an important consideration. Each obligation covers a pool of
individuals which is essentially capped since the Company no longer operates
within the coal industry. Further, such individuals are, for the most part,
above or near normal retirement age. Accordingly, these obligations should see a
steady decrease in number of participants and beneficiaries over time. The only
exception to this is the potential exposure to an increased share of the
unassigned obligation under the Health Benefit Act.
The net present value of these obligations is a valuable tool for assessing
their fair value as of a point in time. However, such values will fluctuate over
time solely due to changes in market interest rates. The critical factor in each
obligation is the cash flow needed to satisfy it.
The Company employs a team of employees, along with third parties, to monitor
and control these liabilities with a primary goal of reducing future cash
out-flows. The primary activities of this group are to verify eligibility of
participants, design and implement plans which provide the required benefit at
the lowest cost and verify costs charged to these plans.
The Company has also taken the step of establishing a VEBA in order to help
manage the financial impact of the obligations. The VEBA is used as a tax
efficient way to fund the obligations related to the retiree medical benefit
plan. A second VEBA could be set up to help fund the Health Benefit Act
obligations. A funded VEBA or VEBAs will help insulate the Company's assets, and
eventually its cash flow, from the obligations. The Company currently plans to
fund the VEBA over time to a range of $300 to $400 million.
Legacy Liabilities and Assets
The Company refers to its various long-term liabilities and assets related to
the former coal operations as its "legacy" liabilities and assets. Some of the
Company's legacy liabilities and assets are not fully recorded on the balance
sheet because certain losses have been deferred in accordance with GAAP. In
addition under GAAP, some of these liabilities are discounted to reflect a
present value, while others are not discounted.
39
To facilitate an understanding of the total estimated present value of these
liabilities and assets as of December 31, 2004, the following table presents a
Company-defined amount, a "Legacy Value," for the Company's legacy liabilities
and assets. Some of the Legacy Values are considered non-GAAP measures because
they exclude GAAP deferred loss adjustments, or reflect discounts to a present
value for liabilities with extended payment dates that are not recorded at
present value under GAAP. The table reconciles each non-GAAP Legacy Value to its
GAAP counterpart.
The liabilities and assets in the table are based on a variety of estimates,
including actuarial assumptions, as are described in the Application of Critical
Accounting Policies and in the notes to the consolidated financial statements.
These estimated liabilities and assets will change in the future to reflect
payments made, investment returns, annual actuarial revaluations, periodic
revaluations of reclamation liabilities and other changes in estimates. Actual
amounts could differ materially from the estimated amounts.
December 31, 2004
Add Back Amounts Not
Legacy Present-Value Yet Recognized GAAP
(In millions) Value Effect Under GAAP Amount
- ------------------------------------------------------------------------------------------------------------------------
Legacy liabilities:
Company-sponsored retiree medical (a):
Before Medicare subsidy and VEBA $ 676.5 - (375.6) 300.9
Medicare subsidy value (58.8) - 53.0 (5.8)
VEBA (172.4) - 8.0 (164.4)
- ------------------------------------------------------------------------------------------------------------------------
Company-sponsored retiree medical 445.3 - (314.6) 130.7
Health Benefit Act (b) 104.1 81.4 - 185.5
Black lung (c) 55.2 - (13.7) 41.5
Multi-employer pension plans withdrawal liability (d) 36.6 - - 36.6
Workers' compensation 30.2 - - 30.2
Advance minimum royalties 13.0 - - 13.0
Reclamation 4.6 - - 4.6
- ------------------------------------------------------------------------------------------------------------------------
Legacy liabilities $ 689.0 81.4 (328.3) 442.1
========================================================================================================================
Legacy assets:
Other assets (e) $ 15.5 - - 15.5
Deferred tax assets (f) 261.7 28.5 (133.4) 156.8
========================================================================================================================
(a) Company-sponsored retiree medical liabilities are accounted for in
accordance with Statements of Financial Accounting Standards ("SFAS") No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." SFAS No. 106 requires a liability be recorded for the present
value of future obligations; however, under the provisions of SFAS No. 106,
actuarial gains and losses are deferred. Actuarial gains and losses occur
when actual events differ from assumptions (for example, when the actual
health care inflation rate differs from the assumed inflation rate or when
the actual return on investments is different than the estimated return) or
when changes are made to assumptions used to estimate the liability,
including the discount rate used to compute the present value (5.75% at
December 31, 2004), expected health care inflation rates, expected life
expectancy rates, asset returns and the effect of the Medicare subsidy.
Actuarial gains and losses are not immediately recognized in earnings
because SFAS No. 106 allows 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 greater of the
accumulated postretirement benefit obligation or plan assets as of the
beginning of the year. 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 deferral of
unrecognized gains and losses as "funded status" in note 4 to the
consolidated financial statements.
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law. The Act provides
for the payment of subsidies to sponsors of retiree medical benefit plans
for a portion of the pharmaceutical expenses as long as the plan meets
certain regulations. The $58.8 million Legacy Value in the table above
reflects an estimate of the current value of such payments over the life of
the plan.
In January 2004, the Company designated the VEBA to pay future benefits of
the Company-sponsored medical plans. Accordingly, it is now accounted for
as a reduction to the liability value of such plans.
40
(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. 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 gradually decline over time as the beneficiary population
declines, and the Company expects payments will be made over the next 60 to
70 years. To determine the Legacy Value of these assets, the Company's
actuaries discounted the estimated future cash flows to a present value
amount using a discount rate of 5.75%. The Company's estimates of annual
payments may change materially due to changes in future assumptions.
Changes to the 1992 law under which benefits are paid also could materially
affect the Company's estimate of its liability. 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.
(c) Actuarial gains and losses resulting from changes in estimates of the
Company's black lung obligations 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 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 $55.2 million of present value of self-insured black lung
benefit obligations at December 31, 2004, approximately $41.5 million had
been recognized on the balance sheet, with the difference relating to
deferred unrecognized actuarial losses. See note 4 to the consolidated
financial statements for further information.
(d) The Company participates in two coal-related multi-employer pension plans
and believes that it is likely that a withdrawal will occur during the plan
year ending June 30, 2005. A withdrawal would require the Company to pay
its pro rata share of the underfunded position of the plans as of June 30,
2004. The payments to settle these obligations may be made in 2005, and the
estimated amounts have been classified as a current liability.
(e) "Other Assets" in the table is primarily a receivable from the state of
Virginia related to tax benefits earned because of coal produced in prior
years. The Company expects to receive approximately $5 million in each of
2005 and 2006; $3 million in 2007 and $1 million in each of 2008 and 2009.
(f) The Company has not yet taken deductions in its tax returns for most of
the retained liabilities associated with the former coal business, and has
recorded a deferred tax asset for this future benefit for these temporary
differences in book and tax bases. The Company's deferred tax benefit on a
Legacy Value basis is different from its GAAP counterpart because the
Company's temporary differences were based on the Legacy Values of the
various coal-related liabilities and assets. In other words, if the Company
had recorded the higher net Legacy Value of the liabilities on its balance
sheet, it would have also recognized a larger deferred tax asset. The
$133.4 million reconciling item represents the additional hypothetical tax
benefit related to the Company-sponsored retiree medical and black lung
obligations. The $28.5 million reconciling item represents the associated
decrease to the deferred tax asset if the Health Benefit Act liability were
recorded on a discounted basis.
Under the Health Benefit Act, the Company and various subsidiaries are jointly
and severally liable for approximately $440 million, at Legacy Value, of
postretirement medical and Health Benefit Act obligations in the above table.
Projected Payments and Expenses of Retained Coal Liabilities and Administrative
Costs
The following tables include the actual cash payments and expense (continuing
operations only) related to the Company's former coal liabilities for 2003 and
2004 and those projected for the next five years.
The projected payments and expenses are estimated based on the assumptions used
in determining the estimated Legacy Value and GAAP counterparts at December 31,
2004; the actual amount of payments and expense in future periods may be
materially different than amounts presented. The amounts paid or expensed in the
future will be dependent on many factors, including inflation in health care and
other costs, the ultimate impact of the recently enacted Medicare reform bill,
discount rates, the market value of postretirement benefits plan assets, the
level of contributions to and the performance of the VEBA, the number of
participants in various benefit programs, and the level of administrative costs
needed to manage the retained liabilities.
41
Cash Payments
(In millions) Actual Payments Projected Payments
- ----------------------------------------------------------------------------------------------------------------
Years Ending December 31, 2003 2004 2005 2006 2007 2008 2009
- ----------------------------------------------------------------------------------------------------------------
Postretirement benefits other than pensions:
Company-sponsored medical plans (a):
Before Medicare subsidy $ 30 35 $ 38 41 44 46 47
Estimated effect of Medicare subsidy - - - - (3) (3) (3)
- ----------------------------------------------------------------------------------------------------------------
Subtotal 30 35 38 41 41 43 44
Health Benefit Act 8 9 9 12 11 11 10
Black lung 8 7 5 5 5 5 5
Withdrawal liability - - 37 - - - -
Workers' compensation 8 5 4 4 3 2 2
Advance minimum royalties 1 1 1 3 2 2 1
Reclamation and inactive mine costs 5 3 3 1 1 - -
Administration and other 18 8 5 5 4 4 4
Cash proceeds and receipts (3) (6) - - - - -
- ----------------------------------------------------------------------------------------------------------------
Total $ 75 62 $ 102 71 67 67 66
================================================================================================================
VEBA contributions (a) $ 82 50 $ - - - - -
================================================================================================================
(a) The Company has contributed cash to a VEBA to be used to make future
payments of the Company's retiree medical plans. The Company intends to
continue to contribute to the VEBA, depending on tax and other
considerations such as alternative uses of capital, until the VEBA holds
between $300 million and $400 million. The Company reevaluates its
contribution policy annually and is not obligated to fund the VEBA. The
Company may elect at any time to use either these assets or its cash from
operations to pay benefits for its retiree medical plans. Estimated
payments in the table have not been reduced to reflect the use of assets
held by the VEBA since there are no plans to do so within the five years
projected.
Expenses in Continuing Operations
(In millions) Actual Expense Projected Expense
- ----------------------------------------------------------------------------------------------------------------
Years Ending December 31, 2003 2004 2005 2006 2007 2008 2009
- ----------------------------------------------------------------------------------------------------------------
Postretirement benefits other than pensions:
Company-sponsored medical plans (a):
Before Medicare subsidy and VEBA $ 50 52 $ 59 58 58 57 56
Estimated effect of Medicare subsidy - (6) (7) (7) (7) (7) (7)
Estimated investment income in VEBA (a) - (9) (15) (16) (18) (19) (21)
- ----------------------------------------------------------------------------------------------------------------
Subtotal 50 37 37 35 33 31 28
Black lung 6 5 4 4 4 4 4
Pension (b) (1) 2 4 4 3 1 1
Administrative, legal and other coal expenses, net 18 9 7 6 5 5 5
Other income, net (c) (3) (7) - - - - -
- ----------------------------------------------------------------------------------------------------------------
Total $ 70 46 $ 52 49 45 41 38
- ----------------------------------------------------------------------------------------------------------------
(a) Beginning in 2004, the Company has accounted for the VEBA as a plan asset
of Company-sponsored medical plans in accordance with SFAS No. 106 and has
recognized a lower amount of amortization of previously unrecognized losses
due to the effects of the 2003 medical subsidy legislation. The above
projection does not assume that any further contributions will be made to
the VEBA. To the extent contributions are made, projected investment income
will be increased to reflect the long-term rate of return on such
contributions.
(b) The above projection does not assume that any pension contributions will be
made. If voluntary or required contributions are made, projected expenses
from that year forward would be reduced by the expected long-term return on
those contributions.
(c) The Company has not recognized an approximate $6 million gain related to
the 2003 coal property sale since the purchaser has not yet fully assumed
certain liabilities contractually transferred in the sale.
42
Following are comments covering the more significant legacy liabilities in the
above tables. For additional information, please see note 4 to the consolidated
financial statements. Each of these liabilities and assets are affected by
estimates and judgments. More information on this is available at "Application
of Critical Accounting Policies" later in this Management's Discussion and
Analysis.
Company-Sponsored Retiree Medical Benefits Obligations and VEBA
The Company provides postretirement health care benefits to eligible former coal
miners and their dependents. With the assistance of actuaries, the Company
annually reevaluates the estimated future cash flows, expenses and current
values of the obligations. Projected payments are expected to increase each year
for the next five years as a result of medical inflation and as eligible
participants attain retirement age. This will be partially offset by reductions
in the number of participants through mortality.
The Legacy Value, which equals the funded status at December 31, 2004 decreased
to $445 million from $526 million at December 31, 2003. Most of this decrease
was due to the assignment of the VEBA to the plan. The Company restricted the
use of the VEBA in 2004 to pay only Company-sponsored retiree medical benefits
and the VEBA in 2004 is considered a plan asset. Partially offsetting this were
the effects of reducing the discount rate by 50 basis points to 5.75% and an
increase in the assumed medical inflation rate.
The VEBA was established by the Company under Internal Revenue Code Section
501(c)(9). In general, a contribution made to the VEBA becomes deductible for
federal income tax purposes in the year in which it is made. Investment earnings
within the VEBA are not subject to federal income tax. Distributions from the
VEBA to pay designated benefits or to reimburse the Company for designated
benefit payments are nontaxable. The Company can determine the timing and size
of any payment from the VEBA to cover expenses of eligible participants.
The Company intends to increase over time the amount of the assets within the
VEBA to approximately $300 million to $400 million. The increase is expected to
come from investment returns and contributions, after taking into consideration
the Company's levels of cash and debt, tax position and growth needs.
Contributions to the VEBA along with investment earnings amounted to about $18
million through December 31, 2002. The Company contributed $82 million to the
VEBA in 2003 and the VEBA generated $5 million in investment returns, leaving a
balance of $105 million at December 31, 2003. In 2004 the Company contributed
approximately $50 million to the VEBA and the VEBA generated $17 million in
investment returns, leaving a balance of $172 million at December 31, 2004. The
Company has not finalized its plans for contributions, if any, in 2005 and
beyond.
The VEBA's assets are allocated among active investment managers of equities and
fixed income securities. Approximately 70% of the trust assets are invested in
equities, with 30% invested in fixed income securities. The VEBA is being
invested in a similar fashion to the Company's primary U.S. pension plan, and
the Company has estimated the same expected long-term rate of return of 8.75%
per annum.
Health Benefit Act Obligations
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 Brink's Company and certain of its subsidiaries
(collectively, the "Brink's 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 addition, the Health Benefit Act provides that assigned companies, including
the Brink's 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 these benefits are not funded from other designated
sources. To date, almost all of the funding for unassigned beneficiaries has
been provided from transfers from the Abandoned Mine Reclamation Fund (the "AML
Fund") or other government sources.
43
The Company's liability for Health Benefit Act obligations 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 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 premium per beneficiary for that year. The
Company expects to pay annual premiums over the next 60 to 70 years, but it
expects these annual premiums to gradually decline over time as the number of
beneficiaries decreases.
Since the passing of the Health Benefit Act, the vast majority of the costs for
unassigned beneficiaries have been paid with transfers of cash from the AML Fund
or other government sources. From the inception of the Combined Benefit Fund
through December 31, 2004, the Company has paid only $0.6 million to the
Combined Benefit Fund for benefits in the unassigned pool. The Company expects
to pay an additional $0.5 million in 2005.
The authority for continued transfers from the AML Fund may expire in June 2005.
Since the continued transfers of funds are not sufficiently assured, the
Company's current estimate of its obligations assumes that no transfers beyond
2005 will be made. There may be a legislative or regulatory extension to the
transfer authority. If the transfer authority is extended, the Company may
decrease its estimate of the probable liability for future premiums payments by
a material amount.
Moreover, the Company's estimate of its contingent liability for unassigned
beneficiaries could increase materially in the future if other responsible coal
operators become insolvent. This liability could also change materially if the
percentage of unassigned beneficiaries that are allocated to the Company changes
due to relative mortality rates of the Company's assigned beneficiaries compared
to the total assigned beneficiaries.
The Company believes that Legacy Value information is useful to investors and
creditors as an estimate of the fair value of a series of payments to be made
over an extended period of time for these obligations.
Legacy Add-Back GAAP
Value Present-Value basis
(discounted) Effect (undiscounted)
- ---------------------------------------------------------------------------------------------
(in millions) 2004 2003 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------
Assigned and other $ 67 71 53 61 120 132
Unassigned 37 35 29 31 66 66
- ---------------------------------------------------------------------------------------------
Total $ 104 106 82 92 186 198
=============================================================================================
The Legacy Value (representing the present value of the obligation) of the
Company's Health Benefit Act obligations at December 31, 2004, was slightly
lower than the $106 million of a year earlier. The Company made $9 million of
payments in 2004. In addition, a slightly lower number of beneficiaries were
assigned to the Brink's Companies than was projected last year. Both of these
factors explain the decrease in the GAAP basis measurement, which is
undiscounted. In addition, the Legacy Value was unfavorably affected by a
reduction in the discount rate used by 50 basis points to 5.75%, and the
accretion of interest for 2004.
Payments related to the Health Benefit Act are projected to rise in 2006 to
reflect the current assumption that the previous sources of funding for the
unassigned pool will not continue beyond 2005. If future funding of all of the
unassigned benefits becomes available through the AML Fund or other sources,
projections for 2006 and later years may be reduced by up to $4 million per
year.
Any changes to expected future obligations determined during annual
reevaluations are recorded as expenses or benefits within discontinued
operations.
Black Lung Obligations
The Company makes payments to former miners who have been determined to have
pneumoconiosis (black lung disease). Such payments primarily cover disability
payments and condition-related medical expenses. These payments stretch out over
many years and have been discounted to a net present value. Actuarial gains and
losses are deferred and amortized into expense over the average remaining life
expectancy of all participants (approximately 10 years).
44
The Legacy Value, which equals the accumulated projected benefit obligation, of
the black lung obligations decreased to $55.2 million in 2004 from $63.0 million
in 2003 largely due to actuarial gains related to a reduction in the number of
pending claims against the Company and $7.0 million of cash benefit payments
made in 2004. This was partially offset by the effect of reducing the discount
rate by 50 basis points to 5.75% as of December 31, 2004.
Future cash payments are expected to gradually decline over time as the number
of participants declines through mortality. Future expense levels are also
expected to decline as the remaining value of obligations declines over time.
Withdrawal Liabilities
The Company participates in the United Mine Workers of America ("UMWA") 1950 and
1974 pension plans. The Company believes that it is likely that it will withdraw
from the plans prior to June 30, 2005, the plan's year end. A withdrawal from
the plans occurs when there is a significant reduction in or elimination of the
hours worked by employees working under UMWA labor agreements. Upon withdrawal
from these coal-related plans, the Company will become obligated to pay the
plans a portion of the underfunded status of the plans as of the beginning of
the plan year in which a withdrawal occurs, as determined by the plan agreements
and by law. The Company expects to become obligated to pay a $36.6 million
withdrawal liability during 2005 based on the funded status of the plans at June
2004. The obligation could change materially if the Company does not withdraw
prior to June 30, 2005.
Discontinued Operations
Years Ended December 31,
(In millions) 2004 2003 2002
- -------------------------------------------------------------------------------------------------
Gain (loss) on sale of
Timber $ 20.7 4.8 -
Gold (0.9) - -
Natural Gas - 56.2 -
Coal 5.0 - 13.2
Results from operations
Timber (0.5) (0.2) (1.0)
Gold (1.2) (4.1) (7.6)
Natural Gas - 11.2 9.0
Coal - - (28.1)
Adjustments to contingent liabilities of former operations
Health Benefit Act liabilities 3.2 (31.3) (24.0)
Withdrawal liabilities 15.4 (17.0) (26.8)
Reclamation liabilities (0.1) (3.2) -
Workers' compensation liabilities (4.9) 0.2 -
Recovery of environmental costs - 5.3 -
Other (3.3) (2.7) -
- -------------------------------------------------------------------------------------------------
Income (loss) from discontinued operation before income taxes 33.4 19.2 (65.3)
Income tax benefit (expense) (12.5) (8.0) 22.0
- -------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations $ 20.9 11.2 (43.3)
=================================================================================================
Gain (loss) on Sale
The Company sold a portion of its timber business for $5.4 million in cash in
2003 and recognized a $4.8 million pretax gain. In 2004, the Company received an
additional $33.7 million for the remaining portion of its timber business. After
deducting the book value of related assets and the payment of $6.2 million in
2004 to purchase equipment formerly leased, the Company recognized a $20.7
million pretax gain in 2004.
45
In February 2004, the Company sold its gold operations for approximately $1.1
million in cash plus the assumption of liabilities and recognized a $0.9 million
loss.
In August 2003, the Company sold its natural gas business and received $81.2
million in cash and recognized a $56.2 million gain.
During 2000 and 2001, the Company recorded charges of $101.8 million to reflect
the estimated loss on the sale of the coal business. A $13.2 million reversal of
the previously estimated loss on sale was recorded during 2002 to reflect the
amount of actual proceeds and values of assets and liabilities at the dates of
sale. The assets disposed of in 2002 primarily consisted of operations including
coal reserves, property, plant and equipment, the Company's economic interest in
Dominion Terminal Associates and inventory. Certain liabilities, primarily
reclamation costs related to properties disposed of, were assumed by the
purchasers.
In February 2005, the Company received additional cash proceeds from the
previous sale of its coal business in Virginia; the related gain of $5 million
was recorded in 2004.
Results from Operations
The operating results of the coal, natural gas, timber and gold operations have
been reclassified to discontinued operations for all periods presented.
The results of operations of the former natural gas operations in the eight
months prior to the 2003 sale improved over the full year of 2002 as a result of
higher natural gas prices. The Company recognized impairment losses related to
its gold business of $1.7 million in 2003 and $5.7 million in 2002.
The Company accounted for the disposition of its coal operations under
Accounting Principles Bulletin No. 30, ("APB No. 30") "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
Under APB No. 30, estimated losses of the coal operation expected to be incurred
through the end of the disposal period were accrued at the measurement date of
December 31, 2000. Accordingly, operating losses (including significant ongoing
expenses 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 in 2002 representing the difference between the estimated amount of
expenses relating to 2002 that were accrued in 2001 and the amount actually
incurred in 2002. Beginning in January of 2003 expenses related to
Company-sponsored pension, postretirement and black lung obligations are
recorded in continuing operations.
The Company had recorded its estimate of operating losses during the expected
disposal period prior to the end of 2001. 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 that year.
Adjustments to Contingent Liabilities of Former Operations
Health Benefit Act Liabilities. The Company has obligations under the Coal
Industry Retiree Health Benefit Act of 1992 (the "Health Benefit Act"), as
described in note 4 to the consolidated financial statements. The estimated
liability is reduced each year as payments are made. In addition, the Company
reduced the estimated liability by $3.2 million in 2004 and increased the
estimated liability by $31.3 million in 2003 and $24.0 million in 2002 to
reflect changes in the estimates of the undiscounted liability. This estimated
liability will be adjusted in future periods as assumptions change.
The $3.2 million reduction in the liability in 2004 is primarily related to a
slight decrease in the number of beneficiaries assigned to the Company at
October 1, 2004 compared to the amount estimated at the end of 2003. As a
result, the estimate of assigned beneficiaries in future periods was also lower.
46
The $31.3 million charge in 2003 is primarily related to the assumed increase in
the number of unassigned beneficiaries allocated to the Company. The increased
allocation was due to two factors. First, the Company increased its allocation
percentage because of a change in the way the Company interprets the statute
governing the allocation, based on findings of court cases that year. Second,
other coal operations became insolvent during the period and their assigned
beneficiaries were transferred to the unassigned pool. These actions reduced the
denominator (the total assigned pool) in the computation of the allocation
percentage, increasing the Company's allocation assumption, and increased the
unassigned pool.
The $24.0 million charge in 2002 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.
Withdrawal Liabilities. The Company participates in the United Mine Workers of
America ("UMWA") 1950 and 1974 pension plans. The Company believes that it is
likely that it will withdraw from the plans prior to June 30, 2005, the plan's
year end. A withdrawal from the plans occurs when there is a significant
reduction in or elimination of the hours worked by employees working under UMWA
labor agreements. Upon withdrawal from these coal-related plans, the Company
will become obligated to pay the plans a portion of the underfunded status of
the plans as of the beginning of the plan year in which a withdrawal occurs, as
determined by the plan agreements and by law. The Company expects to become
obligated to pay a $36.6 million withdrawal liability during 2005 based on the
funded status of the plans at June 2004. The obligation could change materially
if the Company does not withdraw prior to June 30, 2005.
The Company's estimate of the obligation in each year is based on the funded
status of the multi-employer plans for the most recent measurement date. The
change in the Company's estimated liability in the last three years was largely
due to changes in the UMWA plans' unfunded liabilities.
Other. In 2004 the Company settled certain legal and other contingencies related
to its former coal operations and recognized $3.3 million of additional expense.
In 2003, the Company and a third party reached an agreement that establishes the
allocation of past costs related to the recovery of environmental costs, and as
a result, recognized a $5.3 million pretax gain. The matter relates to the
remediation of the Company's formerly owned petroleum terminal facility in
Jersey City, New Jersey.
Sale of Other Natural Resources Assets
In October 2003, the Company sold its 23.3% equity interest in MPI Mines Ltd.,
an Australian minerals exploration and development Company with interests in
gold and nickel, for $18.8 million in cash and recognized a $10.4 million pretax
gain in continuing operations.
In November 2003, the Company sold substantially all of its remaining
coal-related assets for $14 million in cash plus the assumption of reclamation
and other liabilities for total proceeds of $28.8 million. A gain of up to $6
million may be recognized in 2005 as liabilities related to reclamation are
formally transferred to the buyer.
47
Other operating income, net
Other operating income, net, is a component of the operating segments'
previously discussed operating profits.
- ----------------------------------------------------------------------------------------------------
Years Ended December 31, % change
(In millions) 2004 2003 2002 2004 2003
- ----------------------------------------------------------------------------------------------------
Gains on sale of operating assets, net $ 5.9 7.7 - (23) NM
Impairment loss (5.8) (1.3) - 200+ NM
Foreign currency transaction gains, net 2.2 3.2 2.0 (31) 60
Royalty income 1.6 1.7 1.3 (6) 31
Share in earnings of equity affiliates 1.0 0.3 1.2 200+ (75)
Penalties on unpaid value-added taxes (0.4) - - NM NM
Other 4.6 4.0 0.7 15 200+
- ----------------------------------------------------------------------------------------------------
Total $ 9.1 15.6 5.2 (42) 200
====================================================================================================
Other operating income in 2004 included $5.9 million of gains on sale of
operating assets, net, which were primarily the result of disposing of residual
assets of the Company's former coal operations. The impairment loss in 2004
primarily relates to BAX Global's decision to abandon the development and
installation of software. Other operating income in 2003 was higher than 2002
due primarily to $7.7 million of gains on the sale of operating assets,
including a $5.5 million gain on the sale of operating assets of Brink's and
$2.2 million in gains from the sale of residual assets of the former coal
operations partially offset by losses on sales of other property and equipment.
Nonoperating Income and Expense
Interest Income
Years Ended December 31, % change
- ------------------------------------------------------------------------------
(In millions) 2004 2003 2002 2004 2003
- ------------------------------------------------------------------------------
Interest income $ 4.6 6.2 3.1 (26) 100
==============================================================================
Interest earned in the VEBA was only included in Interest Income in 2003.
Interest income declined from 2003 to 2004 primarily as a result of the
Company's decision to restrict the VEBA to only pay certain expenses in early
2004. Because of this, investment income of the VEBA is now treated as an offset
to postretirement medical benefit expense. Interest income increased in 2003 as
compared to 2002 primarily due to the interest earned on the VEBA's investments,
as well as interest income on receivables related to the former coal operations.
Interest earned in the VEBA was classified within discontinued operations in
2002.
Interest Expense
Years Ended December 31, % change
- ------------------------------------------------------------------------------
(In millions) 2004 2003 2002 2004 2003
- ------------------------------------------------------------------------------
Interest expense $ 22.9 25.4 23.0 (10) 10
==============================================================================
Interest expense was lower in 2004 compared to 2003 primarily due to lower
average borrowings and interest rates.
48
Interest expense increased in 2003 as compared to 2002 primarily due to the
inclusion of interest expense related to Dominion Terminal Associates ("DTA") in
the 2003 period. In conjunction with the disposal of its coal operations, the
Company transferred its interest in the operations of DTA, a coal terminal in
Newport News, Virginia, but retained contingent obligations of bond-related
debt. Since the Company no longer has an interest in DTA, its related $43.2
million guarantee of the underlying debt was reclassified to long-term debt from
noncurrent liabilities at December 31, 2002. In prior periods, the cost
associated with the bonds was included in discontinued operations. In addition,
2003 interest expense was higher due to the accretion of interest related to
former coal operations' retained leases and advance minimum royalty agreements,
partially offset by a decrease in U.S. borrowings and lower interest rates.
Stabilization Act Compensation
Years Ended December 31, % change
- --------------------------------------------------------------------------------
(In millions) 2004 2003 2002 2004 2003
- --------------------------------------------------------------------------------
Stabilization Act compensation $ - - 5.9 NM NM
================================================================================
Stabilization Act compensation of $5.9 million in 2002 represents amounts
received by the Company from the U.S. Government pursuant to the Air
Transportation Safety and System Stabilization Act.
Other Income (Expense), Net
Years Ended December 31, % change
- ------------------------------------------------------------------------------------------------------
(In millions) 2004 2003 2002 2004 2003
- ------------------------------------------------------------------------------------------------------
Gain (loss) on sale of marketable securities $ 4.3 (0.2) 0.8 NM NM
Discounts and other fees of accounts receivable
securitization program (1.7) (1.7) (1.6) - 6
Gain on monetization of coal royalty agreement - 2.6 - (100) NM
Other, net 0.2 1.6 (4.4) (88) NM
- ------------------------------------------------------------------------------------------------------
Total $ 2.8 2.3 (5.2) 22 NM
======================================================================================================
Upon the assignment of the VEBA to pay benefits under the postretirement medical
plans of the Company, unrealized gains of over $4 million were recorded as
income in 2004.
Minority Interest
Years Ended December 31, % change
- -----------------------------------------------------------------------------
(In millions) 2004 2003 2002 2004 2003
- -----------------------------------------------------------------------------
Minority Interest $ 12.9 9.0 3.3 43 173
=============================================================================
Changes in minority interest in the last three years are primarily due to
variations in the earnings of the Company's partially owned Venezuelan
subsidiary of Brink's. The Venezuelan subsidiary incurred losses in 2002, and
returned to strong profitability in 2003 and 2004.
49
Share-Based Compensation
The Company maintains a stock option plan and an employee stock purchase plan to
provide incentives for its employees and to encourage employees to own stock in
order to enhance the link between their interests and those of its non-employee
shareholders.
The Company believes that SFAS No. 123R, "Share-Based Payment," will require the
recording of expenses under both plans beginning in the third quarter of 2005.
Based on current estimates, the Company believes that it will record after-tax
expense of approximately $2 million in the last half of 2005. Such expense could
be roughly double in 2006.
The Company may amend or terminate its plans. If so, the above estimate could
change.
Income Taxes
Income tax expense (benefit) Effective tax rate
- -----------------------------------------------------------------------------------------------
Years Ended December 31, 2004 2003 2002 2004 2003 2002
- -----------------------------------------------------------------------------------------------
(in millions) (in percentages)
Continuing operations $ 60.9 55.7 40.4 37.7% 75.4% 36.8%
Discontinued operations 12.5 8.0 (22.0) 37.4 % 41.7% 33.7%
===============================================================================================
Overview
The Company's effective tax rate has fluctuated in the past three years from
statutory rates due to various factors, including:
o changes in valuation allowances, and
o state taxes, changes in the expected geographical mix of earnings.
The Company establishes or reverses valuation allowances for deferred tax assets
depending on all available information including historical and expected future
operating performance of its subsidiaries. Changes in judgment about the future
realization of deferred tax assets can result in significant adjustments to the
valuation allowances. 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 valuation
allowances.
Continuing Operations
2004
The effective income tax rate on continuing operations in 2004 was higher than
the 35% U.S. statutory tax rate primarily as a result of the recording of $9.9
million of net valuation allowance adjustments, mostly related to certain
European operations.
2003
The effective income tax rate for continuing operations in 2003 was higher than
the 35% U.S. statutory tax rate primarily due to $28.4 million of net additional
valuation allowance adjustments for certain state and foreign deferred tax
assets.
2002
The effective income tax rate in 2002 was higher than the 35% U.S. statutory tax
rate primarily due to foreign income taxes and the recording of $1.5 million of
valuation allowances.
Adjustments to income tax expense
The Company has recorded adjustments in each of the last three years based on an
ongoing analysis of its U.S. and non-U.S. current and deferred income tax asset
and liability accounts. The Company has included in current earnings, the effect
of these adjustments because they did not aggregate to a material amount in any
individual year. The income tax expense (benefit) related to these adjustments
was ($0.3) million in 2004, $3.3 million in 2003, and $1.6 million in 2002.
50
Discontinued Operations
Discontinued operations includes the income (loss) before taxes and the related
tax provision or benefit associated with the Company's former natural resource
businesses. The effective tax rate in 2004 was higher than the 35% U.S.
statutory tax rate due to state income tax expense. The effective tax rate in
2003 was higher than the U.S. statutory rate due to additional accruals made in
2003 for tax contingencies related to the natural resource business. In 2002,
tax benefits from percentage depletion of coal production were reflected in the
effective tax rate of discontinued operations.
As discussed in note 23 to the consolidated financial statements, up to $27
million in tax benefits could be recognized in discontinued operations upon the
favorable resolution of a tax contingency.
Other
As of December 31, 2004, the Company has not recorded U.S. federal deferred
income taxes on $340.7 million of undistributed earnings of its foreign
subsidiaries and equity affiliates. With the exception of amounts discussed
below, it is expected that these earnings will be permanently reinvested in
operations outside the U.S. It is not practical to compute the estimated
deferred tax liability on these earnings.
The Company does not expect to be able to complete its evaluation of the
repatriation provision of the new American Jobs Creation Act of 2004 until after
Congress passes statutory technical corrections and the Treasury Department
issues further guidance on key elements of the provision. In January 2005, the
Treasury Department began to issue the first of a series of clarifying guidance
documents related to this provision. The Company expects to complete its
evaluation of the effects of the repatriation provision within the first two
fiscal quarters of 2005, provided Congress and the Treasury Department issue
guidance by that time. The range of possible amounts that the Company is
considering for repatriation under this provision is between zero and $150
million. While the Company estimates that the related potential range of
additional income tax payments is between zero and $10 million, this estimate
may change based on the passage of technical correction legislation.
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, they are
affected by changes in the value of 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.
The Company, from time to time, uses foreign currency forward contracts to hedge
transactional risks associated with foreign currencies. (See "Market Risk
Exposures" below.)
Brink's Venezuelan subsidiaries ("Brink's Venezuela") were considered to be
operating in a highly inflationary country in 2002. However, at January 1, 2003,
Brink's Venezuela was no longer treated as highly inflationary. The Company
estimates that had Brink's Venezuela not been treated as highly inflationary
effective January 1, 2002, revenues in 2002 would have decreased by $1.1
million, operating profit would have increased by $2.4 million and pretax income
would have increased by $1.9 million. Additionally on March 3, 2005, Venezuela's
central bank devalued the local currency by approximately 12%. The effect of
this devaluation on the Company's December 31, 2004 net assets in Brink's
Venezuela would have been a decrease in net assets of approximately $3.7
million. 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 demand for the
Company's services; and
o the devaluation of the currency may exceed the rate of inflation and
reported U.S dollar revenues and profits may decline.
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 these risks on the Company cannot be
predicted.
51
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
Overview
Over the last four years, the Company has used the cash it has generated from
operations and the divestiture of natural resources to strengthen its balance
sheet by reducing debt and making contributions to the VEBA and its primary U.S.
pension plan. Net cash proceeds from the sale of natural resource businesses
totaled $216 million over the last three years. With the sale of the coal
business, the Company is no longer subject to the volatility in cash flows
caused by the fluctuations in coal markets.
Debt repayments, net, aggregated $158 million over the last three years. In
addition to debt reduction, the Company has contributed $132 million to the VEBA
and $66 million to the primary U.S. pension plan over the last three years. The
Company also elected to reduce the funds provided from the sale of accounts
receivable by $44 million since 2001.
The Company expects to make significant investments in 2005 with capital
expenditures projected to increase $60 to $70 million from the 2004 level of
spending. Acquisitions in 2005 by Brink's through the middle of March have
exceeded $40 million. In addition, the Company believes it will have to pay a
withdrawal liability currently estimated to be $37 million. As a result, it is
likely that debt and funding from the sale of receivables will increase in 2005.
Summary of Cash Flow Information
Years Ended December 31, $ change
- ---------------------------------------------------------------------------------------------------------------------------
(In millions) 2004 2003 2002 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Continuing operations:
Before changes in operating assets and liabilities $ 322.0 264.8 276.6 $ 57.2 (11.8)
Changes in assets and liabilities, including working capital (42.1) 16.8 21.1 (58.9) (4.3)
Discontinued operations:
Natural gas, timber and gold 0.2 19.2 10.2 (19.0) 9.0
Coal - - (66.6) - 66.6
- ---------------------------------------------------------------------------------------------------------------------------
Operating activities 280.1 300.8 241.3 (20.7) 59.5
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Continuing operations:
Capital and aircraft heavy maintenance expenditures (245.4) (226.6) (224.4) (18.8) (2.2)
Net proceeds from:
Disposal of former natural resource interests 28.6 119.4 42.3 (90.8) 77.1
Notes receivable and settlement of royalty agreement - 26.0 - (26.0) 26.0
- ---------------------------------------------------------------------------------------------------------------------------
Subtotal of natural resource cash proceeds 28.6 145.4 42.3 (116.8) 103.1
Contributions to VEBA (a) - (82.0) - 82.0 (82.0)
Acquisitions (14.8) (8.1) (0.1) (6.7) (8.0)
Other 9.9 17.9 4.4 (8.0) 13.5
Discontinued operations:
Natural gas, timber and gold (0.8) (8.8) (10.9) 8.0 2.1
Coal - - (19.7) - 19.7
- ---------------------------------------------------------------------------------------------------------------------------
Investing activities (222.5) (162.2) (208.4) (60.3) 46.2
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows before financing activities $ 57.6 138.6 32.9 $ (81.0) 105.7
===========================================================================================================================
(a) In 2004, the VEBA was restricted to pay coal related retiree medical
benefits, as a result the Company began to account for the VEBA as an
offset to the postretirement obligation (see note 4 to the consolidated
financial statements). Accordingly, $50 million of net cash contributions
in 2004 have been classified within operating activities. In 2003, $82
million of contributions were classified within investing activities.
52
Operating Activities
2004
Cash flows provided by operating activities decreased by $20.7 million in 2004
from the prior period primarily as a result of a $50 million net contribution to
the VEBA in 2004; contributions to the VEBA were classified as investing
activities in 2003. Partially offsetting this was improved cash flow from
operating activities provided by the Company's business segments. The Company's
discontinued operations generated less cash in 2004 since the natural resource
businesses were sold in 2003 and early 2004.
2003
Cash provided by operating activities was $59.5 million higher in 2003 compared
to 2002 primarily due to outflows in 2002 related to former coal operations
while they were still operating. Cash provided by operating activities was also
higher due to an increase in the amount of cash provided by operating activities
at Brink's and BHS, partially offset by lower amounts provided by BAX Global. In
addition, the Company contributed $15 million more to its primary U.S. pension
plan in 2002 than it did in 2003.
Coal-related cash outflows were classified as discontinued operations in the
2002 statements of cash flows, including approximately $60.6 million (before
current tax benefit) related to obligations the Company ultimately retained. In
2003, cash outflows of $59.6 million for these retained obligations are included
in continuing operations. In addition to the payments related to retained
obligations, the Company's former coal operations used cash in 2002 largely due
to the poor performance of its operations in the face of difficult industry
conditions.
Investing Activities
Proceeds from Disposition of Assets and Investments
Investing activities in 2004 included $28.6 million of proceeds from the sale of
natural resource businesses. Investing activities in 2003 included $119.4
million of cash proceeds from the sale of natural resource businesses and equity
interests and the realization in 2003 of $26.0 million of cash related to the
monetization of noncash proceeds from the 2002 sale of the Company's former
Virginia coal operations. Proceeds from dispositions of assets and investments
in 2002 included $42.3 million of cash associated with the disposal of a portion
of the Company's former coal operations.
Capital and Aircraft Heavy Maintenance Expenditures
Years Ended December 31, $ change
- --------------------------------------------------------------------------------------------------
(In millions) 2004 2003 2002 2004 2003
- --------------------------------------------------------------------------------------------------
Capital Expenditures
Brink's $ 76.2 80.9 79.3 $ 4.7 (1.6)
BHS 117.6 98.0 86.9 (19.6) (11.1)
BAX Global 25.4 23.6 27.1 (1.8) 3.5
Corporate and other 1.1 0.2 0.1 (0.9) (0.1)
- --------------------------------------------------------------------------------------------------
Capital expenditures $ 220.3 202.7 193.4 $(17.6) (9.3)
==================================================================================================
Aircraft heavy maintenance expenditures $ 25.1 23.9 31.0 $ (1.2) 7.1
==================================================================================================
Higher capital expenditures at BHS in both 2004 and 2003 as compared to the
prior-year periods were primarily due to an increase in subscriber
installations.
Capital expenditures in 2005 are currently expected to range from $280 million
to $290 million. Expected capital expenditures for 2005 reflect an increase in
customer installations at BHS and information technology spending at Brink's and
BAX Global. In addition, BHS's capital expenditures in 2005 are expected to
include approximately $25 million to purchase facilities, including BHS's
headquarters facility, currently occupied under an operating lease, and the
development of a second monitoring center.
Aircraft heavy maintenance expenditures vary as a result of the number of
airplanes leased and owned, the amount of flight time and the timing of
regularly scheduled maintenance for airplanes. The Company expects to spend
between $25 million and $30 million on aircraft heavy maintenance in 2005.
53
VEBA
The Company made $82 million of contributions to its VEBA in 2003, which, as
noted above, were classified as an investing activity. The Company classified
the $50 million of net contributions in 2004 as an operating activity.
Other Investing Activities
Acquisitions in 2003 and 2004 were made primarily by Brink's. In the first
quarter of 2005, the Company announced agreements by Brink's to acquire two
operations in Europe for approximately $43 million.
In comparison to 2002, investing activities in 2003 reflected approximately $13
million of increased proceeds from the sale of operating assets, primarily at
Brink's.
Business Segment Cash Flows
The Company's cash flows before financing activities for each of the operating
segments are presented below.
Years Ended December 31, $ change
- -----------------------------------------------------------------------------------------------------------------------
(In millions) 2004 2003 2002 2004 2003
- -----------------------------------------------------------------------------------------------------------------------
Cash flows before financing activities
Continuing operations:
Business segments:
Brink's $ 103.7 63.6 57.6 $ 40.1 6.0
BHS 47.6 28.8 26.3 18.8 2.5
BAX Global 10.6 4.0 13.4 6.6 (9.4)
- -----------------------------------------------------------------------------------------------------------------------
Subtotal of business segments 161.9 96.4 97.3 65.5 (0.9)
Corporate and former operations:
Proceeds from sale of natural resource interests 28.6 145.4 42.3 (116.8) 103.1
Contributions to the VEBA, net (50.0) (82.0) - 32.0 (82.0)
Contributions to primary U.S. pension plan (11.0) (20.0) (35.1) 9.0 15.1
Other, including payments for coal-related
obligations in 2004 and 2003 (71.3) (11.6) 15.4 (59.7) (27.0)
- -----------------------------------------------------------------------------------------------------------------------
Subtotal of continuing operations 58.2 128.2 119.9 (70.0) 8.3
Discontinued operations:
Natural gas, timber and gold (0.6) 10.4 (0.7) (11.0) 11.1
Coal - - (86.3) - 86.3
- -----------------------------------------------------------------------------------------------------------------------
Cash flows before financing activities $ 57.6 138.6 32.9 $ (81.0) 105.7
=======================================================================================================================
Overview
Cash flows before financing activities from the Company's business segments have
averaged over $100 million per year over the last three years. Sales of natural
resource interests also provided significant cash over that period. Using this
cash flow, the Company made almost $200 million in voluntary contributions to
its VEBA and primary U.S. pension plan over the last three years. The Company's
cash flow also allowed it to make significant cash payments over the last three
years covering the regular annual payments associated with retained liabilities
of the former coal operations. 2002 also had significant cash outflows
associated with the final year of operation of the coal business and poor market
conditions.
Brink's
Cash before financing activities increased in 2004 over 2003 primarily due to
higher operating profit partially offset by an increase in cash used for
acquisitions.
54
Cash flows before financing activities at Brink's increased in 2003 over 2002
due to higher operating profit, offset by a year-over-year increase in the
amount of cash used for working capital needs and costs to relocate its
headquarters. In addition, $10 million in higher proceeds from the sale of
operating assets in 2003 were partially offset by $7 million in cash outflows
primarily related to a 2003 acquisition in Belgium.
BHS
The year-over-year increase in cash flows before financing activities at BHS in
both 2004 and 2003 is primarily due to higher operating results partially offset
by an increase in capital expenditures reflecting growth in installations of
security systems.
BAX Global
Cash flow before financing activities at BAX Global improved in 2004, reflecting
much better operating results versus 2003. This improvement was largely offset
by the effect of the sale of $52 million less of accounts receivable at year end
2004 versus the prior year as a result of the Company's overall cash flow in
2004.
Cash flows before financing activities at BAX Global in 2003 decreased $9.4
million from 2002 reflecting lower operating results in 2003. Partially
offsetting 2003's lower operating results was a reduction in the amount of cash
used to cover working capital needs and lower capital and aircraft heavy
maintenance expenditures.
Corporate and Former Operations
The Company received $216 million in net proceeds during the last three years
from the sale of substantially all of its natural resource interests. In the
last three years, the Company contributed $132 million to its VEBA and $66
million to its primary U.S. pension plan. The $59.7 increase in other cash
outflows reflects higher corporate expenses in 2004 and the collection of
remaining receivables of the coal business during 2003. The increase in other
cash outflows for 2003 compared to 2002 reflects cash spent in 2003 associated
with retained liabilities of the former coal operations (these types of payments
were included in discontinued operations in 2002). The Company expects to pay
approximately $37 million in 2005 associated with the anticipated withdrawal
from the 1950 and 1974 multiemployer pension plans.
Discontinued Operations
Cash flow from discontinued operations, which includes cash from operations and
capital expenditures of the former natural resource businesses, was lower in
2004 as a result of the sale of the businesses in 2003 and early 2004. Higher
natural gas prices improved the natural gas business' cash flows in 2003
compared to 2002. Discontinued operations' cash flow before financing activities
for 2002 reflected cash spent associated with retained liabilities and operating
losses resulting from weak coal market conditions; spending associated with
retained liabilities was included in continuing operations in 2003.
Financing Activities
Summary of Financing Activities Years Ended December 31,
- -------------------------------------------------------------------------------------
(In millions) 2004 2003 2002
- -------------------------------------------------------------------------------------
Short-term debt $ (9.1) (15.1) 9.1
Revolving Facility (12.5) (98.1) (7.2)
Senior Notes - - 20.0
Other (17.5) (5.6) (22.2)
- -------------------------------------------------------------------------------------
Net borrowings (repayments) of debt (39.1) (118.8) (0.3)
Repurchase of stock - - (11.1)
Dividends (5.4) (5.3) (5.7)
Proceeds from exercise of stock options and other 22.4 1.1 0.4
- -------------------------------------------------------------------------------------
Cash flows from financing activities $ (22.1) (123.0) (16.7)
=====================================================================================
55
The Company's day-to-day operating liquidity needs are typically financed by
short-term debt, the Company's accounts receivable securitization facility, and
the Company's Revolving Facility and Letter of Credit Facility, both of which
are described below.
Under a share repurchase program authorized by the Board, the Company redeemed
all its outstanding shares of Convertible Preferred Stock for $10.8 million in
2002.
The Company paid quarterly dividends on its common stock at an annual rate of
$0.10 per share in each of the last three years. Dividends paid on common stock
totaled $5.4 million in 2004, $5.3 million in 2003 and $5.2 million in 2002.
Dividends paid on the Convertible Preferred Stock amounted to $0.5 million in
2002.
Future dividends are dependent on the earnings, financial condition, cash flow
and business requirements of the Company, as determined by the Board. In January
2005, the Board declared a quarterly cash dividend of $0.025 per share of common
stock, payable on March 1, 2005 to shareholders of record on February 8, 2005.
Capitalization
The Company uses a combination of debt, off-balance sheet instruments and equity
to capitalize its operations. As of December 31, 2004, debt as a percentage of
capitalization (total debt and shareholders' equity) was 27% compared to 36% at
December 31, 2003. The reduction resulted from a combination of $178 million of
higher equity and $30 million of lower debt. Equity increased in 2004 primarily
as a result of net income ($121.5 million). The issuance of shares related to
employee benefit plans also was a factor in the increase.
Summary of Debt, Equity and Other Liquidity Information
Amount available
under credit facilities Outstanding Balance
- --------------------------------------------------------------------------------------------------------
December 31, December 31,
(In millions) 2004 2004 2003 $ change (b)
- --------------------------------------------------------------------------------------------------------
Debt:
Short-term debt:
Multi-currency revolving facility
and other committed facilities (a) $ 37 $ 27.5 35.8 $ (8.3)
Long-term debt:
Revolving Facility 382 18.4 30.9 (12.5)
Letter of Credit Facility 43 - - -
Senior Notes 95.0 95.0 -
Dominion Terminal
Associates ("DTA") bonds 43.2 43.2 -
Other 60.1 69.6 (9.5)
- --------------------------------------------------------------------------------------------------------
Debt $ 462 $ 244.2 274.5 $ (30.3)
========================================================================================================
Shareholders' equity $ 674.0 495.6 $ 178.4
========================================================================================================
Other Liquidity Information:
Cash and cash equivalents $ 169.0 128.7 $ 40.3
Amount sold under accounts receivable
securitization facility 25.0 77.0 (52.0)
Net Debt (c) 75.2 145.8 (70.6)
Net Financings (c) 100.2 222.8 (122.6)
========================================================================================================
(a) The Company also had $111.0 million in available credit under uncommitted
cash facilities at December 31, 2004.
(b) In addition to cash borrowings and repayments, the change in the debt
balance also includes changes in currency exchange rates and borrowings
under new capital leases.
(c) These are Non-GAAP measures. Net Debt is equal to short-term debt plus the
current and noncurrent portion of long-term debt, ("Debt" in the tables),
less cash and cash equivalents. Net Financings are equal to Net Debt plus
the amount sold under the accounts receivable securitization facility. See
reconciliation below.
56
Reconciliation of Net Debt and Net Financings to GAAP Measures
December 31,
- ----------------------------------------------------------------------------------------------------
(In millions) 2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Short-term debt $ 27.5 35.8 41.8 27.8 51.0
Long-term debt 216.7 238.7 317.5 270.1 345.8
DTA bonds - - - 43.2 43.2
- ----------------------------------------------------------------------------------------------------
Debt 244.2 274.5 359.3 341.1 440.0
Less cash and cash equivalents (169.0) (128.7) (102.3) (86.7) (97.8)
- ----------------------------------------------------------------------------------------------------
Net Debt 75.2 145.8 257.0 254.4 342.2
Amounts sold under accounts receivable
securitization facility 25.0 77.0 72.0 69.0 85.0
- ----------------------------------------------------------------------------------------------------
Net Financings $ 100.2 222.8 329.0 323.4 427.2
====================================================================================================
The Company believes the presentation of Net Debt and Net Financings are useful
measures of the Company's financial leverage.
Debt
During October 2004, the Company entered into a new unsecured $400 million
revolving bank credit facility with a syndicate of banks to replace the existing
$350 million facility which was due to expire in 2005. The new facility allows
the Company to borrow (or otherwise satisfy credit needs) on a revolving basis
over a five-year term ending in October 2009. Both the old and new facility are
referred to herein as the "Revolving Facility." At December 31, 2004, $381.6
million was available under the Revolving Facility.
During November 2004, the Company also entered into an unsecured $150 million
credit facility with a bank to provide letters of credit and other borrowing
capacity over a five-year term ending in December 2009 (the "Letter of Credit
Facility"). The costs of such letters of credit are expected to be approximately
the same as borrowings under its $400 million facility discussed above. The
Company intends to use the Letter of Credit Facility to replace surety bonds and
other letters of credit needed to support its activities. As of December 31,
2004, $106.7 million was utilized under this revolving credit facility. The
Revolving Facility and the multi-currency revolving credit facilities described
below are also used for the issuance of letters of credit and bank guarantees.
The Company has three unsecured multi-currency revolving bank credit facilities
with a total of $105 million in available credit at December 31, 2004, of which
$37.0 million was available. When rates are favorable, the Company also borrows
from other banks under short-term uncommitted agreements. 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.
At December 31, 2004, the Company had $95.0 million of Senior Notes outstanding
that are scheduled to be repaid in 2005 through 2008, including $18.3 million
which was paid as scheduled in January 2005. Interest on each series of the
Senior 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
Senior Notes are unsecured.
The Company's Brink's, BHS, and BAX Global subsidiaries have guaranteed the
Revolving Facility, the Letter of Credit Facility and the Senior Notes. The
Revolving Facility, the Letter of Credit Facility, 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,
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, 2004.
57
In 2003, at the Company's request, the Peninsula Ports Authority of Virginia
issued a new series of bonds to replace the previous bonds related to Dominion
Terminal Associates, a deep water coal terminal in which the Company no longer
has an interest.
The Company continues to pay interest on and guarantee payment of the $43.2
million principal of the new bonds and ultimately will have to pay for the
retirement of the new bonds in accordance with the terms of the guarantee. The
new bonds bear a fixed interest rate of 6.0% (versus a fixed interest rate of
7.375% for the previous bonds) and mature in 2033. The new bonds may mature
prior to 2033 upon the occurrence of certain specified events such as the
determination that the bonds are taxable or the failure of the Company to abide
by the terms of its guarantee.
The Company believes it has adequate sources of liquidity to meet its near-term
requirements.
Equity
At December 31, 2004, the Company had 100 million shares of common stock
authorized and 56.7 million shares issued and outstanding. Of the outstanding
shares at December 31, 2004, 1.1 million shares were held by The Brink's Company
Employee Benefit Trust and have been accounted for in a manner similar to
treasury stock for earnings per share purposes. The Company has the authority to
issue up to 2.0 million shares of preferred stock, par value $10 per share.
The Company has the authority to repurchase up to 1.0 million shares of common
stock with an aggregate purchase price limitation of $19.1 million. The Company
made no repurchases under this program during 2004.
Off Balance Sheet Arrangements
The Company has various off-balance sheet arrangements that are described in the
notes to the consolidated financial statements. See note 14 for the accounts
receivable securitization program and note 15 for operating leases that have
residual value guarantees or other terms that cause the agreement to be
considered a variable interest. The Company uses these off-balance sheet
arrangements to lower its cost of financings. The Company believes its
off-balance sheet arrangements are an important component of its capital
structure.
In December 2000, the Company entered into a five year agreement to sell a
revolving interest in BAX Global 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. The Company expects to renew or
replace this agreement prior to its expiration in December 2005.
58
Contractual Obligations
The following table includes the contractual obligations of the Company.
Estimated Payments Due by Period
- ----------------------------------------------------------------------------------------------------------------
Later
(In millions) 2005 2006 2007 2008 2009 Years Total
- ----------------------------------------------------------------------------------------------------------------
Contractual obligations
Long-term debt obligations $ 24.3 38.4 27.2 28.8 19.3 46.7 184.7
Capital lease obligations 10.8 7.2 4.4 3.1 4.0 2.5 32.0
Operating lease obligations 130.9 100.6 78.9 59.1 43.7 139.3 552.5
Purchase obligations:
Service contracts 6.9 6.9 1.5 1.4 1.2 0.6 18.5
Other 20.7 0.1 - - - - 20.8
Other long-term liabilities reflected on the
Company's balance sheet under GAAP:
Aircraft lease turnback obligations (a) 52.2 - - - - - 52.2
Non-coal related workers compensation
and other claims 33.6 15.3 8.1 4.9 3.4 7.2 72.5
- ----------------------------------------------------------------------------------------------------------------
Subtotal 279.4 168.5 120.1 97.3 71.6 196.3 933.2
Legacy liabilities (b) 97.0 66.0 63.0 63.0 62.0 1,457.0 1,808.0
- ----------------------------------------------------------------------------------------------------------------
Total $ 376.4 234.5 183.1 160.3 133.6 1,653.3 2,741.2
================================================================================================================
(a) Most of the Company's lease agreements for aircraft require payments be
made for heavy maintenance at the end of the lease term.
(b) The projected payments for liabilities related to former coal operations
(legacy liabilities) are discussed in "Results of Operations - Former Coal
and Other Natural Resource Operations." A portion of the projected payments
will ultimately be paid by the VEBA. Estimated payments above exclude
Administration and other payments.
Primary U.S. Pension Plan
The Company maintains a noncontributory defined benefit pension plan covering
substantially all non-union employees in the U.S. who meet certain requirements.
Using actuarial assumptions as of December 31, 2004, this plan had an
accumulated benefit obligation ("ABO") of approximately $662 million and a
projected benefit obligation ("PBO") of $742 million. The ABO is an estimate of
the benefits earned through December 31, 2004. The difference between the ABO
and PBO is essentially the expected changes in the value of the benefits due to
projected increases in future compensation of plan participants.
59
The ABO and PBO are net present values of expected future cash flows discounted
to December 31, 2004 by 5.75%. 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)
and yields for the broader range of long-term high-quality securities.
Accordingly, as market interest rates fluctuate, the net present value of the
Company's obligations will change. The impact of a one percentage point (100
basis point) change in the discount rate used at December 31, 2004 would have
been as follows:
Discount Rates
- -------------------------------------------------------------
Increased Decreased
(In millions) by 1.0% by 1.0%
- -------------------------------------------------------------
Increase (decrease) in:
ABO at December 31, 2004 $ (89) $ 112
PBO at December 31, 2004 (106) 136
2005 expense (16) 21
At December 31, 2004, the fair value of the plan's assets approximated $595
million. The Company uses a long-term rate of return assumption to determine
annual income from plan assets. Such expected income reduces plan expense. The
Company's current expected long-term rate of return is 8.75%. If the Company
were to use a different long-term rate of return assumption it would affect
annual pension expense.
The historical and projected benefit payments and expense for the U.S. plan are
set out in the table below. The projected benefits and expense reflect
assumptions used in the valuation at year end 2004. These assumptions are
reviewed annually, and it is likely that they will change in future years.
(In millions) Actual Projected
- ------------------------------------------------------------------------------
Years Ending December 31, 2003 2004 2005 2006 2007
- ------------------------------------------------------------------------------
Benefits (paid from plan trust) $ 23 25 26 28 29
Expense 18 27 40 42 37
As can be noted from reviewing the above tables, changes in the amount of
expense are significantly affected by discount rates. The level of expense has
increased largely due to the effects of the reduction in the discount rate used
as a result of the decrease in market interest rates over the last several
years. Also contributing to the increase in expense has been the poor
performance of investment markets from 2000 to 2002, although this has been
moderated by the performance in 2003 and 2004. The above expense amounts are
charged to the business segments in approximately the following proportions :
Brink's - 50%, BHS - 15%, BAX - 25%, former natural resources businesses - 10%.
The amount of cash the Company may have to contribute in the future for the
Company's primary U.S. pension plan is determined using a different set of
assumptions than is used for financial accounting purposes.
Based on December 31, 2004 data, assumptions and funding regulations, the
Company is not required to make a contribution to the plan for the 2005 plan
year. Under existing regulations and using the same assumptions for 2005
activity, a contribution of approximately $26 million could be required for the
2006 plan year but the actual payment could be delayed until as late as
September 2007. Up to $79 million could be required for the 2007 plan year.
60
The above estimated contributions are likely to change. Congress and the
Executive Branch of the Federal government are expected to evaluate changes to
pension funding requirements. As part of this evaluation they may adopt changes
to the definition of the discount rate to be used for funding purposes. Such
rate has changed substantially since the discontinuance of the sale of 30-year
Treasury bonds. In the past, Congress has provided temporary relief from
distortions caused by the discontinuance of the sale of 30-year Treasury bonds.
The current relief expires this year. Any changes to the discount rate used for
funding through an extension of the current relief is expected to reduce
required contributions. In addition, actual investment returns and interest
rates are likely to differ from those assumed at December 31, 2004. Further, the
Company may elect to contribute to the plan in 2005 and/or 2006. Voluntary
contributions have the effect of reducing and potentially delaying later
required contributions. The Company has made voluntary contributions aggregating
$66 million over the last three years.
The pension plan's benefits will be earned and paid out over an extended period
of time. Accordingly, the Company takes a long-term approach to funding levels
and contribution policies. Historically, long-term returns on assets invested
have significantly exceeded the discount rate for pension liabilities so it is
expected that a portion of the future liability will be funded by investment
returns. As a result, the Company's funding target over the medium-term is to
cover the ABO, essentially the obligations already earned as of a given
measurement date. Under this approach, the plan was 90% funded at December 31,
2004.
Other Potential Use of Credit
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
obligations. As of December 31, 2004, the Company had outstanding surety bonds
with third parties totaling approximately $110 million that it has arranged in
order to satisfy 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, $6.8 million of the Company's surety bonds are
expected to be replaced by purchasers' surety bonds after the state mining
permits are transferred. Surety 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.
During November 2004, the Company entered into a new Letter of Credit Facility,
described in "Debt" above. The Company intends to use letters of credit under
the new facility to satisfy a portion of its security requirements, and expects
the amount of outstanding surety bonds will decline in the future. At December
31, 2004, $106.7 million of letters of credit had been issued under the facility
with available credit of $43.3 million.
If the remaining surety bonds are not renewed, the Company believes that it has
adequate available borrowing capacity under its Letter of Credit Facility and
its Revolving Facility to provide letters of credit or other collateral to
secure its obligations.
Other Contingent Gains and Losses
Litigation
BAX Global is defending a claim related to the apparent diversion by a third
party of goods being transported for a customer. Although BAX Global is
defending this claim vigorously and believes that its defenses have merit, it is
possible that this claim ultimately may be decided in favor of the claimant. If
so, the Company expects that the ultimate amount of reasonably possible
unaccrued losses could range from $0 to $10 million.
61
Environmental Remediation
The Company has agreed to pay a portion 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. In 2003, the
Company and a third party reached an agreement that establishes the allocation
of past costs related to the recovery of environmental costs, and as a result,
the Company recognized a $5.3 million pretax gain in discontinued operations.
The Company estimates its portion of the remaining clean-up and operational and
maintenance costs to be $2.6 million.
In connection with the remediation of Tankport, the Company acquired a
noncontrolling interest in an adjacent residential development. The Company has
no cost basis in the investment and has not recorded any income distributions to
date, but may receive income in the future.
Other Coal-related Contingencies
The Company has also recorded estimated liabilities for other contingent
liabilities, including those for Health Benefit Act premiums to the Combined
Fund, coal-related workers' compensation claims and certain reclamation
obligations. These are discussed in more detail at "Results of Operations -
Retained Liabilities and Assets of Former Natural Resource Operations - Legacy
Liabilities and Assets."
The Company is in the process of transferring mining permits to buyers of its
former coal interests. Until the permits are transferred, the Company is
contingently liable for the reclamation of these mining sites.
Gain Contingencies
Federal Black Lung Excise Tax
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 December 31, 2004, the Company had received refunds
including interest of $27.2 million, including $2.8 million received in 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 $15 million (before income taxes), the Company has
not currently recorded receivables for additional FBLET refunds.
Income Tax
The Company has entered into discussions with a tax authority which, if
concluded favorably, could result in a one-time benefit of up to $27 million.
The benefit, if any, would not result in any current cash receipts but would add
to the Company's tax credit carryforwards.
62
MARKET RISK EXPOSURES
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The Company has activities in more than 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 interest rates, commodities prices and
foreign currency exchange rates. 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 financial
instruments, as discussed below, to hedge its interest rate, commodities prices
and foreign currency exposures when appropriate. The risk that counterparties to
these instruments may be unable to perform is minimized by limiting the
counterparties used to major financial institutions with investment grade credit
ratings. The Company does not expect to incur a loss from the failure of any
counterparty to perform under the agreements. The Company does not use
derivative financial instruments for purposes other than hedging underlying
financial or commercial exposures.
The sensitivity analyses discussed below for the market risk exposures were
based on the facts and circumstances in effect at December 31, 2004. 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 and off-balance sheet
instruments to finance its operations. Floating rate obligations, including the
Company's U.S. bank credit facility and the accounts receivable securitization
facility, expose the Company to fluctuations in cash flows due to changes in the
general level of interest rates.
In order to limit the variability of future cash flows, the Company has
converted floating rate cash flows on a portion ($25.0 million effective
December 2004 through September 2005) of its accounts receivable securitization
facility to fixed-rate cash flows by entering into an interest rate swap
agreement which involves the exchange of floating rate payments for fixed rate
payments. The fair value liability of this interest swap at December 31, 2004
was less than $0.1 million. In addition to the interest rate swaps the Company
also has fixed rate debt, including the Company's Senior Notes and Dominion
Terminal Associates debt. 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 interest rate swaps in effect and the contractual interest and discount
rates on the floating rate debt and the securitization facility, respectively,
at December 31, 2004, a hypothetical 10% increase in these rates would increase
cash outflows by approximately $0.4 million over a twelve-month period (in other
words, the Company's weighted average interest rate on its unhedged floating
rate instruments was 5.04% per annum at December 31, 2004. If that average rate
were to increase by 50 basis points to 5.54%, the cash outflows associated with
these instruments would increase by $0.4 million annually). The effect on the
fair value of the interest rate swaps for a hypothetical 10% decrease in the
yield curves from year-end 2004 levels is not material. The effect on the fair
value of the Company's Senior Notes and Dominion Terminal Associates debt for a
hypothetical 10% decrease in the yield curves from year-end 2004 levels would
result in a $4.6 million increase in the fair value of such debt. The Company
has no current plan to pay down either debt issuance before maturity.
63
Commodities Price Risk
The Company consumes various commodities in the normal course of its business
and, from time to time, utilizes derivative financial 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 risk management policies.
During the last three years, the Company utilized swap contracts and collars to
fix a portion of forecasted jet fuel purchases at specific price levels. In
addition, depending on market conditions, the Company has been able to adjust
its pricing through the use of surcharges on customers to partially offset large
increases in the cost of jet fuel. At December 31, 2004, the Company had no
outstanding jet and diesel fuel hedge derivatives.
During 2002 and 2003, the Company utilized forward sales contracts and option
strategies to hedge the selling price on a portion of its forecasted natural gas
and gold sales. The Company exited the natural gas business in 2003 and the gold
business in early 2004. Following the sale of these businesses, the Company has
no outstanding natural gas or gold derivatives.
Foreign Currency Risk
The Company, primarily through its Brink's and BAX Global operations, has
certain exposures to the effects of foreign currency 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 use
derivative financial instruments to hedge investments in foreign subsidiaries
since such investments are long-term in nature.
The effects of a hypothetical simultaneous 10% appreciation in the U.S. dollar
from year-end 2004 levels against all other currencies of countries in which the
Company operates are as follows:
Hypothetical Effects
(In millions) Increase/(decrease)
- ------------------------------------------------------------------------------
Translation of 2004 earnings into U.S. dollars $ (5.2)
Transactional exposures (1.3)
Translation of net assets of foreign subsidiaries (50.7)
- ------------------------------------------------------------------------------
64
APPLICATION OF CRITICAL ACCOUNTING POLICIES
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The application of accounting principles requires the use of assumptions,
estimates and judgments which are the responsibility of management. Management
makes 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, estimates and
judgments are straightforward; other assumptions are not. Reported results could
have been materially different had the Company used a different set of
assumptions, estimates and judgments for certain accounting principle
applications.
Deferred Tax Asset Valuation Allowance
It is common for companies to record expenses and accruals before the related
payments are actually made. 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 the tax benefits. These
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 costs are reported as expenses under GAAP.
As of December 31, 2004, the Company had approximately $324 million of net
deferred tax assets on its consolidated balance sheet. A significant amount of
the Company's deferred tax assets relates to expected future tax deductions
arising from retiree medical and other coal-related expenses the Company has
already recorded in its financial statements. For more details associated with
this net balance, see note 18 to the accompanying consolidated financial
statements.
Since there is no absolute assurance that these assets will be ultimately
realized, management annually reviews the Company's deferred tax positions to
determine if it is more likely than not that the assets will be realized.
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 use to increase the
likelihood that the tax assets will be realized. These strategies are also
considered in the periodic reviews. If after conducting the periodic review,
management determines that the realization of the tax asset does not meet the
"more-likely-than-not" criteria, an offsetting valuation allowance is recorded
thereby reducing net earnings and the deferred tax asset in that period. For
these reasons and since changes in estimates can materially affect net earnings,
management believes the accounting estimate related to deferred tax asset
valuation allowances is a "critical accounting estimate."
Approximately 93% of the deferred tax assets before valuation allowance at
December 31, 2004 relates to the U.S. federal tax jurisdiction. Due to its
expectation that the historical 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 U.S. state jurisdictions and non-U.S. jurisdictions, the Company has
evaluated its ability to fully utilize the net deferred tax assets on an
individual jurisdiction basis. Due to a recent history of losses in certain
jurisdictions and doubts about whether future operating performance will be
sufficiently profitable to realize deferred tax assets, the Company has $55.8
million of valuation allowances at December 31, 2004.
Among other things, should tax statutes, the timing of deductibility of expenses
or expectations for future performance change, the Company could decide to
adjust its valuation allowances, which would increase or decrease tax expense,
possibly materially.
65
Goodwill and Property and Equipment Valuations
Accounting Policies
At December 31, 2004, the Company has $914 million of property and equipment and
$260 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 and other long-lived assets. The review for impairment requires
the use of significant judgments about the future performance of the Company's
operating subsidiaries.
Application of Accounting Policies
Goodwill
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
is indicated. At December 31, 2004, net goodwill was $92 million at Brink's and
$168 million at BAX Global. To date, no impairment has been indicated.
Due to a history of profitability and cash flow, the carrying values of
long-lived assets of Brink's are believed to be appropriate.
Because of the cyclical nature of the heavy freight industry, estimates of fair
value based on future performance of BAX Global may change, which could result
in the Company recording an impairment of BAX Global's goodwill.
Property and Equipment
To determine if an impairment exists related to property and equipment, the
Company compares estimates of the future undiscounted net cash flows of groups
of assets to their carrying value when events or changes in circumstances
indicate the carrying amount may not be recoverable. 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.
Brink's has not had any material impairments of fixed assets in the last three
years.
BAX Global recognized a $5.0 million impairment loss in 2004. The loss related
to a decision to abandon the development and installation of certain
transportation logistics planning software.
Each quarter, when BHS customers disconnect their monitoring service, BHS
records an impairment charge related to the carrying value of the related
security systems estimated to be permanently disconnected based on historical
reconnection experience. 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.
Withdrawal Liabilities
The Company participates in the United Mine Workers of America ("UMWA") 1950 and
1974 pension plans. The Company believes that it is likely that it will withdraw
from the plans prior to June 30, 2005, the plan's year end. A withdrawal from
the plans occurs when there is a significant reduction in or elimination of the
hours worked by employees working under UMWA labor agreements. Upon withdrawal
from these coal-related plans, the Company will become obligated to pay the
plans a portion of the underfunded status of the plans as of the beginning of
the plan year in which a withdrawal occurs, as determined by the plan agreements
and by law. The Company expects to become obligated to pay a $36.6 million
withdrawal liability during 2005 based on the funded status of the plans at June
2004. The obligation could change materially if the Company does not withdraw
prior to June 30, 2005.
66
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 nonemployees under the Health Benefit Act).
The primary benefits which require the Company to make cash payments over an
extended period of years are:
o Pension obligation
o Retiree medical obligation
o Health Benefit Act premiums to the Combined Fund
o Black Lung obligation
Accounting Policy
The Company accounts for its pension plans under SFAS No. 87, "Employers'
Accounting for Pensions." The Company accounts for its retiree medical
obligations and Black Lung obligations under SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." As a result of
annual remeasurements, the Company records changes in liabilities and associated
expenses over time as required under these accounting standards.
Health Benefit Act obligations are recorded under EITF No. 92-13, "Accounting
for Estimated Payments in Connection with the Coal Industry Retiree Health
Benefit Act of 1992," which requires the Company to accrue estimated
undiscounted future premiums to be paid to the Combined Fund.
As is normal for these benefits, cash payments will be made for periods ranging
from the current year to over seventy years from now for certain benefits. The
amount of the cash payments and related expenses will be affected over time by
inflation, salary increases, 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.
Because of the inherent volatility of these items and because the obligations
are significant, the Company believes these represent critical accounting
estimates.
The critical accounting estimates that determine the carrying values of
liabilities and the resulting annual expense are discussed below. The plans that
are affected by the assumptions discussed are identified parenthetically in the
relevant title.
Application of Accounting Policy
Discount Rate (Pension, Retiree Medical and Black Lung)
A discount rate is used to determine the present value of future payments. The
rate should reflect 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 plan obligation valuation.
The Company selects a discount rate for its plan obligations after reviewing
published long-term yield information for a small number of high-quality
fixed-income securities (Moody's AA bond yields) and yields for the broader
range of long-term high-quality securities. After considering these factors, the
Company selected a discount rate of 5.75% for the valuation as of December 2004.
A year ago when market interest rates were higher, the discount rate used was
6.25%. The average Moody's AA bond yields for the ten year period ended December
31, 2004 was approximately 7.1%.
Sensitivity Analysis
The discount rate selected at year end materially affects the valuations of plan
obligations at year end and calculations of net periodic expenses for the
following year.
67
The tables below compare hypothetical plan obligation valuations as of December
31, 2004 and estimated expenses for 2005 if the Company had used discount rates
that were 100 basis points lower or higher.
Plan Obligations at December 31, 2004
Hypothetical Actual Hypothetical
(In millions) 4.75% 5.75% 6.75%
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Primary U.S. pension plan:
ABO $ 775 662 573
PBO 878 742 636
Coal-related retiree medical (APBO before reduction for VEBA) 693 618 555
Black Lung 59 55 51
===========================================================================================================
Projected 2005 Expense
Hypothetical Actual Hypothetical
(In millions) 4.75% 5.75% 6.75%
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Primary U.S. pension plan $ 61 40 24
Coal-related retiree medical 39 37 35
Black Lung 5 4 4
===========================================================================================================
Return on Assets (Pension and Retiree Medical)
The Company's primary U.S. defined benefit pension plan had assets at December
31, 2004 valued at approximately $595 million. This pension plan's assets are
invested primarily using actively managed accounts with asset allocation targets
of 47.5% domestic equities and 22.5% international equities, which include a
broad array of market capitalization sizes and investment styles, and 30% fixed
income securities. The Company's policy does not permit certain investments,
including investments in The Brink's Company common stock, unless part of a
commingled fund, or derivative instruments unless used for hedging purposes.
Fixed-income investments must have an investment grade rating at the time of
purchase. The plan rebalances its assets on a quarterly basis if actual
allocations of assets are outside predetermined ranges. Among other factors, the
performance of asset groups and investment managers will affect the long-term
rate of return.
The Company-sponsored retiree medical plan had assets in the VEBA at December
31, 2004 valued at approximately $172 million. The assets in the VEBA are
invested and managed on a similar basis to the pension plan. Accordingly, the
same long-term rate of return assumption is used for the VEBA.
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, 2004 and 2003.
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. Over the last ten years, the annual returns of the Company's primary
pension plan have fluctuated from a high of a 28% gain (2003) to a low of a 9%
loss (2002) and averaged over 10%, net of fees, over the period. During that
time period there were seven years in which returns exceeded the assumed
long-term rate of return and three years, the three years ended December 31,
2002, with returns below the assumed long-term rate of return.
68
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 100 basis points in the
assumed long-term rate of return on plan assets, the Company's U.S. annual
pension plan expense in 2005 would increase or decrease by approximately $6
million before tax. Similarly, the annual benefit of investment income in the
VEBA would increase or decrease by approximately $2 million.
The reduction (or "credit") to pension 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).
For the pension plan, 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 the plan assets is different from the
actual or fair-market value of the assets. The actual or fair-market value is
the value of the assets at a point in time that are available to make payments
to pensioners and to cover any transaction costs. The market-related value
recognizes changes in fair-value on a straight-line basis over five years. This
spreading reduces the effects of year-over-year volatility in the financial
markets.
The Company had significant investment losses in the three years ending December
31, 2002 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 the net investment losses. This will be partially offset by the
favorable returns earned in 2003 and 2004.
The Company has elected to calculate expected investment returns on assets in
the VEBA by applying the expected long-term rate of return to the fair market
value of the assets at year end. This is likely to cause the credit from the
VEBA's expected return to fluctuate more than the similar credit in the pension
plan.
Salary Inflation (Pension)
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. Since there are no currently known significant changes in
approach to compensation at any of its business units, management believes that
recent historical behavior is likely to continue. Accordingly, its view of
future compensation inflation is heavily influenced by recent history. The
Company expects its weighted average salary inflation for its primary U.S.
pension plan to remain at or about 5%, based on current rates of inflation.
Medical Inflation (Retiree Medical, Health Benefit Act)
Changes in medical inflation will affect liability and expense amounts
differently for the plans noted. There is a direct link between medical
inflation and expected spending for postretirement medical benefits under the
Company-sponsored plan for 2005 and for later years. Future cash payments
associated with the Health Benefit Act will reflect only a portion of the effect
of medical inflation as a result of statutory limitations on premium growth.
For the retiree medical plan, the Company assumed an inflation rate of 10% for
2005, and projects this rate to decline to 5% by 2010 for the Company-sponsored
plans. The average annual increase for medical inflation in the plan for the
last three years has been above 9%. Health Benefit Act liabilities were assumed
to have a 4.5% inflation rate for premium payments. The average annual premium
increases over the last three years have been below 4.5% since premium increases
are related only to increases in prices of medical benefits and do not include
cost changes stemming from the use of more expensive treatments, changes in
technology or the amount of care required. Because of the volatility of medical
inflation it is likely that there will be future adjustments, although the
direction and extent of these adjustments cannot be predicted at the present
time.
69
If the Company had assumed that the health care cost trend rates would be 100
basis points higher in each future year, the APBO for the coal-related retiree
medical benefit plan would have been approximately $78 million higher at
December 31, 2004 and the expense for 2004 would have been $3.8 million higher.
If the Company had assumed that the future health care cost trend rate would be
100 basis points lower, the APBO would have been approximately $65 million lower
at December 31, 2004 and the related 2004 expenses would have been $3.2 million
lower.
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. The Company uses the
1983 Group Annuity Mortality table for all plans, except the Health Benefit Act
liability, which uses the U.S. Life 79-81 mortality table.
Due to the complexity of the contractual relationship with the UMWA for
postretirement medical benefits and the application of regulations associated
with the Health Benefit Act, the number of participants has and will continue to
fluctuate as new participants are made known to the Company and as the Company
and others investigate the application of the regulations. Since the Company is
no longer operating in the coal industry, it anticipates that the number of
participants in the postretirement medical plan and the number of beneficiaries
under the Health Benefit Act will decline over time due to mortality.
Changes in Laws (All Plans)
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 laws that provide
government subsidies for amounts paid for pharmaceuticals for medicare-eligible
medical plan participants have reduced the Company's liability. Changes in laws
directed at changing the funding available for medical benefits related to
unassigned beneficiaries under the Health Benefit Act could significantly reduce
the Company's ultimate liability to the Combined Fund.
Worker's Compensation
Besides the effects of changes in medical costs, workers' compensation costs are
affected by the severity and types of injuries, changes in state regulations and
their application and the quality of programs that assist an employee's return
to work. The Company's liability for future payments for workers' compensation
claims is evaluated with the assistance of its actuary.
70
RECENT ACCOUNTING PRONOUNCEMENTS
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In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." SFAS No.
123R is a revision of SFAS No. 123 and supersedes APB 25. SFAS No. 123R
eliminates the use of the intrinsic value method of accounting, and requires
companies to recognize the cost of employee services received in exchange for
awards of equity instruments based on the grant-date fair value of those awards.
The effective date of SFAS No. 123R is the first reporting period beginning
after June 15, 2005, which is third quarter 2005 for calendar year companies,
although early adoption is allowed. SFAS No. 123R permits companies to adopt its
requirements using either a "modified prospective" method, or a "modified
retrospective" method. Under the "modified prospective" method, compensation
cost is recognized in the financial statements beginning with the effective
date, based on the requirements of SFAS No. 123R for all share-based payments
granted after that date, and based on the requirements of SFAS No. 123 for all
unvested awards granted prior to the effective date of SFAS No. 123R. Under the
"modified retrospective" method, the requirements are the same as under the
"modified prospective" method, except that entities also are allowed to restate
financial statements of previous periods based on pro forma disclosures made in
accordance with SFAS No. 123.
The Company currently utilizes Black-Scholes, a standard option pricing model,
to measure the fair value of stock options granted to employees. While SFAS No.
123R permits entities to continue to use such a model, the standard also permits
the use of a "lattice" model. The Company has not yet determined which model it
will use to measure the fair value of employee stock options upon the adoption
of SFAS No. 123R.
The Company currently expects to adopt SFAS No. 123R effective July 1, 2005;
however, the Company has not yet determined which of the adoption methods it
will use. Subject to a complete review of the requirements of SFAS No. 123R,
based on stock options granted to employees through December 31, 2004, and stock
options expected to be granted during 2005, the Company expects that the
adoption of SFAS No. 123R on July 1, 2005, will reduce both third quarter 2005
and fourth quarter 2005 net earnings by approximately $1 million ($0.02 per
diluted share). See note 16 for further information on the Company's share-based
compensation plans.
71
Forward-Looking Information
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This release contains both historical and forward-looking information. Words
such as "anticipates," "estimates," "expects," "projects," "intends," "plans,"
"believes," "may," "should" and similar expressions may identify forward-looking
information. Forward-looking information in this document includes, but is not
limited to, statements regarding the expectation of significant ongoing expenses
and cash outflows related to former coal operations, the recordation of future
gains and impairment charges, the creation of further valuation allowances and
the reversal of valuation allowances, the anticipated effective tax rate for
2005 and beyond, Brink's ability to generate profit margins above 7% annually,
consolidation of the industry within which Brink's operates, variances in
Brink's performance from period to period, expected increases in expenses
related to safety and security in 2005, the outcome of the investigation into
the non-payment of customs duties and value-added tax by a non-U.S. subsidiary
of Brink's, Incorporated, changes in the disconnect rate at BHS, BHS' expansion
into the commercial sector and the costs related to the expansion, the impact
that the refusal of police departments to respond to calls from alarm companies
without visual verification could have on BHS' results of operations,
anticipated changes in the estimated assets and liabilities related to Legacy
liabilities, increases in pension and health care expense, expected tax
receivables from Virginia, projected expenses related to legacy liabilities of
former coal operations, expected coal-related tax benefits, the expectation that
the Company will realize the benefit of net deferred tax assets, the estimated
payout period for annual Combined Fund premiums, the timing of and liability for
withdrawal from coal-related multi-employer pension plans, changes in payment
requirements for unassigned beneficiaries under the Health Benefit Act and
increases of the Company's obligations under the Health Benefit Act for this and
other reasons, the recognition of tax benefits upon the favorable resolution of
a tax contingency, the expected recognition of a gain in 2005 as
reclamation-related liabilities are transferred to the buyer of the West
Virginia coal properties, expected costs associated with compliance with Section
404 of the Sarbanes-Oxley Act of 2002, the possibility that Venezuela may be
considered highly inflationary again, capital expenditures and aircraft heavy
maintenance expenditures in 2005, expected utilization of additional debt and
increased sales of receivables, estimated contractual obligations for the next
five years, the adequacy of sources of liquidity to meet the Company's near term
requirements, the use of earnings from foreign subsidiaries and equity
affiliates, the impact of exchange rates, possible pension plan funding, 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
use of the Letter of Credit Facility to replace surety bonds and other letters
of credit, the replacement of the BAX Global receivables program, future
contributions to and use of the VEBA, and expected investment returns on funds
contributed to the VEBA, the amount and timing of additional FBLET refunds, if
any, the outcome of pending litigation, estimated remaining clean-up,
operational and maintenance costs for the Tankport matter, estimates for
coal-related contingent liabilities, the likelihood of losses due to
non-performance by parties to hedging instruments, projected payments and
expense for the primary U.S. pension plan and its expected long-term rate of
return, possible pension plan contributions, the effectiveness of the Company's
hedges, possible impairments of BAX Global's goodwill, estimates of future
reconnection experience at BHS and the impact of any change in estimates on BHS'
impairment charges, estimated discount rates and expected returns on assets
related to legacy liabilities, the Company's salary increase assumption, changes
in the assumed level of inflation for a number of the Company's benefit plans,
the impact of the repatriation provision of the American Jobs Creation Act of
2004 and the impact of recent changes in law on the Company's liabilities,
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.
72
These 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 by third parties and governmental authorities relating to
the disposal of the coal assets, retirement decisions by mine workers,
performance of the investments made by the multi-employer plans, estimates made
by the multi-employer plans, the number of participants in the multi-employer
plans and the cost to administer the plans, comparisons of hours worked by
covered coal employees over the last five years versus industry averages, black
lung claims incidence, the number of dependents of mine workers for whom
benefits are provided, actual medical and legal expenses related to benefits,
increases in the Company's shares of the unassigned obligations under the Health
Benefit Act, the funding and benefit levels of multi-employer plans and pension
plans, changes in inflation rates (including medical inflation) and interest
rates, acquisitions and dispositions made by the Company in the future, the
completion and processing of permit replacement documentation and the ability of
the purchasers of coal assets to post the required bonds, the return to
profitability of operations in jurisdictions where the Company has recorded
valuation adjustments, the ability of Brink's competitors to provide safe and
reliable service at a lesser cost, Brink's ability to cost effectively match
customer demand with appropriate resources, Brink's loss experience, changes in
insurance costs, the evaluation of remedial alternatives and the input of
governmental authorities regarding the non-payment of customs duties and
value-added tax, the ability of the home security industry to dissuade law
enforcement and municipalities from refusing to respond to alarms, the
willingness of BHS' customers to pay for private response personnel or other
alternatives to police responses to alarms, the amount of work performed by
third parties in connection with the Company's compliance with Section 404 of
the Sarbanes-Oxley Act of 2002, the demand for capital by the Company and the
availability of such capital, significant changes in the utilization of leased
or owned aircraft, the cash, debt and tax position and growth needs of the
Company, the funding of and accounting for the VEBA, positions taken by
governmental authorities with respect to claims for FBLET refunds, Virginia tax
receivables and the repatriation provision of the American Jobs Creation Act of
2004, discovery of new facts relating to civil suits, the addition of claims or
changes in relief sought by adverse parties, changes in the scope or method of
remediation or monitoring of the Tankport property, the nature of the Company's
hedging relationships, the financial performance of the Company, overall
economic and business conditions, foreign currency exchange rates, changes in
assumptions underlying the Company's critical accounting policies, as more fully
described in the section "Application of Critical Accounting Policies" but
including, discount rates, expectations of future performance, the timing of
deductibility of expenses, estimated reconnection experience at BHS, anticipated
return on assets projections regarding the number of participants in and
beneficiaries of the Company's employee and retiree benefit plans, and the
promulgation and adoption of new accounting standards and interpretations,
including SFAS 123R and Financial Accounting Standards Board ("FASB") Staff
Position 109-2, mandatory or voluntary pension plan contributions, 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.
73
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
- --------------------------------------------------------------------------------
Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934. The Company's internal control over
financial reporting is designed to provide reasonable assurance to the Company's
management and board of directors regarding the preparation and fair
presentation of published financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Management assessed the effectiveness of the Company's internal control over
financial reporting as of December 31, 2004. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in "Internal Control -
Integrated Framework". Based on our assessment, we believe that, as of December
31, 2004, the Company's internal control over financial reporting is effective
based on those criteria.
Management's assessment of the effectiveness of internal control over financial
reporting as of December 31, 2004, has been audited by KPMG LLP, the independent
registered public accounting firm which also audited the Company's consolidated
financial statements. KPMG's attestation report on management's assessment of
the Company's internal control over financial reporting appears on page 75
hereof.
74
REPORT of INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders
The Brink's Company
We have audited management's assessment, included in the accompanying
Management's Report on Internal Controls over Financial Reporting, that The
Brink's Company maintained effective internal control over financial reporting
as of December 31, 2004, based on criteria established in "Internal Control -
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO"). The Brink's Company's management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that The Brink's Company maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on criteria established in
"Internal Control - Integrated Framework" issued by COSO. Also, in our opinion,
The Brink's Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in "Internal Control - Integrated Framework" issued by COSO.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
The Brink's Company and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of operations, comprehensive income (loss),
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2004, and our report dated March 15, 2005, expressed
an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Richmond, Virginia
March 15, 2005
75
REPORT of INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders
The Brink's Company
We have audited the accompanying consolidated balance sheets of The Brink's
Company and subsidiaries (the "Company") as of December 31, 2004 and 2003, and
the related consolidated statements of operations, comprehensive income (loss),
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 Brink's Company
and subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on
criteria established in "Internal Control-Integrated Framework" issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated March 15, 2005, expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
/s/ KPMG LLP
Richmond, Virginia
March 15, 2005
76
THE BRINK'S COMPANY
and subsidiaries
Consolidated Balance Sheets
- ----------------------------------------------------------------------------------------------------
December 31,
(In millions, except per share amounts) 2004 2003
- ----------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 169.0 128.7
Accounts receivable, (net of estimated uncollectible
amounts: 2004 - $26.7; 2003 - $27.6) 749.5 580.3
Prepaid expenses and other current assets 58.1 59.8
Deferred income taxes 116.0 91.7
- ----------------------------------------------------------------------------------------------------
Total current assets 1,092.6 860.5
Property and equipment, net 914.0 873.2
Goodwill, net 259.6 244.1
Investments held by Voluntary Employees' Beneficiary Association trust - 105.2
Deferred income taxes 234.7 282.7
Other 177.3 182.9
- ----------------------------------------------------------------------------------------------------
Total assets $ 2,678.2 2,548.6
====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 27.5 35.8
Current maturities of long-term debt 35.1 17.2
Accounts payable 357.0 286.9
Accrued liabilities 612.5 504.2
- ----------------------------------------------------------------------------------------------------
Total current liabilities 1,032.1 844.1
Long-term debt 181.6 221.5
Accrued pension costs 117.0 86.6
Postretirement benefits other than pensions 331.2 504.2
Deferred revenue 139.5 130.7
Deferred income taxes 26.0 26.5
Other 176.8 239.4
- ----------------------------------------------------------------------------------------------------
Total liabilities 2,004.2 2,053.0
Commitments and contingent liabilities (notes 4, 6, 13, 14, 15, 18 and 23)
Shareholders' equity:
Common stock, par value $1 per share:
Shares authorized: 100.0
Shares issued and outstanding: 2004 - 56.7; 2003 - 54.3 56.7 54.3
Capital in excess of par value 457.4 383.0
Retained earnings 352.9 237.2
Employee benefits trust, at market value:
Shares not allocated to employees: 2004 - 1.1; 2003 - 0.6 (44.9) (14.0)
Accumulated other comprehensive income (loss):
Minimum pension liabilities (129.9) (122.1)
Foreign currency translation (18.2) (45.6)
Unrealized gains on cash flow hedges - 0.1
Unrealized gains on marketable securities - 2.7
- ----------------------------------------------------------------------------------------------------
Accumulated other comprehensive loss (148.1) (164.9)
- ----------------------------------------------------------------------------------------------------
Total shareholders' equity 674.0 495.6
- ----------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,678.2 2,548.6
====================================================================================================
See accompanying notes to consolidated financial statements.
77
THE BRINK'S COMPANY
and subsidiaries
Consolidated Statements of Operations
- ------------------------------------------------------------------------------------------------------------
Years Ended December 31,
(In millions, except per share amounts) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------
Revenues $ 4,718.1 3,998.6 3,733.8
Expenses:
Operating expenses 3,964.2 3,404.2 3,136.1
Selling, general and administrative expenses 573.1 520.6 470.6
- ------------------------------------------------------------------------------------------------------------
Total expenses 4,537.3 3,924.8 3,606.7
Gain on sale of equity interest - 10.4 -
Other operating income, net 9.1 15.6 5.2
- ------------------------------------------------------------------------------------------------------------
Operating profit 189.9 99.8 132.3
Interest income 4.6 6.2 3.1
Interest expense (22.9) (25.4) (23.0)
Stabilization Act compensation - - 5.9
Other income (expense), net 2.8 2.3 (5.2)
Minority interest (12.9) (9.0) (3.3)
- ------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 161.5 73.9 109.8
Provision for income taxes 60.9 55.7 40.4
- ------------------------------------------------------------------------------------------------------------
Income from continuing operations 100.6 18.2 69.4
- ------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations
(2002 includes $2 million of retained expenses of former coal
operations. These types of expenses in 2003 and 2004 are
recorded in continuing operations. See note 6.) 20.9 11.2 (43.3)
- ------------------------------------------------------------------------------------------------------------
Net income $ 121.5 29.4 26.1
============================================================================================================
Net income (loss) per common share
Basic:
Continuing operations $ 1.84 0.34 1.31
Discontinued operations 0.39 0.21 (0.83)
- ------------------------------------------------------------------------------------------------------------
$ 2.23 0.55 0.48
- ------------------------------------------------------------------------------------------------------------
Diluted:
Continuing operations $ 1.82 0.34 1.30
Discontinued operations 0.38 0.21 (0.82)
- ------------------------------------------------------------------------------------------------------------
$ 2.20 0.55 0.48
============================================================================================================
See accompanying notes to consolidated financial statements.
78
THE BRINK'S COMPANY
and subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
(In millions) 2004 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 121.5 29.4 26.1
Other comprehensive income (loss):
Minimum pension liability adjustments:
Adjustments to minimum pension liability (9.2) 27.1 (210.8)
Tax benefit (expense) related to minimum pension liability adjustment 1.4 (12.0) 80.1
- ---------------------------------------------------------------------------------------------------------------------------
Minimum pension liability adjustments, net of tax (7.8) 15.1 (130.7)
- ---------------------------------------------------------------------------------------------------------------------------
Foreign currency:
Translation adjustments arising during the year 25.7 47.0 8.1
Tax benefit related to translation adjustments 0.9 - -
Reclassification adjustment for losses included in net income 0.8 0.9 -
- ---------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustments 27.4 47.9 8.1
- ---------------------------------------------------------------------------------------------------------------------------
Cash flow hedges:
Unrealized net gains (losses) on cash flow hedges arising during the year 2.6 2.4 (4.2)
Tax benefit (expense) related to unrealized net gains (losses) on cash flow hedges (0.9) (0.7) 1.3
Reclassification adjustment for net losses (gains) realized in net income (2.8) 5.2 3.5
Tax expense (benefit) related to net losses (gains) realized in net income 1.0 (1.6) (1.1)
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized net gains (losses) on cash flow hedges, net of tax (0.1) 5.3 (0.5)
- ---------------------------------------------------------------------------------------------------------------------------
Marketable securities:
Unrealized net gains on marketable securities arising during the year 0.1 4.4 0.6
Tax expense related to unrealized net gains on marketable securities - (1.5) (0.2)
Reclassification adjustment for net losses (gains) realized in net income (4.3) 0.2 (0.8)
Tax expense (benefit) related to net losses (gains) realized in net income 1.5 (0.1) 0.2
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized net gains (losses) on marketable securities, net of tax (2.7) 3.0 (0.2)
- ---------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) 16.8 71.3 (123.3)
- ---------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 138.3 100.7 (97.2)
===========================================================================================================================
See accompanying notes to consolidated financial statements.
79
THE BRINK'S COMPANY
and subsidiaries
Consolidated Statements of Shareholders' Equity
- -------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2004, 2003 and 2002
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, 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 ($0.10 per share) - - - (5.2) - - (5.2)
Preferred stock ($31.25 per share) - - - (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 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
Net income - - - 29.4 - - 29.4
Other comprehensive income - - - - - 71.3 71.3
Common stock dividends ($0.10 per share) - - - (5.3) - - (5.3)
Employee benefits trust:
Remeasurement - - (0.1) - 0.1 - -
Shares for employee benefit programs - - (0.1) - 18.9 - 18.8
Tax benefit of stock options exercised - - 0.2 - - - 0.2
- -------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2003 - 54.3 383.0 237.2 (14.0) (164.9) 495.6
Net income - - - 121.5 - - 121.5
Other comprehensive income - - - - - 16.8 16.8
Common stock dividends ($0.10 per share) - - - (5.4) - - (5.4)
Retire shares of common stock - (0.1) (0.2) (0.4) - - (0.7)
Employee benefits trust:
2.5 million shares issued to trust - 2.5 58.9 - (61.4) - -
Remeasurement - - 28.7 - (28.7) - -
Shares for employee benefit programs - - (17.7) - 59.2 - 41.5
Tax benefit of stock options exercised - - 4.7 - - - 4.7
- -------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2004 $ - 56.7 457.4 352.9 (44.9) (148.1) 674.0
=============================================================================================================
See accompanying notes to consolidated financial statements
80
THE BRINK'S COMPANY
and subsidiaries
Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------
Years Ended December 31,
(In millions) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 121.5 29.4 26.1
Adjustments to reconcile net income to net cash provided
by operating activities:
(Income) loss from discontinued operations, net of tax (20.9) (11.2) 43.3
Depreciation and amortization 175.0 168.0 149.9
Impairment charges from subscriber disconnects 38.4 34.3 32.3
Amortization of deferred revenue (26.1) (25.0) (23.9)
Impairment of other long-lived assets 5.8 1.3 15.8
Aircraft heavy maintenance expense 26.2 21.3 30.6
Deferred income taxes 21.8 30.2 (0.5)
Provision (credit) for uncollectible accounts receivable 4.0 (1.1) 3.2
Other operating, net 13.7 3.5 22.9
Postretirement benefit funding (more) less than expense:
Pension 23.5 4.6 (23.8)
Other than pension (60.9) 9.5 0.7
Change in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable (128.9) 12.5 (14.6)
Accounts payable and accrued liabilities 77.4 (6.8) 19.1
Deferred subscriber acquisition cost (19.5) (18.4) (17.7)
Deferred revenue from new subscribers 34.6 28.2 27.1
Other, net (5.7) 1.3 7.2
Discontinued operations, net 0.2 19.2 (56.4)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 280.1 300.8 241.3
- ------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (220.3) (202.7) (193.4)
Aircraft heavy maintenance expenditures (25.1) (23.9) (31.0)
Cash proceeds from:
Disposal of former natural resource interests 28.6 119.4 42.3
Disposal of other property and equipment 11.0 18.7 5.3
Monetization of notes receivable and royalty agreement related
to sale of former coal operations - 26.0 -
Acquisitions (14.8) (8.1) (0.1)
Contributions to Voluntary Employees' Beneficiary Association trust - (82.0) -
Other, net (1.1) (0.8) (0.9)
Discontinued operations, net (0.8) (8.8) (30.6)
- ------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (222.5) (162.2) (208.4)
- ------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Long-term debt:
Additions 89.5 81.7 294.7
Repayments (119.5) (185.4) (304.1)
Short-term borrowings (repayments), net (9.1) (15.1) 9.1
Proceeds from exercise of stock options 24.2 1.7 1.4
Dividends (5.4) (5.3) (5.7)
Repurchase of stock - - (11.1)
Other, net (1.8) (0.6) (1.0)
- ------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (22.1) (123.0) (16.7)
- ------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 4.8 10.8 (0.6)
- ------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 40.3 26.4 15.6
Cash and cash equivalents at beginning of year 128.7 102.3 86.7
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 169.0 128.7 102.3
============================================================================================================
See accompanying notes to consolidated financial statements.
81
THE BRINK'S COMPANY
and subsidiaries
- -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Basis of Presentation
The Brink's Company (along with its subsidiaries, the "Company") has three
operating segments:
o Brink's, Incorporated ("Brink's")
o Brink's Home Security, Inc. ("BHS")
o BAX Global Inc. ("BAX Global")
During the last three years, the Company sold essentially all of its natural
resource businesses and interests, and the results of these operations have been
reclassified to discontinued operations. The Company has significant liabilities
associated with its former coal operations and expects to have significant
ongoing expenses and cash outflows related to these obligations.
Principles of Consolidation
The consolidated financial statements include the accounts of The Brink's
Company and the subsidiaries it controls. Control is determined based on
ownership rights or, when applicable, based on whether the Company is considered
the primary beneficiary of a variable interest entity. The Company's interest in
20%-to 50%-owned companies that are not controlled are accounted for using the
equity method ("equity affiliates"), unless the Company does not sufficiently
influence the management of the investee. All material intercompany accounts and
transactions have been eliminated in consolidation.
Revenue Recognition
Brink's. Revenue is recognized when services are performed. Services related to
armored car transportation, ATM servicing, cash logistics and 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 Fto 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. Nonrefundable
installation revenues and a portion of the related direct costs of acquiring new
subscribers (primarily sales commissions) are deferred and recognized over an
estimated 15 year subscriber relationship. When an installation is identified
for disconnection, any unamortized deferred revenues and deferred costs related
to that installation are recognized at that time.
BAX Global. Revenues related to transportation services are recognized, together
with related variable transportation costs, on the date shipments 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 the collectibility of related billings is reasonably assured.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits and investments
with original maturities of three months or less.
82
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 on 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 14). Transfers of
receivables under this program are accounted for as a sale under Statements of
Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities."
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
Building leasehold improvements 1 to 20
Security systems 15
Vehicles 3 to 12
Capitalized software 3 to 7
Other machinery and equipment 3 to 20
Machinery and equipment leasehold improvements 1 to 10
Aircraft and related assets 1 to 5
=================================================================
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 when incurred and amortized over the
flying time to the next scheduled maintenance date.
BHS retains ownership of most 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 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. In 2004, direct labor and other costs represented
approximately 70% of the amounts capitalized, while equipment and materials
represented 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.
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, including compensation and employee benefits for
employees directly associated with a software development project. Amortization
of capitalized software costs was $19.6 million in 2004, $20.2 million in 2003,
and $19.8 million in 2002.
83
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, in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." At
December 31, 2004, Brink's had $92.1 million of net goodwill, including $7.7
million added in 2004 related to acquisitions. BAX Global had $167.5 million of
net goodwill at December 31, 2004.
Impairment of Long-Lived Assets
The Company reviews and accounts for the impairment of goodwill in accordance
with SFAS No. 142. Goodwill that has an indefinite useful life is not amortized,
but instead is tested for impairment at least annually by comparing the carrying
value of the reporting unit to its estimated fair value. The Company bases its
estimates of fair value on projected future cash flows. The Company completed
goodwill impairment tests during each of the last three years with no impairment
charges required.
The Company reviews and accounts for the impairment of long-lived assets other
than goodwill, including property and equipment and certain other noncurrent
assets in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." Long-lived assets besides goodwill are reviewed
for impairment when events or changes in circumstances indicate the carrying
value of an asset may not be recoverable. For long-lived assets other than
goodwill that are to be held and used in operations, an impairment is indicated
when the estimated total undiscounted cash flow associated with the asset or
group of assets is less than 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.
Long-lived assets not needed for operations and held for sale are carried at the
lower of carrying value or fair value less cost to sell. Fair values are
determined based on quoted market values, discounted cash flows or internal and
external appraisals, as applicable.
Investments Held by VEBA Trust
Prior to January 1, 2004, the Company accounted for the investments held by its
Voluntary Employees' Beneficiary Association trust ("VEBA") as marketable
securities in accordance with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Investments held by the VEBA were classified as
available-for-sale and reported at fair value. Unrealized gains and losses were
recognized in other comprehensive income (loss) and realized gains and losses
were recognized in earnings. Realized gains and losses were computed based on
the average cost method.
Effective January 1, 2004, the Company restricted the use of the assets held by
its VEBA to pay only obligations of its coal-related retiree medical plan and,
accordingly, began accounting for the VEBA as a plan asset in accordance with
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." Since January 1, 2004, the VEBA is reflected as a direct offset to
the liability within postretirement benefits other than pensions on the
Company's balance sheet. With the restriction in the use of the VEBA, an
unrealized net gain of $4.4 million was recognized in 2004 within other income
(expense), net.
Share-Based Compensation
The Company accounts for its share-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.
84
Had compensation costs for the Company's stock option 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 and net income per share would have been the pro forma
amounts indicated below:
Years Ended December 31,
(In millions, except per share amounts) 2004 2003 2002
- ----------------------------------------------------------------------------------------------
Net income
As reported $ 121.5 29.4 26.1
Less share-based compensation expense determined
under fair value method, net of related tax effects (3.6) (4.7) (4.4)
- ----------------------------------------------------------------------------------------------
Pro forma $ 117.9 24.7 21.7
==============================================================================================
Net income per share
Basic, as reported $ 2.23 0.55 0.48
Basic, pro forma 2.16 0.47 0.40
Diluted, as reported $ 2.20 0.55 0.48
Diluted, pro forma 2.13 0.46 0.39
==============================================================================================
In these tables, 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 and net income per share disclosures are computed by amortizing the
estimated fair value of the grants over vesting periods. For options with graded
vesting, the estimated fair value is amortized in accordance with the guidance
in Financial Accounting Standards Board ("FASB") Interpretation No. 28,
"Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans." If a different option-pricing model had been used, results may
have been different.
The assumptions used and the resulting weighted-average grant-date estimates of
fair value for options granted are as follows:
Years Ended December 31,
2004 2003 2002
- ----------------------------------------------------------------------------------------------
Options granted
In millions 0.9 0.6 1.0
Weighted-average exercise price per share $ 31.88 15.24 21.50
Weighted-Average Assumptions
Expected dividend yield 0.5% 0.5% 0.5%
Expected volatility 32% 37% 37%
Risk-free interest rate 3.3% 2.3% 3.7%
Expected term (in years) 3.8 4.0 4.0
Fair value estimates
In millions $ 8.3 3.0 6.6
Weighted-average per share $ 8.84 4.69 6.97
==============================================================================================
85
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 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 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."
Income Taxes
Deferred tax assets and liabilities are recorded to recognize the expected
future tax benefits or costs of events that have been reported in different
years for financial statement purposes than tax purposes. 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.
Foreign Currency Translation
The Company's consolidated financial statements are reported in U.S. dollars. A
substantial amount of the Company's business is transacted in other currencies
due to the large number of countries in which the Company operates. In addition,
the Company's foreign subsidiaries maintain their records primarily in the
currency of the country within which they operate. Accordingly, income, expense
and balance sheet values must be translated into U.S. dollars. The value of
assets and liabilities of foreign subsidiaries are translated into U.S. dollars
using rates of exchange at the balance sheet date and resulting cumulative
translation adjustments are recorded in other comprehensive income (loss).
Revenues and expenses are translated at rates of exchange in effect during the
year. Transaction gains and losses and translation adjustments relating to
subsidiaries in countries with highly inflationary economies are included in net
income.
Derivative Instruments and Hedging Activities
All derivative instruments are recorded in the consolidated balance sheets at
fair value. If the derivative has been designated as a cash flow hedge, changes
in the fair value are recognized in other comprehensive income (loss) until the
hedged transaction is recognized in earnings.
Use of Estimates
In accordance with U.S. generally accepted accounting principles ("GAAP"),
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 goodwill and
long-lived assets, heavy maintenance expense, pension and other postretirement
benefit obligations, withdrawal liability from United Mine Workers of America
pension plans, and deferred tax assets.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year's financial statement presentation.
Former Coal Operations - 2002
The following accounting policies of the Company's former coal operations were
in effect in 2002. The Company completed its exit of the coal business in
December 2002. The operating results of the former coal operations for 2002 are
included as a component of the Company's income (loss) from discontinued
operations. Since the Company is no longer in the coal business, it has not used
these policies since 2002.
86
Revenue Recognition
Coal sales were generally recognized when coal was loaded onto transportation
vehicles for shipment to customers. For domestic sales, this generally occurred
when coal was loaded onto railcars at mine locations. For export sales, this
generally occurred when coal was loaded onto marine vessels at terminal
facilities.
Expenses related to Property, Plant and Equipment
Depletion of bituminous coal lands was provided on the basis of tonnage mined in
relation to the estimated total of recoverable tonnage in the ground. Mine
development costs were capitalized and amortized over the estimated useful life
of the mine. These costs included expenses incurred for site preparation and
development at the mines during the development stage. A mine was considered
under development until management determined that all planned production units
were in place and the mine was available for commercial operation and the mining
of coal.
New Accounting Standards
Adopted Standards
Effective January 1, 2004, the Company adopted FASB Interpretation No. 46
(revised December 2003), "Consolidation of Variable Interest Entities," which
addresses how a business enterprise should evaluate whether it has a controlling
financial interest in an entity through a means other than voting rights. The
implementation of this new standard did not have a material effect on the
Company's results of operations or financial position.
Effective December 31, 2003, the Company adopted SFAS No. 132R, "Employers'
Disclosure about Pensions and Other Postretirement Benefits." SFAS No. 132R does
not change the way liabilities are valued and expenses are calculated for those
plans. The standard requires, among other things, additional disclosures about
the assets held in employer sponsored plans, disclosures relating to plan asset
investment policy and practices, disclosure of expected contributions to be made
to the plans and expected benefit payments to be made by the plans.
In December 2004, the FASB issued FASB Staff Position No. FAS 109-2 ("FSP
109-2"), "Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creations Act of 2004." The
American Job Creation Act introduced a limited time 85% dividends received
deduction on the repatriation of certain foreign earnings to U.S. taxpayers,
provided certain criteria are met. FSP 109-2 provides accounting and disclosure
guidance for the repatriation provision. FSP 109-2 is effective immediately and
the required disclosures have been included in note 18.
Standards not yet adopted
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." SFAS No.
123R is a revision of SFAS No. 123 and supersedes APB 25. SFAS No. 123R
eliminates the use of the intrinsic value method of accounting, and requires
companies to recognize the cost of employee services received in exchange for
awards of equity instruments based on the grant-date fair value of those awards.
The effective date of SFAS No. 123R is the first reporting period beginning
after June 15, 2005, which is third quarter 2005 for calendar year companies,
although early adoption is allowed. SFAS No. 123R permits companies to adopt its
requirements using either a "modified prospective" method or a "modified
retrospective" method. Under the "modified prospective" method, compensation
cost is recognized in the financial statements beginning with the effective
date, based on the requirements of SFAS No. 123R for all share-based payments
granted after that date, and based on the requirements of SFAS No. 123 for all
unvested awards granted prior to the effective date of SFAS No. 123R. Under the
"modified retrospective" method, the requirements are the same as under the
"modified prospective" method, except that entities also are allowed to restate
financial statements of previous periods based on pro forma disclosures made in
accordance with SFAS No. 123.
The Company currently utilizes Black-Scholes, a standard option pricing model,
to measure the fair value of stock options granted to employees. While SFAS No.
123R permits entities to continue to use such a model, the standard also permits
the use of a "lattice" model. The Company has not yet determined which model it
will use to measure the fair value of employee stock options upon the adoption
of SFAS No. 123R. See note 16 for further information.
87
The Company currently expects to adopt SFAS No. 123R effective July 1, 2005;
however, the Company has not yet determined which of the adoption methods it
will use. Subject to a complete review of the requirements of SFAS No. 123R,
based on stock options granted to employees through December 31, 2004, and stock
options expected to be granted during 2005, the Company expects that the
adoption of SFAS No. 123R on July 1, 2005, will reduce both third quarter 2005
and fourth quarter 2005 net earnings by approximately $1 million ($0.02 per
diluted share). See note 16 for further information on the Company's share-based
compensation plans.
NOTE 2 - SEGMENT INFORMATION
- --------------------------------------------------------------------------------
The Company conducts business in three different operating segments: Brink's,
BHS, and BAX Global. 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 offers services globally including armored car transportation, automated
teller machine ("ATM") replenishment and servicing, currency and deposit
processing including its "Cash Logistics" operations, 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. Brink's operates in approximately 50 countries.
BHS offers monitored security services in North America primarily for
owner-occupied, single-family residences. To a lesser extent, BHS offers
security services for commercial and multi-family properties. BHS typically
installs and owns the on-site security systems, and charges fees to monitor and
service the systems.
BAX Global provides transportation and supply chain management services on a
global basis, specializing in the heavy freight market for business-to-business
shipping. In North America, BAX Global provides overnight, second day and
deferred freight delivery as well as supply chain management services and
charter services. Internationally, BAX Global provides air and ocean delivery
services, freight forwarding services, supply chain management services and
international customs brokerage services. BAX Global has approximately 90
stations in the U.S. and approximately 170 stations in international locations
and has agency agreements with approximately 115 agent locations.
The Company has no single customer that represents more than 10% of its total
revenue.
Assets Revenues Operating Profit (Loss)
- ------------------------------------------------------------------------------------------------------------------------
December 31, Years Ended December 31, Years Ended December 31,
(In millions) 2004 2003 2002 2004 2003 2002 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------
Business Segments
Brink's $ 1,041.2 945.2 842.8 $ 1,931.9 1,689.0 1,579.9 $ 144.7 112.5 96.1
BHS 440.6 410.9 387.5 345.6 310.4 282.4 80.8 71.2 60.9
BAX Global 839.7 763.1 741.6 2,440.6 1,999.2 1,871.5 56.2 3.0 17.6
- ------------------------------------------------------------------------------------------------------------------------
Business Segments 2,321.5 2,119.2 1,971.9 4,718.1 3,998.6 3,733.8 281.7 186.7 174.6
Corporate:
VEBA (a) - 105.2 18.2 - - - - - -
Other 101.3 45.8 72.8 - - - (45.9) (27.8) (23.1)
Former operations and interests:
Net deferred tax assets 230.1 228.0 238.7 - - - - - -
Gain on sale of equity interest - - - - - - - 10.4 -
Other (b) 25.3 50.4 158.3 - - - (45.9) (69.5) (19.2)
- ------------------------------------------------------------------------------------------------------------------------
$ 2,678.2 2,548.6 2,459.9 $ 4,718.1 3,998.6 3,733.8 $ 189.9 99.8 132.3
========================================================================================================================
(a) See notes 4 and 5.
(b) Former coal operations operating loss in 2004 and 2003 represents ongoing
expenses of former coal operations; these types of expenses were classified
as discontinued operations in 2002. Operating loss in 2002 represents
impairment and other charges.
88
Capital Expenditures Depreciation and Amortization
- -----------------------------------------------------------------------------------------------------------
Years Ended December 31, Years Ended December 31,
(In millions) 2004 2003 2002 2004 2003 2002
- -----------------------------------------------------------------------------------------------------------
Business Segments
Brink's $ 76.2 80.9 79.3 $ 81.0 70.6 61.3
BHS 117.6 98.0 86.9 42.9 40.1 37.3
BAX Global (a) 25.4 23.6 27.1 41.8 47.0 44.4
Corporate 1.1 0.2 0.1 0.7 2.5 0.3
- -----------------------------------------------------------------------------------------------------------
Property and equipment 220.3 202.7 193.4 166.4 160.2 143.3
Amortization of BHS deferred subscriber
acquisition costs - - - 8.6 7.8 6.6
- -----------------------------------------------------------------------------------------------------------
$ 220.3 202.7 193.4 $ 175.0 168.0 149.9
- -----------------------------------------------------------------------------------------------------------
(a) Excludes aircraft heavy maintenance expenditures and amortization.
Years Ended December 31
- -----------------------------------------------------------------------------------------------------------
(In millions) 2004 2003 2002
- -----------------------------------------------------------------------------------------------------------
Other BHS Information
Impairment charges from subscriber disconnects $ 38.4 34.3 32.3
Amortization of deferred revenue (26.1) (25.0) (23.9)
Deferred subscriber acquisition costs (current year payments) (19.5) (18.4) (17.7)
Deferred revenue from new subscribers (current year receipts) 34.6 28.2 27.1
===========================================================================================================
Long-Lived Assets Revenues
- ----------------------------------------------------------------------------------------------------------
December 31, Years Ended December 31,
(In millions) 2004 2003 2002 2004 2003 2002
- ----------------------------------------------------------------------------------------------------------
Geographic
International:
Business segments:
France $ 168.1 156.4 134.7 $ 516.9 420.7 376.7
Other 315.9 278.8 241.3 2,303.7 1,741.6 1,546.8
- -----------------------------------------------------------------------------------------------------------
Subtotal 484.0 435.2 376.0 2,820.6 2,162.3 1,923.5
===========================================================================================================
United States:
Business segments 776.6 767.9 751.2 1,897.5 1,836.3 1,810.3
Corporate 1.5 0.7 0.8 - - -
Former operations 2.3 6.4 53.6 - - -
- -----------------------------------------------------------------------------------------------------------
Subtotal 780.4 775.0 805.6 1,897.5 1,836.3 1,810.3
- ----------------------------------------------------------------------------------------------------------
$ 1,264.4 1,210.2 1,181.6 $4,718.1 3,998.6 3,733.8
==========================================================================================================
89
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.
December 31,
(In millions) 2004 2003 2002
- --------------------------------------------------------------------------------------
Net assets outside the U.S.
EMEA (a) $ 252.5 241.8 203.5
Latin America (b) 92.0 73.7 64.2
Asia Pacific 155.2 116.9 74.4
Canada and other 53.6 40.0 35.7
- --------------------------------------------------------------------------------------
$ 553.3 472.4 377.8
======================================================================================
(a) Europe, Middle East and Africa.
(b) Latin America, Mexico and Puerto Rico.
December 31,
(In millions) 2004 2003 2002
- --------------------------------------------------------------------------------------
Investments in unconsolidated equity affiliates
Brink's $ 11.9 23.1 23.8
Other 5.2 6.9 11.7
- --------------------------------------------------------------------------------------
$ 17.1 30.0 35.5
======================================================================================
Share of earnings of unconsolidated equity affiliates
Brink's $ 1.0 1.6 1.3
Other - (1.3) (0.1)
- --------------------------------------------------------------------------------------
$ 1.0 0.3 1.2
======================================================================================
The Company's accounting method for a 20%-owned Mexican investee of Brink's
changed in the third quarter of 2004 from the equity method of accounting to the
cost method of accounting reflecting management's conclusion that the Company no
longer sufficiently influences the management of the investee to merit
equity-method accounting. The Company's investment at December 31, 2004 was
approximately $9 million. The Company has approximately $14 million of currency
exchange losses in accumulated other comprehensive loss related to the investee.
Undistributed earnings of equity affiliates included in consolidated retained
earnings approximated $8.6 million at December 31, 2004 and $33 million at
December 31, 2003.
90
NOTE 3 - 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) 2004 2003 2002
- -----------------------------------------------------------------------------------------------------------
Numerator
Income from continuing operations $ 100.6 18.2 69.4
Preferred stock dividends (a) - - (0.5)
Premium on repurchase of preferred stock (a) - - (0.6)
- -----------------------------------------------------------------------------------------------------------
Numerator for basic and diluted income per share from continuing operations $ 100.6 18.2 68.3
===========================================================================================================
Denominator
Basic weighted average common shares outstanding 54.6 53.1 52.1
Effect of dilutive stock options 0.7 0.1 0.3
- -----------------------------------------------------------------------------------------------------------
Diluted weighted average common shares outstanding 55.3 53.2 52.4
===========================================================================================================
Antidilutive stock options excluded from computation 0.6 3.1 1.2
===========================================================================================================
(a) See "Series C Convertible Preferred Stock" in note 17.
Shares of the Company's common stock held by The Brink's Company Employee
Benefits Trust (the "Trust") that have not been allocated to employees under the
Company's various benefit plans are excluded from earnings per share
calculations since they are treated as treasury shares for the calculation of
earnings per share. The Trust held 1.1 million unallocated shares at December
31, 2004, 0.6 million unallocated shares at December 31, 2003 and 1.8 million
unallocated shares at December 31, 2002.
NOTE 4 - EMPLOYEE AND RETIREE BENEFITS
- --------------------------------------------------------------------------------
The employee benefit plans and other liabilities described below cover eligible
employees and retirees. The measurement date for all plans is December 31, 2004.
Pension Plans
The Company has noncontributory defined benefit pension plans covering
substantially all U.S. non-union 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 required by applicable regulations.
91
The weighted average assumptions used in determining the net pension cost and
benefit obligations for the Company's pension plans were as follows:
U.S. Plans Non-U.S. Plans
- -----------------------------------------------------------------------------------------------------------
2004 2003 2002 2004 2003 2002
- -----------------------------------------------------------------------------------------------------------
Discount rate:
Pension cost 6.25% 6.75% 7.25% 5.55% 5.86% 6.51%
Benefit obligation at year end 5.75% 6.25% 6.75% 5.32% 5.55% 5.86%
Expected long-term rate of return on assets -
Pension cost 8.75% 8.75% 10.00% 6.37% 6.74% 7.78%
Average rate of increase in salaries (a):
Pension cost 5.03% 5.04% 5.04% 3.09% 3.40% 3.61%
Benefit obligation at year end 5.03% 5.03% 5.04% 3.21% 3.09% 3.40%
===========================================================================================================
(a) Salary scale assumptions are determined through historical experience and
vary by age and industry.
The net pension cost for the Company's pension plans is as follows:
(in millions) U.S. Plans Non-U.S. Plans Total
- -------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2004 2003 2002 2004 2003 2002 2004 2003 2002
- -------------------------------------------------------------------------------------------------------------
Service cost $ 23.5 23.0 25.0 $ 8.7 7.6 5.5 $ 32.2 30.6 30.5
Interest cost on PBO 40.8 38.6 36.0 9.4 7.8 6.3 50.2 46.4 42.3
Return on assets - expected (49.5) (49.1) (52.4) (8.8) (7.4) (7.8) (58.3) (56.5) (60.2)
Amortization of losses 14.4 7.4 0.9 3.1 3.1 0.5 17.5 10.5 1.4
- -------------------------------------------------------------------------------------------------------------
Net pension cost $ 29.2 19.9 9.5 $ 12.4 11.1 4.5 $ 41.6 31.0 14.0
=============================================================================================================
In June 2003, the Company amended the benefit formula for its U.S. pension plan
which resulted in a $4.1 million reduction in service cost in 2003 from what it
would have otherwise been. This change had no effect on benefits earned for
service prior to June 2003.
92
Reconciliations of the PBO, plan assets, funded status and net pension assets at
December 31, 2004 and 2003 for all of the Company's pension plans are as
follows:
(In millions) U.S. Plans Non-U.S. Plans Total
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2004 2003 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------
PBO at beginning of year $ 672.9 589.1 172.4 126.6 845.3 715.7
Service cost 23.5 23.0 8.7 7.6 32.2 30.6
Interest cost 40.8 38.6 9.4 7.8 50.2 46.4
Plan participants' contributions - - 2.7 2.2 2.7 2.2
Benefits paid (25.3) (23.4) (5.9) (4.2) (31.2) (27.6)
Actuarial loss 50.5 45.6 7.8 9.2 58.3 54.8
Foreign currency exchange rate changes - - 15.6 23.2 15.6 23.2
- -------------------------------------------------------------------------------------------------------------------
PBO at end of year $ 762.4 672.9 210.7 172.4 973.1 845.3
===================================================================================================================
Fair value of plan assets at beginning of year $ 541.9 431.2 135.5 98.7 677.4 529.9
Return on assets - actual 67.1 113.7 7.4 14.8 74.5 128.5
Plan participants' contributions - - 2.7 2.2 2.7 2.2
Employer contributions 11.4 20.4 6.7 6.0 18.1 26.4
Benefits paid (25.3) (23.4) (5.9) (4.2) (31.2) (27.6)
Foreign currency exchange rate changes - - 11.7 18.0 11.7 18.0
- -------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 595.1 541.9 158.1 135.5 753.2 677.4
===================================================================================================================
Funded status $ (167.3) (131.0) (52.6) (36.9) (219.9) (167.9)
Unrecognized experience loss 253.3 234.7 57.3 49.0 310.6 283.7
Unrecognized prior service cost 0.2 0.3 1.0 1.3 1.2 1.6
- -------------------------------------------------------------------------------------------------------------------
Net prepaid pension assets $ 86.2 104.0 5.7 13.4 91.9 117.4
===================================================================================================================
Included in:
Prepaid pension assets $ - - 14.1 15.8 14.1 15.8
Accrued pension cost:
Current, included in accrued liabilities (0.4) (0.4) (7.6) (5.0) (8.0) (5.4)
Noncurrent (80.8) (56.7) (36.2) (29.9) (117.0) (86.6)
Accumulated other comprehensive loss 167.4 161.1 35.4 32.5 202.8 193.6
- -------------------------------------------------------------------------------------------------------------------
Net prepaid pension assets $ 86.2 104.0 5.7 13.4 91.9 117.4
===================================================================================================================
Information comparing plan assets to plan obligations as of December 31, 2004
and 2003 are aggregated below. The accumulated benefit obligation ("ABO")
differs from the PBO in that the ABO is the obligation actually earned through
the date noted. The PBO includes assumptions about future compensation levels.
ABO Greater Plan Assets
(In millions) Than Plan Assets Greater Than ABO Total
- ------------------------------------------------------------------------------------------------
December 31, 2004 2003 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------
PBO $ 919.6 801.7 53.4 43.6 973.0 845.3
ABO 824.5 716.4 47.5 37.2 872.0 753.6
Fair value of plan assets 703.5 632.2 49.7 45.2 753.2 677.4
================================================================================================
93
The Company's unrecognized experience loss increased in 2004 primarily due to
lower discount rate assumptions (which increased the ABO and PBO) partially
offset by higher than expected returns on plan assets. The unrecognized
experience loss at the end of 2003 was slightly lower than the prior year as
actuarial losses related to lower discount rates were more than offset by better
than expected returns on plan assets. These actuarial losses are largely
deferred with a portion of these losses being amortized on a straight-line basis
over the average remaining service period of employees expected to receive
benefits under the plans.
The Company's weighted-average asset allocations at December 31, 2004 and 2003
by asset category is as follows:
(In millions, except percentages) U.S. Plans Non-U.S. Plans
- ------------------------------------------------------------------------------
December 31, 2004 2003 2004 2003
- ------------------------------------------------------------------------------
Equity securities 72% 73% 54% 52%
Debt securities 27% 26% 43% 44%
Other 1% 1% 3% 4%
- ------------------------------------------------------------------------------
Total 100% 100% 100% 100%
==============================================================================
Plan assets at fair value $ 595.1 541.9 158.1 135.5
Actual return on assets during year $ 67.1 113.7 7.4 14.8
==============================================================================
Assets of U.S. pension plans are invested primarily using actively managed
accounts with asset allocation targets of 70% equities, which include a broad
array of market capitalization sizes and investment styles, and 30% fixed income
securities. The Company's policy does not permit certain investments, including
investments in The Brink's Company common stock, unless part of a commingled
fund, or derivative instruments unless used for hedging purposes. Fixed-income
investments must have an investment grade rating at the time of purchase. The
plan rebalances its assets on a quarterly basis if actual allocations of assets
are outside predetermined ranges. Among other factors, the performance of asset
groups and investment managers will affect the long-term rate of return.
The Company selects the expected long-term rate of return assumption for its
U.S. pension plan 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.
Based on December 31, 2004 data, assumptions and funding regulations, the
Company does not currently plan to make a contribution to the primary U.S. plan
in 2005. There are limits to the amount of benefits which can be paid to
participants from a U.S. qualified pension plan. The Company maintains a
nonqualified U.S. plan to pay benefits for those eligible current and former
employees in the U.S. whose benefits exceed the regulatory limits.
Assets of non-U.S. plans are invested primarily using actively managed accounts
with weighted-average asset allocation targets of 53% equities, 46% fixed income
securities and 1% other, primarily cash. The Company selects the expected
long-term rates of return for its non-U.S. pension plans using advice from its
investment advisors and its actuary considering plan asset allocation targets
and expected overall investment manager performance.
The Company expects to contribute approximately $7.5 million to its non-U.S.
pension plans in 2005.
94
The Company's projected benefit payments at December 31, 2004 for each of the
next five years and the aggregate five years thereafter are as follows:
(In millions) U.S. Plans Non-U.S. Plans Total
- --------------------------------------------------------------------
2005 $ 26.8 4.4 31.2
2006 28.2 4.9 33.1
2007 30.0 5.6 35.6
2008 31.9 6.6 38.5
2009 33.9 7.5 41.4
2010 through 2014 209.0 48.0 257.0
- --------------------------------------------------------------------
Total $ 359.8 77.0 436.8
====================================================================
Multi-employer Pension Plans
The Company participates in the United Mine Workers of America ("UMWA") 1950 and
1974 pension plans. The Company believes that it is likely that it will withdraw
from the plans prior to June 30, 2005, the plan's year end. A withdrawal from
the plans occurs when there is a significant reduction in or elimination of the
hours worked by employees working under UMWA labor agreements. Upon withdrawal
from these coal-related plans, the Company will become obligated to pay the
plans a portion of the underfunded status of the plans as of the beginning of
the plan year in which a withdrawal occurs, as determined by the plan agreements
and by law. The Company expects to become obligated to pay a $36.6 million
withdrawal liability during 2005 based on the funded status of the plans at June
2004. The obligation could change materially if the Company does not withdraw
prior to June 30, 2005.
Expense included in continuing operations for multi-employer pension plans
(excluding coal-related plans) was $3.7 million in 2004, $2.8 million in 2003
and $1.8 million in 2002.
Savings Plans
The Company sponsors various defined contribution plans to assist eligible
employees in providing for retirement. Employee contributions to the primary
U.S. 401(k) plan in 2002 and the first half of 2003 were matched at rates of
between 50% to 100% on up to 5% of compensation (subject to certain
limitations). In June 2003, the Company modified the match provision of the
primary U.S. 401(k) plan and employee contributions were matched at 75% over the
last half of 2003 and all of 2004. Contribution expense in continuing operations
for the primary U.S. 401(k) plan aggregated $10.9 million in 2004, $11.5 million
in 2003 and $10.9 million in 2002. Contribution expense for the primary U.S.
401(k) plan included in discontinued operations was $0.1 in 2003 and $0.6
million in 2002.
Contribution expense related to other plans aggregated $5.8 million in 2004,
$5.0 million in 2003 and $3.6 million in 2002.
95
Postretirement Benefits Other Than Pensions
Summary
The Company has various postretirement benefits other than pensions. The related
amounts recorded on the balance sheets for the last two years are detailed
below.
December 31,
(In millions) 2004 2003
- ---------------------------------------------------------------------------
Company-sponsored plans $ 157.1 311.9
Health Benefit Act 185.5 197.5
Black Lung 41.5 43.7
- ---------------------------------------------------------------------------
384.1 553.1
Current, included in accrued liabilities (52.9) (48.9)
- ---------------------------------------------------------------------------
Noncurrent $ 331.2 504.2
===========================================================================
Company-Sponsored Plans
The Company provides certain postretirement health care 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 related to Company-sponsored
plans were as follows:
(In millions) Coal-related plans Other plans Total
- ---------------------------------------------------------------------------------------------------------
Years Ended December 31, 2004 2003 2002 2004 2003 2002 2004 2003 2002
- ---------------------------------------------------------------------------------------------------------
Service cost $ - - 0.4 $ 1.0 0.9 0.8 $ 1.0 0.9 1.2
Interest cost on accumulated
postretirement benefit
obligations ("APBO") 32.2 34.7 31.7 1.6 1.5 1.4 33.8 36.2 33.1
Return on assets - expected (9.2) - - - - - (9.2) - -
Amortization of losses 13.5 14.3 9.7 0.3 0.1 - 13.8 14.4 9.7
- ---------------------------------------------------------------------------------------------------------
Net periodic postretirement
costs $ 36.5 49.0 41.8 $ 2.9 2.5 2.2 $ 39.4 51.5 44.0
=========================================================================================================
96
Reconciliations of the APBO and funded status to the accrued other
postretirement benefit cost (the amount recorded on the balance sheet) for
Company-sponsored plans at December 31, 2004 and 2003 are as follows:
(In millions) Coal-related plans Other plans Total
- -----------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2004 2003 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------------
APBO at beginning of year $ 526.2 518.3 $ 26.8 23.1 $ 553.0 541.4
Service cost - - 1.0 0.9 1.0 0.9
Interest cost 32.2 34.7 1.6 1.5 33.8 36.2
Benefits paid (35.0) (30.4) (2.3) (2.0) (37.3) (32.4)
Actuarial loss, net 96.3 3.6 3.1 3.3 99.4 6.9
Other (2.0) - - - (2.0) -
- -----------------------------------------------------------------------------------------------------------------------
APBO at end of year $ 617.7 526.2 $ 30.2 26.8 $ 647.9 553.0
=======================================================================================================================
Fair value of plan assets at
beginning of year $ - - $ - - $ - -
Employer contributions:
Restriction of VEBA at January 1, 2004
(see note 5) 105.2 - - - 105.2 -
Payments to beneficiaries 35.0 30.4 2.3 2.0 37.3 32.4
Payments to VEBA 50.0 - - - 50.0 -
Return on assets - actual 17.2 - - - 17.2 -
Benefits paid (35.0) (30.4) (2.3) (2.0) (37.3) (32.4)
- -----------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 172.4 - $ - - $ 172.4 -
=======================================================================================================================
Funded status $ (445.3) (526.2) $ (30.2) (26.8) $ (475.5) (553.0)
Unrecognized experience loss 314.6 239.8 3.1 0.4 317.7 240.2
Unrecognized prior service cost - - 0.7 0.9 0.7 0.9
- -----------------------------------------------------------------------------------------------------------------------
Accrued other postretirement
benefit cost at end of year $ (130.7) (286.4) $ (26.4) (25.5) $ (157.1) (311.9)
=======================================================================================================================
The APBO for each of the plans was determined using the unit credit method and
an assumed discount rate as follows:
Company-sponsored plans 2004 2003 2002
- --------------------------------------------------------------------------
Weighted-average discount rate:
Postretirement cost 6.25% 6.75% 7.25%
Benefit obligation at year end 5.75% 6.25% 6.75%
Expected long-term rate of return on
assets - postretirement cost 8.75% N/A N/A
==========================================================================
For Company-sponsored coal-related plans, the assumed health care cost trend
rate used to compute the 2004 APBO was 10% for 2005, declining ratably to 5% in
2010 and thereafter (in 2003: 9% for 2004 declining ratably to 5% in 2009 and
thereafter). The other plans provide for fixed-dollar value coverage for
eligible participants and, accordingly, are not adjusted for inflation.
97
The table below shows the estimated effects of a one percentage point change in
the assumed health care cost trend rates for each future year.
Effect of Change in
Health Care Trend Rates
--------------------------------
(In millions) Increase 1% Decrease 1%
- ------------------------------------------------------------------------------
Higher (lower):
Service and interest cost in 2004 $ 4.0 (3.3)
APBO at December 31, 2004 79.0 (65.9)
==============================================================================
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law. The Act introduced a
prescription drug benefit under Medicare as well as a federal subsidy to
sponsors of retiree health care benefit plans that provide a benefit that is at
least actuarially equivalent to Medicare prescription drug benefits. Because of
the broadness of coverage provided under the Company's plan, the Company
believes that the plan benefits are at least actuarially equivalent to the
Medicare benefits. The Company reflected the estimated effect of the new
legislation in 2003 as a $45.7 million reduction to the actuarial loss, as
permitted by FASB Staff Position No. 106-1, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003." The estimated value of the projected federal subsidy
assumes no changes in participation rates and assumes that the subsidy is
received in the year after claims are paid. The estimated reduction in per
capita claim costs for participants over 65 years old was 12%.
The Act had no effect on 2003 expense. In 2004, the Company's net periodic
postretirement costs were approximately $5.8 million lower due to the Act as a
result of lower amortization of losses. The estimated net present value of the
subsidy, reflected as a reduction to the APBO, was approximately $59 million at
December 31, 2004.
The plans had an actuarial loss in 2004 due to a combination of the increase in
expected medical inflation and the reduction in the discount rate. In 2003, the
plans had an actuarial gain from the Medicare subsidy. This was more than offset
by an actuarial loss primarily related to the reduction in the discount rate.
In 2004, the Company restricted the use of the VEBA so that it will be used to
only pay benefits related to the Company's coal-related postretirement medical
plan. Accordingly, under SFAS No. 106, estimated returns on the VEBA assets were
included in the determination of net periodic postretirement costs for 2004.
The Company's asset allocations at December 31, 2004 by asset category are as
follows:
December 31,
(In millions, except percentages) 2004
- -----------------------------------------------------------
Equity securities 73%
Debt securities 26%
Other 1%
- -----------------------------------------------------------
Total 100%
===========================================================
Plan assets at fair value $ 172.4
Actual return on assets during year $ 17.2
===========================================================
Plan assets of the Company-sponsored postretirement medical plan held by the
VEBA are invested primarily using actively managed accounts with asset
allocation targets of 70% equities, which include a broad array of market
capitalization sizes and investment styles, and 30% fixed income securities. The
Company's policy does not permit certain investments, including investments in
The Brink's Company common stock, unless part of a commingled fund, or
derivative instruments unless used for hedging purposes. Fixed-income
investments must have an investment grade rating at the time of purchase. The
plan rebalances its assets on a quarterly basis if actual allocations of assets
are outside predetermined ranges. Among other factors, the performance of asset
groups and investment managers will affect the long-term rate of return.
98
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
for the primary U.S. pension plan which is invested similarly.
Although the Company intends to further fund the VEBA over time, there is no
requirement to do so. The Company determines whether it will make a contribution
on an annual basis.
The Company's projected benefit payments at December 31, 2004 for each of the
next five years and the aggregate five years thereafter are as follows:
Before Medicare Subsidy
---------------------------------------------
(In millions) Coal-related Plans Other Plans Subtotal Medicare Subsidy(a) Net projected payments
- ---------------------------------------------------------------------------------------------------------------
2005 $ 38.3 1.7 40.0 - 40.0
2006 41.0 1.8 42.8 - 42.8
2007 43.6 2.1 45.7 (2.8) 42.9
2008 45.5 2.1 47.6 (3.0) 44.6
2009 47.5 1.9 49.4 (3.2) 46.2
2010 through 2014 242.4 10.4 252.8 (18.8) 234.0
- ---------------------------------------------------------------------------------------------------------------
Total $ 458.3 20.0 478.3 (27.8) 450.5
===============================================================================================================
(a) Only the coal-related plans are expected to meet the requirements to
receive the Medicare subsidy.
Health Benefit Act Liabilities
Background
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.
Assigned Beneficiaries. 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 Brink's Company
and certain of its subsidiaries (collectively, the "Brink's 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 Brink's
Companies have received notices from the Social Security Administration (the
"SSA") with regard to the current number of assigned beneficiaries for which the
Brink's Companies are deemed responsible under the Health Benefit Act.
Unassigned Beneficiaries. In addition, the Health Benefit Act provides that
assigned companies, including the Brink's 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 these benefits are not funded
from other designated sources. To date, almost all of the funding for unassigned
beneficiaries has been provided from transfers from the Abandoned Mine Land
Reclamation Fund (the "AML Fund") or other government sources.
Information and Assumptions Used to Estimate Obligation
The Company's liability for Health Benefit Act obligations 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 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 premium per beneficiary for that year. The
Company expects to pay annual premiums over the next 60 to 70 years, but it
expects these annual premiums to gradually decline over time as the number of
beneficiaries decreases.
99
The estimated liability at December 31, 2004 assumes that almost all of the
costs for unassigned beneficiaries for the plan year ending September 30, 2005
will continue to be paid with transfers of cash from the AML Fund and other
government sources. Transfers to the Combined Fund from the AML Fund beyond this
date are not sufficiently assured and the Company's current estimate of its
obligations assumes that no future transfers will be made by the AML Fund. The
Company's estimate of its probable contingent liability for premiums for
unassigned beneficiaries could materially decrease in future periods depending
on the availability of future funding by the AML Fund or other sources.
Moreover, the Company's estimate of its contingent liability for unassigned
beneficiaries could increase materially in the future if other responsible coal
operators become insolvent. This liability could also change materially if the
percentage of unassigned beneficiaries that are allocated to the Company changes
due to relative mortality rates of the Company's assigned beneficiaries compared
to the total assigned beneficiaries.
Information provided by the Combined Fund and assumptions made by the Company
are as follows:
At the beginning of the plan year 2004 2003
- ------------------------------------------------------------------------------------------
Number of assigned beneficiaries for the Brink's Companies 2,343 2,581
Total unassigned pool of beneficiaries 16,502 17,394
Percent of total unassigned pool allocated to the Brink's Companies 9.7% 9.2%
Health benefit premium per beneficiary $ 3,099 2,965
==========================================================================================
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. At December 31, 2003 and 2004, annual inflation rates for
per-beneficiary health care premiums were assumed to be 4.5% for all future
years. 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.
Undiscounted Obligation for Health Benefit Act Liabilities
December 31,
(In millions) 2004 2003
- -----------------------------------------------------------------------------
Combined Fund:
Assigned beneficiaries $ 112.4 124.5
Unassigned beneficiaries 66.1 65.7
Other 7.0 7.3
- -----------------------------------------------------------------------------
$ 185.5 197.5
=============================================================================
Reconciliation of Health Benefit Act Liabilities
Years Ended December 31,
(In millions) 2004 2003 2002
- -----------------------------------------------------------------------------------------------
Beginning of the year $ 197.5 174.1 159.9
Actuarial (gain) loss (a) (3.2) 31.3 24.0
Payments (8.8) (7.9) (9.8)
- -----------------------------------------------------------------------------------------------
End of the year $ 185.5 197.5 174.1
===============================================================================================
(a) Included in income (loss) from discontinued operations.
The $3.2 million actuarial gain in 2004 is primarily related to a slight
decrease in the number of beneficiaries assigned to the Company at October 1,
2004 compared to the amount estimated at the end of 2003. As a result, the
estimate of assigned beneficiaries in future periods was also lower.
100
The $31.3 million charge in 2003 is primarily related to the assumed increase in
the number of unassigned beneficiaries allocated to the Company. The increased
allocation was due to two factors. First, the Company increased its allocation
percentage because of a change in the way the Company interprets the statute
governing the allocation, based on findings of court cases that year. Second,
other coal operations became insolvent during the period and their assigned
beneficiaries were transferred to the unassigned pool. These actions reduced the
denominator (the total assigned pool) in the computation of the allocation
percentage, increasing the Company's allocation assumption, and increased the
unassigned pool.
The $24.0 million actuarial loss in 2002 primarily resulted from the Company's
ability 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 Company currently estimates that its annual cash funding under the Health
Benefit Act will be slightly higher in 2005, increase in 2006 to approximately
$12 million as a result of the assumption that premiums for unassigned
beneficiaries will not be paid for through transfers from the AML Fund. In
subsequent years, payments are expected to decline as the number of
beneficiaries decreases. The Company's projected benefit payments at December
31, 2004 for each of the next five years and the aggregate five years thereafter
are as follows:
Projected
(In millions) Payments
---------------------------------------
2005 $ 8.9
2006 12.0
2007 11.3
2008 10.7
2009 10.0
2010 through 2014 41.1
---------------------------------------
Total $ 94.0
=======================================
Pneumoconiosis (Black Lung) Obligations
The Company acts as self-insurer with respect to almost all black lung
obligations. 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). The components of net periodic
postretirement benefit costs related to black lung obligations were as follows:
Years Ended December 31,
(In millions) 2004 2003 2002
- ---------------------------------------------------------------------
Interest cost on APBO and other $ 3.6 4.5 5.4
Amortization of losses 1.2 1.5 1.9
- ---------------------------------------------------------------------
Net periodic postretirement costs $ 4.8 6.0 7.3
=====================================================================
101
Reconciliations of the APBO and funded status to the accrued other
postretirement benefit costs for black lung obligations at December 31, 2004 and
2003 are as follows:
Years Ended December 31,
(In millions) 2004 2003
- --------------------------------------------------------------------------------
APBO at beginning of year $ 63.0 60.0
Interest costs and other 3.6 4.5
Benefits paid (7.0) (7.7)
Actuarial (gain) loss, net (4.4) 6.2
- --------------------------------------------------------------------------------
APBO at end of year $ 55.2 63.0
================================================================================
Funded status $ (55.2) (63.0)
Unrecognized experience loss 13.7 19.3
- --------------------------------------------------------------------------------
Accrued other postretirement benefit cost at end of year $ (41.5) (43.7)
================================================================================
The 1983 Group Annuity Mortality table is used. The following are the other key
actuarial assumptions for the black lung obligations:
December 31,
Black Lung Benefits 2004 2003
- --------------------------------------------------------------------------------
Discount rate:
Postretirement cost 6.25% 6.75%
Benefit obligation at year end 5.75% 6.25%
Medical cost inflation 8.00% 8.00%
================================================================================
The Company's projected benefit payments at December 31, 2004 for each of the
next five years and the aggregate five years thereafter are as follows:
Projected
(In millions) Payments
---------------------------------------
2005 $ 5.2
2006 5.0
2007 4.8
2008 4.6
2009 4.5
2010 through 2014 21.0
---------------------------------------
Total $ 45.1
=======================================
102
NOTE 5 - INVESTMENTS HELD BY VEBA TRUST
- --------------------------------------------------------------------------------
At the beginning of 2004, the use of the VEBA was restricted to the Company's
coal-related postretirement medical plan. As a result, the Company may use the
assets in the VEBA only to pay for certain retiree benefits and not for other
purposes. Accordingly, beginning in 2004 the VEBA assets are reflected as a plan
asset for the Company's coal related postretirement medical plan. In 2003, the
investments held by the VEBA were classified as available for sale. The
information shown below reflects unrealized gains and losses as of December 31,
2003.
Gross Gross
unrealized unrealized
holding holding Fair
(In millions) Cost gains losses Value
- ------------------------------------------------------------------------------
December 31, 2003
Debt securities:
Government $ 9.7 0.1 (0.1) 9.7
Corporate 20.4 0.1 (0.2) 20.3
- ------------------------------------------------------------------------------
Debt securities 30.1 0.2 (0.3) 30.0
Equity securities 70.3 4.8 (0.3) 74.8
Cash equivalents 0.4 - - 0.4
- ------------------------------------------------------------------------------
Total assets held by the VEBA $ 100.8 5.0 (0.6) 105.2
==============================================================================
The contractual maturities of the VEBA's debt securities holdings at December
31, 2003 were:
(In millions) Cost Fair Value
- ---------------------------------------------------------------
Due in one year or less $ 6.0 5.8
Due after one through five years 20.1 20.2
Due after five through 10 years 1.7 1.7
Due after 10 years 2.3 2.3
- ---------------------------------------------------------------
Total $ 30.1 30.0
===============================================================
103
NOTE 6 - FORMER NATURAL RESOURCE OPERATIONS
- --------------------------------------------------------------------------------
The Company has disposed of essentially all of its natural resources interests.
Summary of Proceeds from Sales of Natural Resource Interests
Notes
Net Liabilities Receivable Fair Value
Cash Assumed by and Royalty Received for
(In millions) Received Purchaser (a) Agreement (b) Assets Disposed
- -----------------------------------------------------------------------------------------------------------------
2002
Coal business
(Virginia and Kentucky) $ 42.3 22.1 24.0 88.4
=================================================================================================================
2003
Natural gas business $ 81.2 - - 81.2
Portion of timber business 5.4 - - 5.4
Equity interest in MPI Mines Ltd. 18.8 - - 18.8
Coal assets (West Virginia) 14.0 14.8 - 28.8
- -----------------------------------------------------------------------------------------------------------------
2003 $ 119.4 14.8 - 134.2
=================================================================================================================
2004
Remainder of timber business $ 33.7 - - 33.7
Purchase of leased assets (6.2) - - (6.2)
Gold business 1.1 2.6 - 3.7
- -----------------------------------------------------------------------------------------------------------------
2004 $ 28.6 2.6 - 31.2
=================================================================================================================
2005
Coal business (Virginia) (c) $ 5.0 - - 5.0
=================================================================================================================
(a) Liabilities in this column are primarily reclamation liabilities and
exclude working capital liabilities.
(b) The Company settled the royalty agreement and collected the notes
receivables in 2003 for $26.0 million in cash.
(c) Additional proceeds from the sale of the coal business in Virginia;
collected in early 2005 and accrued in 2004 in discontinued operations.
104
Discontinued Operations
Years Ended December 31,
(In millions) 2004 2003 2002
- -------------------------------------------------------------------------------------------------
Gain (loss) on sale of
Timber $ 20.7 4.8 -
Gold (0.9) - -
Natural Gas - 56.2 -
Coal 5.0 - 13.2
Results from operations
Timber (0.5) (0.2) (1.0)
Gold (1.2) (4.1) (7.6)
Natural Gas - 11.2 9.0
Coal (a) - - (28.1)
Adjustments to contingent liabilities of former operations
Health Benefit Act liabilities (See note 4) 3.2 (31.3) (24.0)
Withdrawal liabilities (See note 4) 15.4 (17.0) (26.8)
Reclamation liabilities (0.1) (3.2) -
Workers' compensation liabilities (4.9) 0.2 -
Recovery of environmental costs (See note 23) - 5.3 -
Other (3.3) (2.7) -
- -------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations before income taxes 33.4 19.2 (65.3)
Income tax benefit (expense) (12.5) (8.0) 22.0
- -------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations $ 20.9 11.2 (43.3)
=================================================================================================
(a) Coal's loss was recognized under APB No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," in which future losses are estimated and accrued in advance
of the period in which losses occur.
Gain (loss) on Sale
In December 2003, the Company sold a portion of its timber business for $5.4
million in cash and recognized a $4.8 million pretax gain. In 2004, the Company
received an additional $33.7 million for the remaining portion of its timber
business. After deducting the book value of related assets and the payment of
$6.2 million in 2004 to purchase equipment formerly leased, the Company
recognized a $20.7 million pretax gain in discontinued operations in 2004.
In February 2004, the Company sold its gold operations for approximately $1.1
million in cash plus the assumption of liabilities and recognized a $0.9 million
loss.
In August 2003, the Company sold its natural gas business and received $81.2
million in cash and recognized a $56.2 million gain.
In 2004, the Company recognized a $5.0 million gain from additional
consideration earned under its agreement to sell its former coal business in
Virginia. The additional $5.0 million in consideration was collected in February
2005.
105
During 2000 and 2001, the Company recorded charges of $101.8 million to reflect
the estimated loss on the sale of the coal business. A $13.2 million reversal of
the previously estimated loss on sale was recorded during 2002 to reflect the
amount of actual proceeds and values of assets and liabilities at the dates of
sale. The assets disposed of in 2002 primarily consisted of operations including
coal reserves, property, plant and equipment, the Company's economic interest in
Dominion Terminal Associates and inventory. Certain liabilities, primarily
reclamation costs related to properties disposed of, were assumed by the
purchasers.
Interest expense allocated to discontinued operations in the last three years
was not material.
Results of Operations
The following tables show selected financial information for the results from
operations for discontinued operations for the three years ended December 31,
2004.
Years Ended December 31,
(In millions) 2004 2003 2002
- -----------------------------------------------------------------------------
Timber
Revenues $ 1.2 21.1 20.9
Pretax loss (0.5) (0.2) (1.0)
=============================================================================
Gold
Revenues $ 4.4 23.5 15.2
Pretax loss (1.2) (4.1) (7.6)
=============================================================================
Natural Gas
Revenues $ - 7.3 6.8
Pretax income - 11.2 9.0
=============================================================================
Coal
Revenues $ - - 266.5
Pretax loss - - (77.5)
=============================================================================
Continuing Operations
In October 2003, the Company sold its 23.3% equity interest in MPI Mines Ltd.,
an Australian exploration and development company with interests in gold and
nickel, for $18.8 million in cash and recognized a $10.4 million pretax gain in
continuing operations.
In November 2003, the Company sold substantially all of its remaining
coal-related assets for $14 million in cash plus the assumption of reclamation
and other liabilities for total proceeds of $28.8 million. A gain of up to $6
million may be recognized in 2005 as liabilities related to reclamation are
formally transferred to the buyer.
106
Classification of Ongoing Expenses in the Statements of Operations
The classification of income statement items related to the Company's former
coal business during the last three years is set forth in the following table.
After the disposal of the coal business, certain expenses began to be classified
within continuing operations, while adjustments to coal-related contingent
assets and liabilities continue to be reported within discontinued operations.
The classification of expenses in 2005 and beyond is expected to be the same as
in 2003 and 2004:
Years Ended December 31,
2004 2003 2002
- ----------------------------------------------------------------------------------------------------------
Classification as Continuing or Discontinued Operations
Ongoing expenses:
Company-sponsored postretirement benefits Continuing Continuing Discontinued
Black lung obligations Continuing Continuing Discontinued
Pension Continuing Continuing Discontinued
Administrative, legal and other coal expenses Continuing Continuing Discontinued
Adjustments to contingent assets and liabilities
of former businesses (a) Discontinued Discontinued Discontinued
==========================================================================================================
(a) Includes contingent reclamation liabilities of closed mines, Health Benefit
Act liabilities, withdrawal liabilities from multi-employer pension plans,
workers' compensation liabilities, and Federal Black Lung Excise Tax
contingent assets.
Costs of Former Operations Included in Continuing Operations
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------
(In millions) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------
Postretirement benefits other than pensions:
Retiree medical benefits $ 37.1 49.8 -
Black lung 4.8 6.0 -
Pension 1.8 (0.8) -
Administrative, legal and other coal expenses, net 9.2 17.4 -
Other income, net (7.0) (2.9) -
Impairment and other costs - - 19.2
- ------------------------------------------------------------------------------------------------------
Total $ 45.9 69.5 19.2
======================================================================================================
107
NOTE 7 - COSTS ASSOCIATED WITH EXIT ACTIVITIES
- --------------------------------------------------------------------------------
In 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. The
following summarizes the 2003 and 2004 expense, payments and liability for costs
associated with the closure. The expense was primarily included in selling,
general and administrative expense.
One-time Lease
(In millions) Termination Benefits Termination Costs Other Total
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $ - - - -
Expense 1.7 0.6 3.1 5.4
Payments (1.4) - (2.9) (4.3)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 0.3 0.6 0.2 1.1
Revision to liability recorded as an adjustment to expense - (0.1) - (0.1)
Payments (0.3) (0.5) (0.2) (1.0)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 $ - - - -
=============================================================================================================================
NOTE 8 - PROPERTY AND EQUIPMENT
- --------------------------------------------------------------------------------
The following table presents the Company's property and equipment that is
classified as held and used:
December 31,
(In millions) 2004 2003
- ------------------------------------------------------------------------------
Land $ 23.2 21.8
Buildings 159.6 158.6
Leasehold improvements 171.2 156.6
Security systems 647.3 579.2
Vehicles 210.5 189.1
Capitalized software 155.8 151.3
Aircraft and related assets 64.0 72.7
Other machinery and equipment 480.2 444.8
- ------------------------------------------------------------------------------
1,911.8 1,774.1
Accumulated depreciation and amortization (997.8) (900.9)
- ------------------------------------------------------------------------------
Property and equipment, net $ 914.0 873.2
==============================================================================
108
NOTE 9 - IMPAIRMENT OF LONG-LIVED ASSETS
- --------------------------------------------------------------------------------
As described in note 1, the Company regularly records impairment charges at BHS
related to disconnected security systems. Other impairment charges recorded
within continuing operations are as follows:
Years Ended December 31,
(In millions) 2004 2003 2002
- -------------------------------------------------------------------------------
Coal assets reclassified to held and used $ - - 14.1
BAX Global transportation software 5.0 - -
Other 0.8 1.3 1.7
- -------------------------------------------------------------------------------
Total $ 5.8 1.3 15.8
===============================================================================
The Company recognized a $5.0 million impairment loss within its BAX Global
segment in 2004. The loss related to a decision to abandon the development and
installation of certain transportation logistics planning software. The
impairment loss has been recorded as a component of other operating income, net,
in the Company's consolidated statement of operations.
At December 31, 2002, approximately $43.3 million (original carrying value) of
residual long-lived coal assets were reclassified 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, or 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 in
2002 as a result of the reclassification. In 2003, as described in note 6, the
Company sold substantially all of its coal assets that previously had been
classified as held and used.
NOTE 10 - OTHER ASSETS
- --------------------------------------------------------------------------------
December 31,
(In millions) 2004 2003
- --------------------------------------------------------------------------------
Deferred subscriber acquisition costs $ 65.1 60.1
Deferred charges for aircraft heavy maintenance 18.7 22.3
Investment in unconsolidated affiliates:
Equity method 17.1 30.0
Cost method 8.9 -
Long-term receivables 16.7 18.5
Prepaid pension assets 14.1 15.8
Other 36.7 36.2
- --------------------------------------------------------------------------------
Other assets $ 177.3 182.9
================================================================================
109
NOTE 11 - ACCRUED LIABILITIES
- --------------------------------------------------------------------------------
December 31,
(In millions) 2004 2003
- --------------------------------------------------------------------------------------------------
Payroll and other employee liabilities $ 135.9 125.6
Taxes 111.5 90.9
Postretirement benefits other than pensions 52.9 48.9
Aircraft lease turnback obligations (a) 52.2 22.4
Withdrawal obligation for coal related multi-employer pension plan (b) 36.6 -
Workers' compensation and other claims 37.6 38.0
Other 185.8 178.4
- --------------------------------------------------------------------------------------------------
Accrued liabilities $ 612.5 504.2
==================================================================================================
(a) Aircraft lease turnback obligations represent amounts estimated to be paid
related to heavy maintenance upon the expiration of aircraft lease
agreements. At December 31, 2004, all of the aircraft lease agreements were
scheduled to expire in 2005.
(b) See note 4.
NOTE 12 - OTHER LIABILITIES
- --------------------------------------------------------------------------------
December 31,
(In millions) 2004 2003
- --------------------------------------------------------------------------------------------------
Workers' compensation and other claims $ 65.1 60.4
Minority interest 40.0 36.1
Withdrawal obligations for coal-related multi-employer pension plans (a) - 52.0
Aircraft lease turnback obligations (b) - 29.8
Other 71.7 61.1
- --------------------------------------------------------------------------------------------------
Other liabilities $ 176.8 239.4
==================================================================================================
(a) See note 4.
(b) See note 11.
110
NOTE 13 - LONG-TERM DEBT
- --------------------------------------------------------------------------------
December 31,
(In millions, denominated in U.S. dollars unless noted) 2004 2003
- ---------------------------------------------------------------------------------------------------
Bank credit facilities:
Revolving Facility (year-end weighted average rate of
2.90% in 2004 and 2.40% in 2003) $ 18.4 30.9
Euro-denominated credit facilities of French
subsidiaries (year-end weighted average rate of
3.11% in 2004 and 3.40% in 2003) 7.5 13.4
Other non-U.S. dollar denominated facilities (year-end
weighted average rate of 9.92% in 2004 and 8.70% in 2003) 20.6 19.9
- ---------------------------------------------------------------------------------------------------
46.5 64.2
- ---------------------------------------------------------------------------------------------------
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 20.0
- ---------------------------------------------------------------------------------------------------
95.0 95.0
- ---------------------------------------------------------------------------------------------------
Other:
Capital leases (average rates: 5.35% in 2004 and 5.54% in 2003) 32.0 36.3
Dominion Terminal Associates 6.0% bonds, due 2033 43.2 43.2
- ---------------------------------------------------------------------------------------------------
Total long-term debt 216.7 238.7
Current maturities of long-term debt:
Bank credit facilities 6.0 7.3
Senior Notes 18.3 -
Capital leases 10.8 9.9
- ---------------------------------------------------------------------------------------------------
Total current maturities of long-term debt 35.1 17.2
- ---------------------------------------------------------------------------------------------------
Total long-term debt excluding current maturities $ 181.6 221.5
===================================================================================================
During October 2004, the Company entered into a new unsecured $400 million
revolving bank credit facility with a syndicate of banks to replace the existing
$350 million facility which was due to expire in 2005. The new facility allows
the Company to borrow (or otherwise satisfy credit needs) on a revolving basis
over a five-year term ending in October 2009. Both the old and new facility are
referred to herein as the "Revolving Facility." At December 31, 2004, $381.6
million was available for usage under the new Revolving Facility. The Company
has the option to borrow based on a eurocurrency-based rate plus a margin, a
prime rate or a competitive bid among the individual banks. The margin on
eurocurrency-based borrowings, which can range from 0.3% to 1.0% depending on
the Company's credit rating, was 0.6% at December 31, 2004. When borrowings and
letters of credit under the Revolving Facility are in excess of $200 million,
the applicable interest rate is increased by 0.125%. The Company also pays an
annual fee on the Revolving Facility based on the Company's credit rating. The
facility fee, which can range from 0.1% to 0.25%, was 0.15% as of December 31,
2004.
During November 2004, the Company also entered into an unsecured $150 million
credit facility with a bank to provide letters of credit and other borrowing
capacity over a five-year term ending in December 2009 (the "Letter of Credit
Facility"). The costs of such letters of credit are expected to be approximately
the same as borrowings under its $400 million facility discussed above. The
Company intends to use the Letter of Credit Facility to replace surety bonds and
other letters of credit needed to support its activities. As of December 31,
2004, $106.7 million was utilized under this revolving credit facility. The
Revolving Facility and the multi-currency revolving credit facilities are also
used for the issuance of letters of credit and bank guarantees.
111
At December 31, 2004, the Company had $95 million of Senior Notes outstanding
that are scheduled to be repaid in 2005 through 2008, including $18.3 million
which was paid as scheduled in January 2005. Interest on each series of the
Senior 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
Senior Notes are unsecured.
The Company has three unsecured multi-currency revolving bank credit facilities
with a total of $105 million in available credit at December 31, 2004, of which
$37.0 million was unused. When rates are favorable, the Company also borrows
from other banks under short-term uncommitted agreements. 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.
Minimum repayments of long-term debt are as follows:
Capital Other long-
(In millions) Leases term debt Total
------------------------------------------------------
2005 $ 10.8 24.3 35.1
2006 7.2 38.4 45.6
2007 4.4 27.2 31.6
2008 3.1 28.8 31.9
2009 4.0 19.3 23.3
Later years 2.5 46.7 49.2
------------------------------------------------------
Total $ 32.0 184.7 216.7
======================================================
The Company's Brink's, BHS and BAX Global subsidiaries have guaranteed the
Revolving Facility, the Letter of Credit Facility and the Senior Notes. The
Revolving Facility, the Letter of Credit Facility, 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,
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. The credit agreements do not provide for the acceleration of
payments should the Company's credit rating be reduced. If the Company were not
to comply with the terms of its various loan agreements, the repayment terms
could be accelerated and the commitment could be withdrawn. 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, 2004.
In 2003, at the Company's request, the Peninsula Ports Authority of Virginia
issued a new series of bonds to replace the previous bonds related to Dominion
Terminal Associates, a deep water coal terminal in which the Company no longer
has an interest. The Company continues to pay interest on and guarantee payment
of the $43.2 million principle of the new bonds and ultimately will have to pay
for the retirement of the new bonds in accordance with the terms of the
guarantee. The new bonds bear a fixed interest rate of 6.0% (versus a fixed
interest rate of 7.375% for the previous bonds) and mature in 2033. The new
bonds may mature prior to 2033 upon the occurrence of certain specified events
such as the determination that the bonds are taxable or the failure of the
Company to abide by the terms of its guarantee.
At December 31, 2004, the Company had undrawn unsecured letters of credit and
guarantees totaling $221.7 million, including $106.7 million issued under the
Letter of Credit Facility, and $44.4 million issued under the multicurrency
revolving bank credit facility. These letters of credit primarily support the
Company's obligations under various self-insurance programs, credit facilities
and aircraft leases.
112
NOTE 14 - ACCOUNTS RECEIVABLE AND ASSET SECURITIZATION
- --------------------------------------------------------------------------------
December 31,
(In millions) 2004 2003
- ------------------------------------------------------------------
Trade $ 716.1 562.8
Other 60.1 45.1
- ------------------------------------------------------------------
776.2 607.9
Estimated uncollectible amounts (26.7) (27.6)
- ------------------------------------------------------------------
Accounts receivable, net $ 749.5 580.3
==================================================================
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.
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
Revolving Facility. The Company expects to renew or replace this agreement prior
to its expiration in December 2005.
The conduit has a priority collection interest in the entire pool of receivables
and, as a result, BAX Funding has retained credit risk in excess of its retained
interest. 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 Brink's Company has guaranteed the performance of BAX Global with
respect to the agreement.
December 31,
(In millions) 2004 2003
- -------------------------------------------------------------------------------
Accounts receivable purchased by BAX Funding:
Total pool $ 118.9 93.0
Revolving interest sold to conduit (25.0) (77.0)
- -------------------------------------------------------------------------------
Amount included in accounts receivable $ 93.9 16.0
- -------------------------------------------------------------------------------
Due to the short-term nature of the Company's retained interest in accounts
receivable, fair value approximates carrying value, net of an appropriate
allowance. The Company has not recorded a servicing asset or liability because
the average servicing period for accounts receivable approximates one month.
113
NOTE 15 - OPERATING LEASES
- --------------------------------------------------------------------------------
The Company leases facilities, 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. The Company expects that in the
normal course of business, the majority of operating leases will be renewed or
replaced by other leases.
As of December 31, 2004, future minimum lease payments under noncancellable
operating leases with initial or remaining lease terms in excess of one year are
included below.
(In millions) Facilities Vehicles Other Total
- --------------------------------------------------------------------
2005 $ 95.2 29.5 6.2 130.9
2006 74.1 22.3 4.2 100.6
2007 60.9 15.2 2.8 78.9
2008 47.4 9.8 1.9 59.1
2009 36.0 6.1 1.6 43.7
Later years 131.0 7.0 1.3 139.3
- --------------------------------------------------------------------
$ 444.6 89.9 18.0 552.5
====================================================================
The table above includes lease payments for the initial accounting lease term
and all renewal periods for most 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 $54.4
million at December 31, 2004. 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 value guarantee will reduce to zero at the end of the final renewal
period.
The Company leases BHS's headquarters and monitoring facility and two Brink's
branch facilities in the U.S. which have the option to either renew the lease,
purchase the asset at a predetermined price, or pay a guaranteed residual value.
At December 31, 2004, the maximum guaranteed residuals on these leases totaled
$12.3 million. The Company has committed to purchase the BHS facility and one of
the Brink's branches in early 2005 for $12.6 million. The residual value
guarantee on the remaining lease was $1.3 million. In addition, the Company has
$4.9 million of maximum guaranteed residuals on another operating lease.
At December 31, 2004, the Company had thirteen DC-8 aircraft under one-year
lease agreements used primarily in BAX Global's American transportation network.
The lease agreements expire in 2005 with operating lease payments aggregating
$12.7 million. In addition, in early 2005, the Company entered into agreements
for eleven 727 aircraft to be used in the network under aircraft, crew,
maintenance and insurance agreements. These agreements expire in 2005 with
minimum 2005 payments aggregating $33.1 million.
Net rent expense amounted to $159.1 million in 2004, $152.0 million in 2003 and
$149.0 million in 2002. Sublease rental income for all years presented was not
significant.
114
NOTE 16 - SHARE-BASED COMPENSATION PLANS
- --------------------------------------------------------------------------------
The Company has stock incentive plans to encourage employees and nonemployee
directors to remain with the Company and to more closely align their interests
with those of the Company's shareholders.
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 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 and vest in full at the end of six
months. There are 0.7 million shares underlying options for both plans that are
authorized, but not yet granted.
The table below summarizes the activity in all plans for options of the
Company's common stock for 2004, 2003 and 2002.
Per Share
Weighted Average
(Shares in millions) Shares Exercise Price
- -------------------------------------------------------------------------
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
Granted 0.6 15.24
Exercised (0.1) 14.10
Forfeited or expired (0.6) 30.79
- -------------------------------------------------------------------------
Outstanding at December 31, 2003 4.0 21.14
Granted 0.9 31.88
Exercised (1.3) 19.63
Forfeited or expired (0.3) 35.18
- -------------------------------------------------------------------------
Outstanding at December 31, 2004 3.3 $ 23.24
=========================================================================
115
The following table summarizes information about stock options outstanding and
exercisable as of December 31, 2004.
(Shares in millions) Stock Options Outstanding Stock Options Exercisable
- ----------------------------------------------------------------------------------------------------------
Weighted Average Per Share Per Share
Range of Remaining Contractual Weighted Average Weighted Average
Exercise Prices Shares Life (Years) Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------
$ 13.66 to 14.49 0.2 1.9 $ 13.70 0.2 $ 13.70
14.50 to 16.99 0.6 4.6 15.26 0.1 15.24
17.00 to 19.99 0.1 1.8 18.88 0.1 18.86
20.00 to 21.49 0.7 3.4 21.41 0.3 21.31
21.50 to 23.99 0.5 3.0 21.72 0.5 21.72
24.00 to 30.99 0.3 2.3 26.38 0.3 27.25
31.00 to 159.12 0.9 5.6 33.00 - 41.97
- ----------------------------------------------------------------------------------------------------------
Total 3.3 3.8 $ 23.24 1.5 $ 20.68
==========================================================================================================
There were 2.3 million shares of exercisable options with a weighted-average
exercise price of $22.62 per share at December 31, 2003 and 2.1 million shares
of exercisable options with a weighted-average exercise price of $26.40 per
share at December 31, 2002.
Employee Stock Purchase Plan
Under the 1994 Employee Stock Purchase Plan (the "ESPP"), as amended in 2004,
the Company is authorized to issue up to 0.6 million shares of common stock (of
which 0.1 million shares had been issued as of December 31, 2004) to eligible
employees. The ESPP is a noncompensatory plan that allows eligible employees to
buy the Company's common stock at below market value, subject to plan
limitations on the amount an employee may purchase annually. Under the ESPP, the
Company sold approximately 0.1 million shares of common stock to employees in
2004, approximately 0.2 million shares in 2003 and approximately 0.1 million
shares in 2002.
NOTE 17 - CAPITAL STOCK
- --------------------------------------------------------------------------------
Repurchase Program
The Company has the remaining authority to purchase up to 1.0 million shares of
common stock under a share repurchase program authorized by the Board of
Directors, with an aggregate purchase price limitation of $19.1 million.
Employee Benefits Trust
The Brink's Company Employee Benefits Trust (the "Trust") holds shares of the
Company's common stock to fund obligations under certain compensation and
employee benefit programs that provide for the issuance of stock. In December
2003, the Board approved an additional 2.5 million shares of common stock which
was issued to the Trust in 2004. Shares held by the Trust that have not been
allocated to employees are accounted for at fair value as a reduction of
shareholders' equity. Shares of 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 401(k) plan.
Preferred Stock
At December 31, 2004, the Company has authority to issue up to 2.0 million
shares of preferred stock, par value $10 per share.
116
Series A Preferred Stock Rights Agreement
Under the Amended and Restated Rights Agreement dated as of September 2003,
holders of 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 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 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 common
stock or on specific dates 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 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 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.
Series C Convertible Preferred Stock
On August 15, 2002 the Company redeemed all 21,433 outstanding shares of the
$31.25 Series C Cumulative Convertible Preferred Stock for $506.25 per share, or
$10.8 million, including a $0.6 million premium on the redemption. The premium
represents the excess of cash paid to holders over the carrying value of the
shares redeemed.
NOTE 18 - INCOME TAXES
- --------------------------------------------------------------------------------
The provision (benefit) for income taxes from continuing operations consists of
the following:
Years Ended December 31,
(In millions) 2004 2003 2002
- --------------------------------------------------------------------------
Current tax provision
U.S. federal $ 0.2 - 12.0
State 5.6 1.0 3.1
Foreign 33.3 24.5 25.8
- --------------------------------------------------------------------------
39.1 25.5 40.9
- --------------------------------------------------------------------------
Deferred tax provision (benefit)
U.S. federal 18.5 (8.6) 2.1
State 0.4 20.4 (4.1)
Foreign 2.9 18.4 1.5
- --------------------------------------------------------------------------
21.8 30.2 (0.5)
- --------------------------------------------------------------------------
$ 60.9 55.7 40.4
==========================================================================
The U.S. federal current income tax provision on continuing operations in 2002
was offset by U.S. federal current tax benefits included in the loss from
discontinued operations.
117
Years Ended December 31,
(In millions) 2004 2003 2002
- ---------------------------------------------------------------------------------------------------------
Comprehensive provision (benefit) for income taxes allocable to
Continuing operations $ 60.9 55.7 40.4
Discontinued operations 12.5 8.0 (22.0)
Other comprehensive income (loss) (3.9) 15.9 (80.3)
Shareholders' equity (4.7) (0.2) (0.2)
- ---------------------------------------------------------------------------------------------------------
$ 64.8 79.4 (62.1)
=========================================================================================================
The components of the net deferred tax asset are as follows:
December 31,
(In millions) 2004 2003
- -------------------------------------------------------------------------------------------------
Deferred tax assets
Accounts receivable $ 7.9 6.8
Postretirement benefits other than pensions 125.2 178.2
Pension liabilities 56.0 35.4
Multi-employer pension plan withdrawal liabilities 12.8 18.2
Workers' compensation and other claims 46.8 47.3
Deferred revenue 60.4 58.0
Other assets and liabilities 129.4 139.5
Net operating loss carryforwards 78.4 51.3
Alternative minimum tax credits 56.1 54.9
- -------------------------------------------------------------------------------------------------
Subtotal 573.0 589.6
Valuation allowances (55.8) (43.5)
- -------------------------------------------------------------------------------------------------
Total deferred tax assets 517.2 546.1
- -------------------------------------------------------------------------------------------------
Deferred tax liabilities
Property and equipment, net 130.1 116.2
Prepaid pension assets 9.5 5.5
Other prepaid assets 20.4 19.1
VEBA - 36.8
Other assets and miscellaneous 33.4 20.7
- -------------------------------------------------------------------------------------------------
Total deferred tax liabilities 193.4 198.3
- -------------------------------------------------------------------------------------------------
Net deferred tax asset $ 323.8 347.8
=================================================================================================
Included in:
Current assets $ 116.0 91.7
Noncurrent assets 234.7 282.7
Current liabilities, included in accrued liabilities (0.9) (0.1)
Noncurrent liabilities (26.0) (26.5)
- -------------------------------------------------------------------------------------------------
Net deferred tax asset $ 323.8 347.8
=================================================================================================
The valuation allowances relate to deferred tax assets in certain state and
non-U.S. 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
valuation allowances, at December 31, 2004.
118
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 each year to the income from continuing
operations before income taxes.
Years Ended December 31,
(In millions) 2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes:
United States $ 66.4 10.1 61.9
Foreign 95.1 63.8 47.9
- -----------------------------------------------------------------------------------------------------------------------
Total $ 161.5 73.9 109.8
=======================================================================================================================
Tax provision computed at statutory rate $ 56.5 25.9 38.4
Increases (reductions) in taxes due to:
Adjustments to valuation allowances 10.2 34.3 1.5
Federal benefit for valuation allowance on state deferred tax assets (0.3) (5.9) -
State income taxes (net of federal tax benefit exclusive of valuation allowance) 3.0 2.9 (0.7)
Medicare subsidy of postretirement costs (2.0) - -
Foreign income taxes (4.7) (3.7) 1.5
Taxes on undistributed earnings of foreign affiliates (1.7) 1.2 -
Changes in accrual for tax contingencies 0.6 (2.0) (3.4)
Adjustments to current and deferred tax accounts (0.3) 3.3 1.6
Other (0.4) (0.3) 1.5
- -----------------------------------------------------------------------------------------------------------------------
Actual tax provision from continuing operations $ 60.9 55.7 40.4
=======================================================================================================================
Adjustments to the beginning-of-year valuation allowance in 2004 were $5.6
million and related primarily to several European operations with a recent
history of losses. The valuation allowance also increased by $4.6 million in
2004 to offset the net 2004 increase in deferred tax assets in jurisdictions
where the Company had concluded in prior years that valuation allowances were
necessary. Adjustments to the beginning-of-year valuation allowance in 2003 were
$34.3 million and related primarily to certain state and foreign deferred tax
assets. The valuation allowances were required due to the Company's assessment
that these assets did not meet the more-likely-than-not recognition criteria of
SFAS No. 109.
Adjustments were made to the Company's current and deferred tax assets and
liabilities in the prior three years based on a detailed analysis conducted by
the Company. In 2003 and 2002, the Company also reversed contingency accruals
related to favorable settlements of issues relating primarily to the Company's
U.S. federal tax returns.
As of December 31, 2004, the Company has not recorded U.S. federal deferred
income taxes on $340.7 million of undistributed earnings of its foreign
subsidiaries. With the exception of amounts discussed below, it is expected that
these earnings will be permanently reinvested in operations outside the U.S. It
is not practical to compute the estimated deferred tax liability on these
earnings.
The Company does not expect to be able to complete its evaluation of the
repatriation provision of the new American Jobs Creation Act of 2004 until after
Congress passes statutory technical corrections and the Treasury Department
issues further guidance on key elements of the provision. In January 2005, the
Treasury Department began to issue the first of a series of clarifying guidance
documents related to this provision. The Company expects to complete its
evaluation of the effects of the repatriation provision within the first two
fiscal quarters of 2005, provided Congress and the Treasury Department issue
guidance by that time. The range of possible amounts that the Company is
considering for repatriation under this provision is between zero and $150
million. While the Company estimates that the related potential range of
additional income tax payments is between zero and $10 million, this estimate
may change based on the passage of technical correction legislation.
The Company's U.S. entities file a consolidated U.S. federal income tax return.
119
As of December 31, 2004, the Company had approximately $56 million of
alternative minimum tax credits available to offset future U.S. federal income
taxes and, under current tax law, the carryforward period for these credits is
unlimited.
The gross amount of the net operating loss carryforwards as of December 31, 2004
was $416.7 million. The tax benefit of net operating loss carryforwards, before
valuation allowances, as of December 31, 2004 was $78.4 million. Tax benefits
related to operating losses of $2.8 million were recognized in 2004 as a benefit
in income from continuing operations. Net operating loss carryforwards expire as
follows:
(In millions) Federal State Foreign Total
- ----------------------------------------------------------------------------
Year of expiration:
2005-2009 $ - 2.9 5.8 8.7
2010-2014 - 3.2 1.2 4.4
2015 and thereafter 14.1 10.4 - 24.5
Unlimited - - 40.8 40.8
- ----------------------------------------------------------------------------
$ 14.1 16.5 47.8 78.4
============================================================================
The Company and its subsidiaries are subject to tax examinations in various U.S.
and foreign jurisdictions and the Company has accrued approximately $16 million
for related contingencies. While it is difficult to predict the final outcome of
the various issues that may arise during an examination, the Company believes
that it has adequately provided for all contingent income tax liabilities and
interest.
NOTE 19 - SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------------------------------------------
Years Ended December 31,
(In millions) 2004 2003 2002
- --------------------------------------------------------------------------------------------------
Cash paid for:
Interest $ 19.3 23.9 22.7
Income taxes, net 34.4 25.3 14.8
==================================================================================================
Other noncash financing activities - settlement of
employee benefits with Company common shares $ 16.3 16.8 17.1
==================================================================================================
NOTE 20 - OTHER OPERATING INCOME, NET
- --------------------------------------------------------------------------------
Years Ended December 31,
- --------------------------------------------------------------------------------------------------
(In millions) 2004 2003 2002
- --------------------------------------------------------------------------------------------------
Gains on sale of operating assets, net $ 5.9 7.7 -
Impairment losses (5.8) (1.3) -
Foreign currency transaction gains, net 2.2 3.2 2.0
Royalty income 1.6 1.7 1.3
Share of earnings of equity affiliates 1.0 0.3 1.2
Penalties on unpaid value-added taxes (0.4) - -
Other 4.6 4.0 0.7
- --------------------------------------------------------------------------------------------------
Total $ 9.1 15.6 5.2
==================================================================================================
120
NOTE 21 - OTHER NONOPERATING INCOME (EXPENSE), NET
- --------------------------------------------------------------------------------
Years Ended December 31,
(In millions) 2004 2003 2002
- --------------------------------------------------------------------------------------------------------
Gains (losses) on marketable securities $ 4.3 (0.2) 0.8
Discounts and other fees of accounts receivable securitization program (1.7) (1.7) (1.6)
Gain on monetization of coal royalty agreement - 2.6 -
Other, net 0.2 1.6 (4.4)
- --------------------------------------------------------------------------------------------------------
Total $ 2.8 2.3 (5.2)
========================================================================================================
NOTE 22 - RISK MANAGEMENT
- --------------------------------------------------------------------------------
The Company has risk management policies designed to minimize the impact on
earnings and cash flows of the Company from fluctuations in interest rates,
commodity prices and foreign exchange rates. The Company utilizes derivative and
non-derivative financial instruments in order to manage these risks. The Company
does not use derivative financial instruments for purposes other than hedging
underlying commercial or financial exposures of the Company. The risk that
counterparties to these derivative financial 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
to incur a loss from the failure of any counterparty to perform under the
agreements.
Derivative Financial Instruments and Hedging Activities
Interest Rate Risk Management
The Company's interest-bearing debt and certain other obligations are subject to
interest rate fluctuation risk. The Company's risk management policy requires
that the Company maintain certain ratios between fixed and floating rates. The
Company utilizes derivative financial instruments such as interest rate swaps to
assist in meeting this objective. Interest rate swaps used by the Company
effectively change a portion of variable cash flows from floating rates to fixed
rates. The notional amounts of the swap outstanding at December 31, 2004 is
$25.0 million; this swap expires in September 2005.
During 2002, 2003, and most of 2004, the Company designated its interest rate
swaps as cash flow hedges for accounting purposes. Changes in fair value on
interest rate swaps that are accounted for as cash flow hedges are initially
recorded in other comprehensive income (loss); they are subsequently
reclassified to nonoperating expense (for hedges related to the accounts
receivable securitization facility) and to interest expense (for hedges related
to debt) in the same period in which the variable cash flows affect earnings.
Any ineffectiveness in the hedging relationship is recognized immediately in
earnings. During each of the three years ended December 31, 2004, no significant
amounts were included in earnings as a result of the interest rate swaps being
ineffective. For the three years ended December 31, 2004, no amounts were
excluded from the assessment of effectiveness.
Because the Company's debt and accounts receivable securitization levels have
decreased, the Company concluded that the associated future variable cash flows
were no longer probable. The Company terminated a notional $25.0 million
interest rate swap in December 2004. In addition, beginning in December 2004,
the Company ended the designation of its remaining notional $25.0 million
interest rate swap as a cash flow hedge. Losses previously deferred in
accumulated other comprehensive income aggregating $0.8 million at December 31,
2003 were recognized in earnings in 2004. Future changes in the fair value of
the interest rate swap will be recognized immediately in earnings. At December
31, 2004, no amount was included in accumulated other comprehensive loss related
to the remaining interest rate swap.
121
Commodities Price Risk Management
In the past, the Company has entered into swap contracts and collars to hedge a
portion of its forecasted jet fuel purchases for use in the BAX Global aircraft
operation. In addition, depending on market conditions, the Company charges its
customers a fuel surcharge to offset the effects of high jet fuel prices. At
December 31, 2004, there were no swap contracts or collars for jet fuel
outstanding. The amount of ineffectiveness recognized in 2004 pretax earnings
was not significant. No amount was included in accumulated other comprehensive
loss at December 31, 2004.
Prior to the February 2004 sale of its gold operations, the Company had entered
into forward gold sales contracts to fix the selling price on a portion of
forecasted gold sales. As part of the sale of the business, the buyer assumed
all remaining derivative financial instruments at the date of the sale.
During 2003, the Company utilized forward sales contracts and option strategies
to hedge the selling price on a portion of its forecasted natural gas sales. The
Company exited the natural gas business in 2003.
During the past three years, the Company designated its commodity derivatives as
cash flow hedges for accounting purposes. Effectiveness was assessed based on
the total changes in the estimated present value of cash flows for its jet fuel
and natural gas hedges. The effectiveness of gold hedges was assessed based on
changes in the spot rate of gold; other changes in expected cash flows were
excluded from the assessment.
For jet fuel swaps and collars, the changes in fair value were recorded in other
comprehensive income (loss) and subsequently reclassified to earnings, as a
component of operating expenses, in the same period as the jet fuel was used.
For natural gas and gold contracts prior to the sale of these businesses, the
changes in fair value were recorded in other accumulated comprehensive income
(loss) and subsequently reclassified to earnings, as a component of discontinued
operations.
Foreign Currency Risk Management
The Company is exposed to foreign currency exchange fluctuations due to various
transactions to which the Company is a party. For example, some customers are
billed for BAX Global's services in currencies that are different than the
functional currency of the subsidiary that recognizes the sale. Also, some
transportation costs incurred by BAX Global's non-U.S. subsidiaries are
denominated in currencies that are different than the subsidiaries' functional
currency. In addition, the Company has subsidiaries that have intercompany
receivables and payables that are not denominated in the subsidiaries'
functional currency.
The Company utilizes foreign currency forward contracts to minimize the
variability in cash flows due to changes in foreign currency values. The
Company's foreign currency forward contracts provide an economic hedge of the
risk associated with changes in currency rates on the related assets and
liabilities. Changes in the fair value of foreign currency forward contracts are
reported in earnings in the same period that the foreign currency transaction
gains and losses on the related assets and liabilities are reported.
As of December 31, 2004, the maximum length of time over which the Company is
hedging its exposure to the variability in future cash flows associated with
forecasted foreign currency denominated transactions is two years.
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.
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.
122
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,
2004 2003
- -----------------------------------------------------------------------------
Fair Carrying Fair Carrying
(In millions) Value Values Value Values
- -----------------------------------------------------------------------------
Senior Notes $ 102.6 95.0 107.2 95.0
DTA bonds 46.6 43.2 48.0 43.2
=============================================================================
NOTE 23 - OTHER COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
Purchase Obligations
At December 31, 2004, the Company had noncancelable commitments for $18.5
million of computer processing and consulting services and $20.8 million for
other agreements.
Value-added taxes and customs duties
One of the Company's non-U.S. Brink's, Incorporated business units has not paid
foreign customs duties and value-added taxes with respect to the importation of
certain goods and services. The Company has been advised that there could be
civil and criminal penalties asserted for the non-payment of these custom duties
and value-added taxes. The business unit has commenced discussions with the
appropriate governmental authorities in the affected jurisdiction regarding this
matter. To date no penalties have been asserted.
As a result of its investigation, the Company recorded charges in 2004 of $1.1
million to operating profit and $0.7 million to interest expense. A summary of
the impact of this situation on earnings is provided below.
Year Ended
(In millions) December 31, 2004
- --------------------------------------------------------------------------------
Penalties on unpaid value-added taxes $ 0.4
Duties 0.7
- --------------------------------------------------------------------------------
Amount charged to operating expenses 1.1
Interest expense on unpaid value-added taxes and customs duties 0.7
- --------------------------------------------------------------------------------
$ 1.8
================================================================================
The Company evaluates many factors to determine whether it should recognize or
disclose a loss contingency, including the probability of an unfavorable outcome
and the ability to make a reasonable estimate of the amount of loss. The Company
believes that the range of probable penalties related to unpaid value-added
taxes is between $0.4 million and $3 million and that no amount within that
range is a better estimate than any other amount within the range. Accordingly,
the Company has accrued $0.4 million for these penalties.
The Company has concluded that a loss related to penalties on unpaid customs
duties is not probable. The Company believes that the range of reasonably
possible losses related to customs duties penalties is between $0 and
approximately $35 million. The Company believes that the assertion of these
penalties would be excessive and would vigorously defend against any such
assertion.
123
The Company intends to diligently pursue the timely resolution of this matter
and, accordingly, the Company's estimate of the potential losses could change
materially in future periods. The assertion of potential penalties may be
material to the Company's financial position and results of operations. These
penalties could be asserted at any time. Although the Company has accrued $0.7
million of interest on the unpaid value-added taxes and customs duties, the
Company does not expect to be assessed interest charges in connection with any
penalties that may be asserted.
Litigation
BAX Global is defending a claim related to the apparent diversion by a third
party of goods being transported for a customer. Although BAX Global is
defending this claim vigorously and believes that its defenses have merit, it is
reasonably possible that this claim ultimately may be decided in favor of the
claimant. If so, the Company expects that the ultimate amount of reasonably
possible unaccrued losses could range from $0 to $10 million.
Former Coal Operations
At December 31, 2004, the Company had obligations of $23.4 million ($13.0
million at net present value) under mineral lease agreements that give it the
right to access and mine coal properties in exchange for required minimum annual
payments. These agreements required that the Company pay royalties to lessors
based on production of coal or minimum amounts if coal is not produced. In 2002,
the last year the Company produced coal, the Company's former coal operations
recorded $6.6 million of expense related to royalty payments under these
contracts.
Future advance minimum royalty payments due under the mineral lease agreements
at December 31, 2004 were as follows:
Advanced Minimum
(In millions) Royalty Payments Due
- ---------------------------------------------
2005 $ 0.7
2006 2.5
2007 1.6
2008 1.6
2009 1.1
Later years 15.9
- ---------------------------------------------
$ 23.4
=============================================
Federal Black Lung Excise Tax
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 December 31, 2004, the Company had received refunds
including interest of $27.2 million, including $2.8 million received in 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 $15 million (before income taxes), the Company has
not recorded receivables for additional FBLET refunds.
Income Tax
The Company has entered into discussions with a tax authority which, if
concluded favorably, could result in a one-time benefit of up to $27 million.
The benefit, if any, would not result in any current cash receipts but would add
to the Company's tax credit carryforwards.
124
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
obligations. As of December 31, 2004, the Company had outstanding surety bonds
with third parties totaling approximately $110 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, $6.8 million of the Company's surety bonds are
expected to be replaced by purchasers' surety bonds after the state mining
permits are transferred. Surety 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.
During November 2004, the Company entered into a new Letter of Credit Facility,
described in note 13 above. The Company intends to use letters of credit under
the new facility to satisfy much of its security requirements, and expects the
amount of outstanding surety bonds will decline in the future. At December 31,
2004, $106.7 million of letters of credit had been issued under the facility
with available credit of $43.3 million.
If the remaining surety bonds are not renewed, the Company believes that it has
adequate available borrowing capacity under its Letter of Credit Facility and
its Revolving Facility to provide letters of credit or other collateral to
secure its obligations.
Environmental Remediation
The Company has agreed to pay a portion 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 completing remediation of the site under an approved plan. In
2003, the Company and a third party reached an agreement that establishes the
allocation of past costs related to the recovery of environmental costs, and as
a result, the Company recognized a $5.3 million pretax gain in discontinued
operations. The Company estimates its portion of the remaining clean-up and
operational and maintenance costs to be $2.6 million.
In connection with the remediation of Tankport, the Company acquired a
noncontrolling interest in an adjacent residential development. The Company has
no cost basis in the investment and has not recorded any income distributions to
date, but may receive income in the future.
125
NOTE 24 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------
2004 Quarters 2003 Quarters
(In millions, except per share amounts) 1st 2nd 3rd 4th (a) 1st 2nd 3rd 4th (b)
- ----------------------------------------------------------------------------------------------------------------------
Revenues $ 1,094.5 1,131.5 1,195.0 1,297.1 $ 928.9 960.6 999.4 1,109.7
Operating profit 33.7 37.8 58.7 59.7 - 13.2 22.4 64.2
Income (loss) from:
Continuing operations $ 17.2 12.6 37.7 33.1 $ (3.2) 5.6 11.5 4.3
Discontinued operations 8.6 6.0 0.4 5.9 1.5 0.5 38.5 (29.3)
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 25.8 18.6 38.1 39.0 $ (1.7) 6.1 50.0 (25.0)
======================================================================================================================
Net income (loss) per common share:
Basic:
Continuing operations $ 0.32 0.23 0.69 0.60 $ (0.06) 0.11 0.22 0.08
Discontinued operations 0.16 0.11 - 0.11 0.03 - 0.72 (0.55)
- ----------------------------------------------------------------------------------------------------------------------
Basic $ 0.48 0.34 0.69 0.71 $ (0.03) 0.11 0.94 (0.47)
======================================================================================================================
Diluted:
Continuing operations $ 0.32 0.23 0.68 0.59 $ (0.06) 0.11 0.22 0.08
Discontinued operations 0.15 0.11 - 0.11 0.03 - 0.72 (0.55)
- ----------------------------------------------------------------------------------------------------------------------
Diluted $ 0.47 0.34 0.68 0.70 $ (0.03) 0.11 0.94 (0.47)
======================================================================================================================
Dividends declared per common share $ 0.025 0.025 0.025 0.025 $ 0.025 0.025 0.025 0.025
Stock prices:
High $ 28.38 34.47 34.29 39.91 $ 18.81 16.40 18.25 23.34
Low 22.71 27.57 25.80 30.00 12.36 12.39 14.38 17.65
======================================================================================================================
(a) Income (loss) from discontinued operations in the fourth quarter of 2004
includes a $5.0 million pretax gain as a result of additional proceeds from
the sale of a former coal operation, and $7.3 million of pretax income as a
result of a decrease in the estimate of the Company's obligation related to
the withdrawal from coal-related multiemployer pension plans.
(b) Income (loss) from continuing operations in the fourth quarter of 2003
includes $28.4 million of expense as a result of adjustments to deferred
tax valuation allowances, net, and $10.4 million pretax gain on the sale of
an investment in a gold and nickel interest. In addition, the quarter also
includes expense of $5.4 million ($3.3 million for the full year) for
adjustments related to a detailed analysis conducted by the Company of its
current and deferred income tax assets and liabilities. Income (loss) from
discontinued operations in the fourth quarter of 2003 includes pretax
adjustments to the Health Benefit Act obligation ($31.3 million of expense)
and withdrawal liability ($14.0 million of expense). The quarter also
included pretax income related to a $5.3 million recovery of environmental
costs and a $4.8 million gain on the sale of timber.
At December 31, 2004, approximately $291 million of stockholders' equity was not
available for dividends to shareholders due to limitations imposed by certain of
the Company's Revolving Facility and other lending arrangements (see note 13).
Earnings per share amounts for each quarter are required to be computed
independently. As a result, their sum may not equal the annual earnings per
share.
The Company's quarterly financial data has been reclassified to reflect the
Company's natural gas, timber and gold as part of discontinued operations.
The Company's common stock trades on the New York Stock Exchange as "BCO." Prior
to May 2003, the Company traded on the NYSE as "PZB." As of March 1, 2005, there
were approximately 2,768 shareholders of record of common stock.
126
THE BRINK'S COMPANY
and subsidiaries
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
Five Years in Review
(In millions, except per share amounts) 2004 2003 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Revenues and Income
Revenues $ 4,718.1 3,998.6 3,733.8 3,584.0 3,798.6
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ 100.6 18.2 69.4 38.3 (2.1)
Income (loss) from discontinued operations (a) 20.9 11.2 (43.3) (21.7) (202.5)
Cumulative effect of change in accounting principle (b) - - - - (52.0)
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 121.5 29.4 26.1 16.6 (256.6)
====================================================================================================================
Financial Position
Property and equipment, net $ 914.0 873.2 871.2 915.5 925.8
Total assets 2,678.2 2,548.6 2,459.9 2,423.2 2,478.7
Long-term debt, less current maturities 181.6 221.5 304.2 257.4 313.6
Shareholders' equity 674.0 495.6 381.2 476.1 475.8
====================================================================================================================
Per Common Share
Basic, net income (loss):
Continuing operations $ 1.84 0.34 1.31 0.74 -
Discontinued operations (a) 0.39 0.21 (0.83) (0.43) (4.07)
Cumulative effect of change in accounting principle (b) - - - - (1.04)
- --------------------------------------------------------------------------------------------------------------------
Total basic $ 2.23 0.55 0.48 0.31 (5.11)
- --------------------------------------------------------------------------------------------------------------------
Diluted, net income (loss):
Continuing operations $ 1.82 0.34 1.30 0.73 (0.01)
Discontinued operations (a) 0.38 0.21 (0.82) (0.42) (4.07)
Cumulative effect of change in accounting principle (b) - - - - (1.04)
- --------------------------------------------------------------------------------------------------------------------
Total diluted $ 2.20 0.55 0.48 0.31 (5.12)
- --------------------------------------------------------------------------------------------------------------------
Cash dividends $ 0.10 0.10 0.10 0.10 0.10
====================================================================================================================
Weighted Average Common Shares Outstanding
Basic 54.6 53.1 52.1 51.2 50.1
Diluted 55.3 53.2 52.4 51.4 50.1
====================================================================================================================
(a) Income (loss) from discontinued operations reflects the operations and
losses on disposal of the Company's former coal, natural gas, timber and
gold operations. Some of the expenses recorded within discontinued
operations through 2002 are continuing after the disposition of the coal
business and are recorded within continuing operations in 2003 and 2004.
The expenses that continue primarily consist of postretirement and other
employee benefits associated with Company-sponsored plans and black lung
obligations, and administrative and legal expenses to oversee residual
assets and retained benefit obligations. See notes 4 and 6. In accordance
with APB No. 30, the Company included these expenses within discontinued
operations for periods prior to 2003. Beginning in 2003, expenses related
to Company-sponsored pension and postretirement benefit obligations, black
lung obligations and related administrative costs are 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. 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.
127
BOARD OF DIRECTORS AND SENIOR MANAGEMENT
- --------------------------------------------------------------------------------
The Board of Directors, as elected by the shareholders, is divided into three
classes, with the term of office of one of the three classes of directors
expiring each year, and with each class being elected for a three-year term.
Presently, there are eleven members of the Board of Directors, ten of whom are
outside directors with broad experience in business, finance and public affairs.
Roger G. Ackerman /1/, /3,/ /5/
Retired Chairman and Chief Executive Officer - Corning Incorporated (specialty
glass, ceramics and communications)
Betty C. Alewine /1/, /4/, /6/
Retired President and Chief Executive Officer - COMSAT Corporation (provider of
global satellite services and digital networking services and technology)
James R. Barker /1/, /2/, /3/
Chairman - The Interlake Steamship Co. (vessel owners and operators of self
unloaders); Vice Chairman - Mormac Marine Group, Inc. (vessel owners of oil
product carriers); and Vice Chairman - Moran Towing Corporation (tug and barge
owners and operators)
Marc C. Breslawsky /1/, /2/, /5/
President and Chief Executive Officer - Imagistics International Inc. (direct
sales, service and marketing of enterprise office imaging and document
solutions)
John S. Brinzo /1/, /2/, /5/
Chairman, President and Chief Executive Officer - Cleveland - Cliffs Inc
(supplier of iron ore products to the steel industry in North America, China and
Europe)
James L. Broadhead /1/, /3/, /6/
Retired Chairman and Chief Executive Officer - FPL Group, Inc. (public utility
holding company)
Michael T. Dan /1/
Chairman of the Board, President and Chief Executive Officer - The Brink's
Company
Gerald Grinstein /1/, /3/, /4/
Chief Executive Officer - Delta Air Lines, Inc. (commercial airline); Principal
- - Madrona Investment Group LLC (private investment firm); Strategic Advisor -
Madrona Venture Fund (Seattle-based venture fund)
Ronald M. Gross /1/, /2/, /4/
Chairman Emeritus, Former Chairman and Chief Executive Officer - Rayonier Inc.
(a global supplier of specialty pulps, timber and wood products)
Carl S. Sloane /1/, /2/, /6/
Private Consultant and Ernest L. Arbuckle Professor of Business Administration,
Emeritus, Harvard University, Graduate School of Business Administration
Ronald L. Turner /1/, /4/, /5/
Chairman, President and Chief Executive Officer - Ceridian Corporation
(information services company engaged in providing outsourcing services to human
resources, transportation and retail markets in the United States, Canada and
Europe)
/1/ Executive Committee
/2/ Audit and Ethics Committee
/3/ Compensation and Benefits Committee
/4/ Corporate Governance and Nominating Committee
/5/ Finance Committee
/6/ Pension Committee
THE BRINK'S COMPANY
EXECUTIVE OFFICERS
Michael T. Dan
Chairman of the Board, President and
Chief Executive Officer
James B. Hartough
Vice President - Corporate Finance and Treasurer
Frank T. Lennon
Vice President - Human Resources and Administration
Austin F. Reed
Vice President, General Counsel and Secretary
Robert T. Ritter
Vice President and Chief Financial Officer
128