UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-9148
THE BRINK'S COMPANY
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(Exact name of registrant as specified in its charter)
Virginia 54-1317776
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1801 Bayberry Court, Richmond, Virginia 23226-8100
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (804) 289-9600
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
As of May 2, 2005, 56,732,685 shares of $1 par value common stock were
outstanding.
Part I - Financial Information
- ------------------------------
The Brink's Company
and subsidiaries
Consolidated Balance Sheets
March 31, December 31,
(In millions) 2005 2004
- -----------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 136.6 169.0
Accounts receivable, net 746.4 749.5
Prepaid expenses and other 68.3 58.1
Deferred income taxes 101.3 116.0
- -----------------------------------------------------------------------------------------------
Total current assets 1,052.6 1,092.6
Property and equipment, net 944.0 914.0
Goodwill, net 275.2 259.6
Deferred income taxes 244.8 234.7
Other assets 183.3 177.3
- -----------------------------------------------------------------------------------------------
Total assets $ 2,699.9 2,678.2
===============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 50.9 27.5
Current maturities of long-term debt 33.6 35.1
Accounts payable 346.6 357.0
Accrued liabilities 561.7 612.5
- -----------------------------------------------------------------------------------------------
Total current liabilities 992.8 1,032.1
Long-term debt 195.4 181.6
Accrued pension costs 126.3 117.0
Postretirement benefits other than pensions 327.6 331.2
Deferred revenue 142.6 139.5
Deferred income taxes 25.5 26.0
Other liabilities 210.1 176.8
- -----------------------------------------------------------------------------------------------
Total liabilities 2,020.3 2,004.2
Commitments and contingent liabilities (notes 5 and 8)
Shareholders' equity:
Common stock 56.7 56.7
Capital in excess of par value 450.7 457.4
Retained earnings 365.1 352.9
Accumulated other comprehensive loss (165.5) (148.1)
Employee benefits trust, at market value (27.4) (44.9)
- -----------------------------------------------------------------------------------------------
Total shareholders' equity 679.6 674.0
- -----------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,699.9 2,678.2
===============================================================================================
See accompanying notes to consolidated financial statements.
2
The Brink's Company
and subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months
Ended March 31,
(In millions, except per share amounts) 2005 2004
- --------------------------------------------------------------------------------------------
Revenues $ 1,224.6 1,094.5
Expenses:
Operating expenses 1,052.1 929.9
Selling, general and administrative expenses 138.8 134.4
- --------------------------------------------------------------------------------------------
Total expenses 1,190.9 1,064.3
Other operating income, net 3.1 3.5
- --------------------------------------------------------------------------------------------
Operating profit 36.8 33.7
Interest expense (4.6) (5.8)
Interest and other income, net 0.7 4.4
Minority interest (3.8) (3.3)
- --------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 29.1 29.0
Provision for income taxes 13.3 11.8
- --------------------------------------------------------------------------------------------
Income from continuing operations 15.8 17.2
- --------------------------------------------------------------------------------------------
Income (loss) from discontinued operations, net of tax (2.2) 8.6
- --------------------------------------------------------------------------------------------
Net income $ 13.6 25.8
============================================================================================
Net income (loss) per common share:
Basic:
Continuing operations $ 0.28 0.32
Discontinued operations (0.04) 0.16
- --------------------------------------------------------------------------------------------
$ 0.24 0.48
============================================================================================
Diluted:
Continuing operations $ 0.28 0.32
Discontinued operations (0.04) 0.15
- --------------------------------------------------------------------------------------------
$ 0.24 0.47
============================================================================================
Cash dividends paid per common share $ 0.025 0.025
============================================================================================
See accompanying notes to consolidated financial statements.
3
The Brink's Company
and subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Three Months
Ended March 31,
(In millions) 2005 2004
- ---------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 13.6 25.8
Adjustments to reconcile net income to net cash provided by operating activities:
(Income) loss from discontinued operations, net of tax 2.2 (8.6)
Depreciation and amortization 45.4 42.7
Impairment charges from subscriber disconnects 8.8 8.7
Amortization of deferred revenue (6.5) (6.1)
Aircraft heavy maintenance expense 5.4 6.4
Deferred income taxes 5.9 2.0
Provision for uncollectible accounts receivable 1.0 1.3
Postretirement benefit funding (more) less than expense:
Pension 11.5 9.9
Other than pension (1.3) (1.7)
Other operating, net 12.0 0.9
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (11.6) (8.4)
Accounts payable and accrued liabilities (15.1) (0.5)
Deferred subscriber acquisition costs (5.0) (4.7)
Deferred revenue from new subscribers 9.6 8.1
Prepaid and other current assets (9.9) (17.4)
Other, net (4.1) (2.6)
Discontinued operations, net - 0.2
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 61.9 56.0
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (91.8) (50.0)
Aircraft heavy maintenance expenditures (5.4) (3.8)
Acquisitions (40.0) (13.2)
Proceeds from disposal of:
Coal business 5.0 -
Timber business - 31.8
Less purchase of equipment formerly leased - (6.2)
Gold business - 1.1
Property and equipment and other assets 5.0 1.9
Other, net 0.2 (5.4)
Discontinued operations, net - (0.8)
- ---------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (127.0) (44.6)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Long term debt:
Additions 51.5 20.1
Repayments (38.4) (46.2)
Short-term borrowings, net 24.5 25.9
Dividends (1.4) (1.3)
Proceeds from exercise of stock options 1.0 4.2
Other 0.1 0.1
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 37.3 2.8
- ---------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (4.6) (1.7)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (32.4) 12.5
Cash and cash equivalents at beginning of period 169.0 128.7
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 136.6 141.2
===============================================================================================================
See accompanying notes to consolidated financial statements.
4
THE BRINK'S COMPANY
and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - 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")
The Company has significant liabilities associated with its former coal
operations and expects to have significant ongoing expenses and cash outflows
related to these operations.
The Company's unaudited consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles ("GAAP") for
interim financial reporting and applicable quarterly reporting regulations of
the Securities and Exchange Commission. Accordingly, they do not include all of
the information and notes required by GAAP for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Certain prior period amounts have been reclassified to conform to the current
period's financial statement presentation. Operating results for interim periods
are not necessarily indicative of the results that may be expected for the full
year. For further information, refer to the Company's Annual Report on Form 10-K
for the year ended December 31, 2004.
Pro forma earnings per share
The Company accounts for its share-based compensation plans using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, since options are granted with an exercise price equal to the
market price of the stock on the date of grant, the Company has not recognized
any compensation expense related to its stock option plans.
5
Had compensation costs for share-based compensation plans been determined based
on the fair value of awards at the grant dates consistent with the optional
recognition provision of SFAS No. 123, "Accounting for Stock Based
Compensation," net income per share would have approximated the pro forma
amounts indicated below:
Three Months
Ended March 31,
(In millions, except per share amounts) 2005 2004
- --------------------------------------------------------------------------------
Net income:
As reported $ 13.6 25.8
Less: share-based compensation expense determined
under fair-value method, net of related tax effects (1.0) (0.5)
- --------------------------------------------------------------------------------
Pro forma $ 12.6 25.3
================================================================================
Net income per share:
Basic, as reported $ 0.24 0.48
Basic, pro forma 0.23 0.47
Diluted, as reported $ 0.24 0.47
Diluted, pro forma 0.22 0.46
- --------------------------------------------------------------------------------
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 in the first quarter of 2004 are below. There
were no options granted in the first quarter of 2005.
Three Months
Ended March 31,
2004
- --------------------------------------------------------------------------------
Options granted:
In millions 0.1
Weighted-average exercise price per share $ 24.48
Weighted-average assumptions:
Expected dividend yield 0.5%
Expected volatility 31%
Risk-free interest rate 2.4%
Expected term in years 3.4
Fair value estimates:
In millions $ 0.6
Weighted-average per share $ 6.01
================================================================================
6
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.
On April 14, 2005, the Securities and Exchange Commission adopted a new rule
that amends the compliance date, and the Company is required to adopt SFAS 123R
effective January 1, 2006. 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 has not determined which of the
adoption methods it will use.
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 intends to implement SFAS 123R on January 1, 2006.
Note 2 - Earnings per share
Basic and diluted weighted-average share information used to compute the
Company's earnings per share was as follows:
Three Months
Ended March 31,
(In millions of shares) 2005 2004
- --------------------------------------------------------------------------------
Weighted-average shares outstanding:
Basic 55.7 53.9
Effect of dilutive stock options 0.8 0.5
- --------------------------------------------------------------------------------
Diluted 56.5 54.4
================================================================================
Antidilutive stock options excluded from computation - 0.6
================================================================================
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 0.8 million unallocated shares at March 31,
2005 and 2.7 million unallocated shares at March 31, 2004.
7
Note 3 - Pension and other postretirement benefits
Pension
The Company has defined benefit pension plans covering substantially all U.S.
non-union employees who meet certain minimum requirements. The Company also has
other defined benefit plans for eligible non-U.S. employees. The net pension
cost for the Company's pension plans in the first quarter of 2005 and 2004 was
as follows:
(In millions) U.S. Plans Non-U.S. Plans Total
- ------------------------------------------------------------------------------------------------------------
Three months ended March 31, 2005 2004 2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------
Service cost $ 7.0 6.7 2.5 2.2 9.5 8.9
Interest cost on projected benefit obligation 10.8 10.3 2.7 2.4 13.5 12.7
Return on assets - expected (12.5) (12.4) (2.4) (2.2) (14.9) (14.6)
Other amortization, net 5.3 3.7 0.9 0.9 6.2 4.6
- ------------------------------------------------------------------------------------------------------------
Net pension cost $ 10.6 8.3 3.7 3.3 14.3 11.6
============================================================================================================
Based on December 31, 2004 assumptions and funding regulations, the Company does
not believe it will be required to make a contribution to the primary U.S. plan
in 2005. No decision has been made as to whether or not a voluntary contribution
will be made this year to the primary U.S. pension plan. The Company made
contributions of $2.7 million to its non-U.S. pension plans in the first quarter
of 2005.
Other postretirement benefits
Company-Sponsored Plans
The Company provides certain postretirement health care and life insurance
benefits (the "Company-sponsored plans") for eligible active and retired
employees in the U.S. and Canada of the Company's current and former businesses,
including eligible participants of the former coal operations (the
"coal-related" plans). The components of net periodic postretirement costs
related to Company-sponsored plans were as follows:
(In millions) Coal-related plans Other plans Total
- --------------------------------------------------------------------------------------------------------
Three months ended March 31, 2005 2004 2005 2004 2005 2004
- --------------------------------------------------------------------------------------------------------
Service cost $ - - 0.3 0.2 0.3 0.2
Interest cost on accumulated
postretirement benefit
obligations ("APBO") 8.6 8.2 0.4 0.4 9.0 8.6
Return on assets - expected (3.7) (2.3) - - (3.7) (2.3)
Amortization of losses 4.4 3.5 0.1 - 4.5 3.5
- --------------------------------------------------------------------------------------------------------
Net postretirement benefit costs $ 9.3 9.4 0.8 0.6 10.1 10.0
========================================================================================================
8
Pneumoconiosis (Black Lung) Benefits
The Company is self-insured with respect to black lung benefits. The components
of net periodic postretirement benefit costs related to black lung benefits were
as follows:
Three Months
Ended March 31,
(In millions) 2005 2004
- -----------------------------------------------------------------------------------------------
Interest cost on APBO $ 0.8 1.0
Amortization of losses and other 0.4 0.5
- -----------------------------------------------------------------------------------------------
Net periodic postretirement costs $ 1.2 1.5
===============================================================================================
Note 4 - Acquisitions
In the first quarter of 2005, Brink's acquired operations in Luxembourg,
Scotland and Ireland. The aggregate purchase price for these acquisitions was
$40 million. These acquisitions have been accounted for as business
combinations. Under the purchase method of accounting assets acquired and
liabilities assumed from these operations are recorded at the date of
acquisition at their respective fair values. The consolidated financial
statements of the Company for the first quarter of 2005 include the respective
fair values of assets acquired and liabilities assumed of these operations.
The above purchase prices have been preliminarily allocated based on estimates
of fair value of assets acquired and liabilities assumed. The final valuation of
net assets is expected to be completed as soon as possible but not later than
one year from the acquisition date in accordance with U.S. GAAP.
On April 29, 2005 the Company announced the acquisition by Brink's of security
operations in Eastern Europe for approximately $9 million.
Note 5 - Discontinued operations
Three Months
Ended March 31,
(In millions) 2005 2004
- -----------------------------------------------------------------------------------------------
Gain (loss) on sales of:
Timber $ - 18.8
Gold - (0.9)
Results from operations:
Timber - (0.5)
Gold - (1.2)
Adjustments to contingent liabilities of former operations (see note 8) (3.4) (2.9)
- -----------------------------------------------------------------------------------------------
Income (loss) from discontinued operations before income taxes (3.4) 13.3
Income tax benefit (expense) 1.2 (4.7)
- -----------------------------------------------------------------------------------------------
Income (loss) from discontinued operations $ (2.2) 8.6
===============================================================================================
9
Gain (loss) on sales
Timber
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 discontinued
operations. The Company received $33.7 million in 2004 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 an $18.8 million pretax gain in discontinued operations in
the first quarter of 2004. An additional $1.9 million pretax gain was recognized
in the second quarter of 2004.
Gold
In February 2004, the Company completed the sale of its gold operations for
approximately $1.1 million in cash plus the assumption of liabilities and
recognized a $0.9 million loss.
Results of operations
The results of operations of the former natural resource businesses through the
date of the related sale have been classified as discontinued operations for all
periods presented.
Note 6 - Supplemental cash flow information
Three Months
Ended March 31,
(In millions) 2005 2004
- --------------------------------------------------------------------------------
Cash paid for:
Interest $ 4.8 5.4
Income taxes, net of refunds 11.8 4.8
================================================================================
Other noncash financing activities - settlement of
employee benefits with Company common shares $ 9.9 4.0
================================================================================
Note 7 - Comprehensive income (loss)
Three Months
Ended March 31,
(In millions) 2005 2004
- --------------------------------------------------------------------------------
Net income $ 13.6 25.8
Other comprehensive income (loss), net of reclasses and taxes:
Foreign currency translation adjustments (17.5) (4.0)
Cash flow hedges - (0.2)
Marketable securities 0.1 (2.8)
- --------------------------------------------------------------------------------
Comprehensive income (loss) $ (3.8) 18.8
================================================================================
10
Note 8 - Contingencies
Value-added taxes and customs duties
During 2004, the Company determined that one of its non-U.S. Brink's,
Incorporated business units had 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.
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.
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 $9 million.
Health Benefit Act
The Company is obligated to pay premiums to the UMWA Combined Benefit Fund, as
described in the Company's 2004 Annual Report on Form 10-K. At March 31, 2005,
the Company has $183.3 million recorded for the obligation, reflecting the
recorded liability at December 31, 2004 less payments made in 2005. This
liability is adjusted annually as new historical data is received and
assumptions used to estimate the obligations change.
11
Withdrawal liability
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 during 2005 to pay a $36.6
million withdrawal liability based on the funded status of the plans at June
2004, the beginning of the plan year. The obligation could change materially if
the Company does not withdraw prior to June 30, 2005.
Other loss contingencies
The Company recorded $3.6 million of additional expense in the first quarter of
2005 to reflect an increase in the cost of reclamation at one of its former coal
mines. The estimate of the cost of reclamation may change in the future. The
Company also has other contingent liabilities, primarily related to former
operations, including those for expected settlement of coal-related workers'
compensation claims and other reclamation obligations.
The Company recorded $2.9 million of additional expense in the first quarter of
2004 associated with the settlement of legal matters related to its former coal
operations.
Gain contingencies
Income taxes
The Company has entered into discussions with a tax authority which, if
concluded favorably, could result in a one-time benefit recorded in discontinued
operations of up to $27 million. The benefit, if any, would not result in any
current cash receipts but would increase the Company's tax credit carryforwards.
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. The Company has received refunds including interest of $27.2
million in prior years and 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), as
well as the timing of any additional FBLET refunds, the Company has not
currently recorded receivables for such additional FBLET refunds.
12
THE BRINK'S COMPANY
and Subsidiaries
Management's Discussion and Analysis of
Results of Operations and Financial Condition
================================================================================
Operations
================================================================================
The Brink's Company (along with its subsidiaries, the "Company") has three
operating segments:
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
properties. BHS typically installs and
owns the on-site home 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.
The Company has significant liabilities associated with its former coal
operations and expects to have significant ongoing expenses and cash outflows
related to former coal operations. The Company has funded a portion of its
retiree benefit obligation using a Voluntary Employees' Beneficiary Association
trust (the "VEBA"). The VEBA is reflected in the Company's balance sheet as a
reduction of the retiree benefit obligations.
13
RESULTS OF OPERATIONS
================================================================================
Overview
Three Months
Ended March 31,
(In millions) 2005 2004
- --------------------------------------------------------------------------------
Income (loss) from:
Continuing operations $ 15.8 17.2
Discontinued operations (2.2) 8.6
- --------------------------------------------------------------------------------
Net income $ 13.6 25.8
================================================================================
The income items in the above table are reported after tax.
Income from continuing operations declined in the first quarter of 2005 compared
to the 2004 period despite higher operating profits. The decline was primarily
due to a higher income tax provision in the first quarter of 2005 and a one-time
$4.4 million pretax gain that was recorded in the first quarter of 2004 upon
conversion of the Company's VEBA from a general corporate asset to one
specifically restricted to pay certain coal-related postretirement liabilities.
Operating profits were higher in 2005 on improved operating performance from BHS
and BAX Global, partially offset by lower earnings from Brink's, Incorporated.
BAX Global's performance for 2005 improved from the prior year on higher volumes
in Asia Pacific and North America and stronger margins in Asia Pacific. BHS
continued to report improved operating results.
Discontinued operations includes a $18.8 million pretax gain on the sale of the
timber business in the first quarter of 2004. The after-tax results of
operations for the former natural gas, timber and gold businesses have been
classified as discontinued operations for all periods presented.
Value-Added Taxes and Customs Duties
During 2004, the Company determined that one of its non-U.S. Brink's,
Incorporated business units had 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.
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.
14
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.
Consolidated Review
Three Months
Ended March 31, %
(In millions) 2005 2004 change
- --------------------------------------------------------------------------------
Revenues:
Brink's $ 509.2 458.0 11
BHS 91.9 82.0 12
BAX Global 623.5 554.5 12
- --------------------------------------------------------------------------------
Revenues $ 1,224.6 1,094.5 12
================================================================================
Operating profit:
Brink's $ 30.3 32.8 (8)
BHS 22.5 19.4 16
BAX Global 8.2 3.1 165
- --------------------------------------------------------------------------------
Business segments 61.0 55.3 10
Former coal operations (13.2) (12.5) 6
Corporate (11.0) (9.1) 21
- --------------------------------------------------------------------------------
Operating profit $ 36.8 33.7 9
================================================================================
The Company reported increased operating profits from higher revenue in the
first quarter of 2005 compared to the prior year period. BHS continued its
steady growth, reporting 16% higher operating profit for the current quarter
over the same quarter last year. BAX Global's 2005 operating profit is $5.1
million above last year's levels on higher volume and margins in Asia Pacific.
Operating profit at Brink's in the first quarter of 2005 decreased primarily due
to lower operating profit in Europe.
Expenses related to former coal operations were higher in the 2005 period
compared to the prior year. In 2004, expenses were partially offset by higher
gains related to sales of residual property.
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
impact of changing foreign currency exchange rates. Relative to most other
currencies relevant to the Company, the U.S. dollar was weaker in the first
quarter of 2005 over the same prior-year period, 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.
15
Brink's, Incorporated
Three Months
Ended March 31, %
(In millions) 2005 2004 change
- --------------------------------------------------------------------------------
Revenues:
North America (a) $ 186.0 180.1 3
International (b) 323.2 277.9 16
- --------------------------------------------------------------------------------
$ 509.2 458.0 11
================================================================================
Operating profit:
North America (a) $ 12.7 12.9 (2)
International (b) 17.6 19.9 (12)
- --------------------------------------------------------------------------------
$ 30.3 32.8 (8)
================================================================================
Cash flow information:
Depreciation and amortization $ 21.2 19.1 11
Capital expenditures 31.4 16.1 95
================================================================================
(a) U.S. and Canada.
(b) Europe, South America and Asia-Pacific.
Overview
Revenues at Brink's were higher in the first quarter of 2005 compared to the
prior-year period. Operating profit in North America decreased slightly in the
first three months of 2005 compared to the same period last year. International
operating profit for all regions except South America in the 2005 period was
lower than in the 2004 period primarily as a result of losses in Belgium and the
Netherlands in the European region and lower operating profit in the Asia
Pacific region. South America results in the first three months of 2005 have
improved because of better operating performance by Venezuela and Columbia.
North America
North American revenues in the 2005 period were 3% higher than the prior-year
period primarily as the result of improved U.S. and Canadian armored car and
U.S. Cash Logistics operations. Operating profit in the 2005 period was slightly
lower than 2004 due to lower contribution from the U.S. armored car operation,
partly as a result of higher fuel costs, and higher compensation and benefit
expense. This was partially offset by slightly improved performance from Cash
Logistics, Coin Wrapping and Global Services operations.
International
Revenues improved in the first quarter of 2005 over last year due to higher
revenues from Europe and higher revenues in South America. Operating profit in
the 2005 period was lower in Europe partially offset by improved operating
profit in South America.
Europe. Revenues increased 18% in the first quarter of 2005 when compared to the
prior year period. On a constant currency basis, 2005 revenues were 13% higher
in the first quarter compared to the prior year period, partially as a result of
acquisitions. Operating profit was lower in 2005 due to a reduction in volume in
the Netherlands and Belgium. In addition, the guarding business in France
experienced operating difficulties resulting in higher costs.
Brink's acquired operations in Greece in 2004; Luxembourg, Scotland and Ireland
in the first quarter of 2005; and Poland, Hungary, and the Czech Republic in the
second quarter of 2005. These acquisitions are expected to increase revenue by
approximately $100 million on an annualized basis.
16
South America. Revenues and operating profit in the first quarter of 2005 were
higher than the prior-year period primarily reflecting higher volume and better
operating performance particularly in Venezuela and Colombia. These improvements
were partially offset by weakened operating performance in Brazil as a result of
the loss of a significant customer.
Asia-Pacific. Asia-Pacific operating profit in the first quarter of 2005 was
slightly lower than for the same period last year primarily due to lower Global
Service volumes.
Other. As discussed in "Value-added taxes and customs duties" above and in note
8 to the consolidated financial statements, the Company could be assessed
penalties materially in excess of accrued amounts.
Management is evaluating restructuring certain operations to align costs with
potentially lower future revenues and may incur severance and other costs in the
second quarter of 2005. Management expects that costs for safety and security
will be higher in 2005 than in 2004.
Brink's Home Security
Three Months
Ended March 31, %
(In millions) 2005 2004 change
- --------------------------------------------------------------------------------
Revenues: $ 91.9 82.0 12
Operating profit:
Recurring services (a) $ 41.5 35.1 18
Investment in new subscribers (b) (19.0) (15.7) 21
- --------------------------------------------------------------------------------
$ 22.5 19.4 16
================================================================================
Monthly recurring revenues (c) 26.9 24.0 12
================================================================================
Cash flow information:
Depreciation and amortization (d) $ 13.9 12.5 11
Impairment charges from subscriber disconnects 8.8 8.7 1
Amortization of deferred revenue (e) (6.5) (6.1) 7
Deferral of subscriber acquisition costs
(current year payments) (5.0) (4.7) 6
Deferral of revenue from new subscribers
(current year receipts) 9.6 8.1 19
Capital expenditures (f) (43.2) (26.7) 62
================================================================================
(a) Reflects operating profit generated from the existing subscriber base
including the amortization of deferred revenues and deferred expenses.
(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) See "Reconciliation of Non-GAAP Measures - Monthly Recurring Revenues."
(d) Includes amortization of deferred subscriber acquisition costs.
(e) Includes amortization of deferred revenue related to active subscriber
accounts as well as the immediate recognition of deferred revenue related
to subscriber disconnects.
(f) Includes $10.2 million for the purchase of its headquarters in Irving,
Texas. The facility was formerly leased.
Revenues
The increase in BHS' revenues for the first quarter of 2005 over the comparable
2004 period was primarily due to an increase in the subscriber base of
approximately 11% and slightly higher average monitoring rates. The slight
increase in average monitoring rates is primarily due to new customers
initiating service at generally higher monitoring rates than the average rate
being paid by existing customers. The above factors also contributed to a 12%
increase in monthly recurring revenues for March 2005 as compared to March 2004.
17
Operating profit
Operating profit increased $3.1 million for the first quarter of 2005 compared
to the same period in 2004 as higher profit from recurring services was
partially offset by an increased investment in new subscribers. Higher profit
from recurring services in each period was primarily due to incremental revenues
generated from the larger subscriber base, favorable leverage in costs incurred
in providing recurring services to the larger subscriber base, and a reduction
in the disconnect rate. BHS intends to expand its presence in commercial alarm
installation and monitoring as well as increase the volume of its installation
business driven by relationships with major home builders. As a result, the cost
of investment in new subscribers may continue to grow faster than installations
as BHS develops the resources needed to achieve its objectives. BHS has begun
the building of a second monitoring center which may slow the growth in profit
from recurring services in the near term. These initiatives are expected to have
a positive impact on future growth and productivity.
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.
Subscriber activity
Three Months
Ended March 31, %
(Subscriber data in thousands) 2005 2004 change
- --------------------------------------------------------------------------------
Number of subscribers:
Beginning of period 921.4 833.5
Installations 39.3 34.1 15
Disconnects (13.6) (13.5) 1
- --------------------------------------------------------------------------------
End of period 947.1 854.1 11
================================================================================
Average number of subscribers 933.6 843.5 11
Annualized disconnect rate (a) 5.8% 6.4%
================================================================================
(a) The disconnect rate is a ratio, the numerator of which is the number of
customer cancellations during the period and the denominator of which is
the average number of 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, accounts charged back to
the dealers because the customers cancelled service during the specified
contractual term, and inactive sites that return to active service during
the period.
Installations were 15% higher in the first three months of 2005 as compared to
the same period of 2004, primarily as a result of growth in traditional
installation volume and to a lesser extent from installations obtained through
the growing dealer network. Disconnect rates are typically higher in the second
and third calendar quarters of the year because of an increase in residential
moves during summer months. BHS has reduced its disconnect rate in recent years
through improving its subscriber selection and retention processes. Since a
certain amount of disconnects cannot be prevented (e.g. customer moves), the
disconnect rate may not materially improve in the future.
18
Reconciliation of Non-GAAP Measures - Monthly Recurring Revenues
Three Months
Ended March 31,
(In millions) 2005 2004
- --------------------------------------------------------------------------------
March:
Monthly recurring revenues ("MRR") (a) $ 26.9 24.0
Amounts excluded from MRR:
Amortization of deferred revenue 2.3 2.1
Other revenues (b) 2.2 1.8
- --------------------------------------------------------------------------------
Revenues on a GAAP basis $ 31.4 27.9
- --------------------------------------------------------------------------------
Revenues on a GAAP basis:
March $ 31.4 27.9
January - February 60.5 54.1
- --------------------------------------------------------------------------------
January - March $ 91.9 82.0
================================================================================
(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 home security business produces.
BAX Global
Three Months
Ended March 31, %
(In millions) 2005 2004 change
- --------------------------------------------------------------------------------
Revenues:
Americas (a) $ 293.4 264.7 11
International (b) 354.7 309.1 15
Eliminations (24.6) (19.3) 27
- --------------------------------------------------------------------------------
$ 623.5 554.5 12
================================================================================
Operating profit (loss):
Americas (a) $ (3.4) (1.9) 79
International (b) 14.2 8.7 63
Corporate and other (2.6) (3.7) (30)
- --------------------------------------------------------------------------------
$ 8.2 3.1 165
================================================================================
Cash flow information:
Depreciation and amortization $ 10.1 10.7 (6)
Capital expenditures 17.1 6.9 148
================================================================================
Intra-America revenue $ 135.8 125.1 9
Worldwide expedited freight services (c):
Revenues $ 465.3 415.6 12
Weight in pounds 431.3 418.0 3
================================================================================
(a) U.S., Mexico, Latin America and Canada.
(b) Europe-Middle East-Africa ("EMEA") and Asia-Pacific.
(c) Includes U.S. deferred freight services.
19
Overview
BAX Global's operating profit in the first quarter of 2005 was $5.1 million
above that of the same quarter last year on a 12% increase in revenues (10%
increase in revenues on a constant currency basis). Operating profit was better
than the first quarter of 2004 primarily due to higher volumes and improved
margins in the Asia-Pacific region partially offset by a decrease in U.S.
expedited air freight volumes.
Americas
BAX Global's operating loss in the Americas region in the first quarter of 2005
was $1.5 million higher than the same 2004 period despite an 11% increase in
revenues.
Intra-America. Revenues improved over the prior-year quarter primarily due to an
increase in BAX Global's wholesale freight-forwarding product and deferred
freight volumes. Partially offsetting this increase were lower volumes of
overnight and second-day products, which on average have higher revenue per
pound. Operating profit in the Americas was lower in the first quarter of 2005
due largely to the shift in volumes of overnight and second-day products to
ground products. BAX Global continued to see growth in its wholesale
freight-forwarding business.
The shift from air to ground by customers has been affected by offerings of
overnight ground products that are significantly less expensive than air
transportation. Higher fuel surcharges on air transportation as a result of
higher fuel costs also may have exacerbated the shift to ground products.
The impact of higher market fuel costs in the 2005 period 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 effectiveness of the fuel surcharge, however, is
somewhat dependent on expedited volumes, and as volumes reduce some of the
effects of higher fuel costs are absorbed by the Company. The fuel surcharge
represents approximately 8.7% of revenues in the Americas region for the recent
quarter.
Other. U.S. air export volumes were higher in the first three months of 2005
compared to the same 2004 period, and revenue per pound (excluding fuel and
other surcharges) were about even with 2004. Charter activity was also higher in
the 2005 period compared to the prior year. Ocean freight has also increased
slightly in 2005.
International
International operating profits increased 63% for the first quarter of 2005
compared to the 2004 period on a 15% increase in revenues (11% increase in
revenues on a constant currency basis).
Asia-Pacific. Revenues and operating profit for the 2005 period benefited from
an increase in Asia-Pacific air export volumes, particularly from China and Hong
Kong, due to their strong economies.
EMEA. Revenues increased by 7% in the first quarter of 2005 when compared to
prior year. On a constant currency basis 2005 revenues were 2% higher than the
same period last year. Operating profit were up slightly in the 2005 period
compared with 2004 despite weak business conditions and continuing competitive
market pressures.
Other
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.
However, the relative strength of the worldwide economies generally has a larger
effect on BAX Global's results as compared to seasonal forces.
20
Corporate Expense - The Brink's Company
Three Months
Ended March 31, %
(In millions) 2005 2004 change
- --------------------------------------------------------------------------------
Corporate expense $ 11.0 9.1 21
================================================================================
Corporate expense was higher in the 2005 period primarily as a result of higher
long-term incentive accruals and 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. Costs related to Section 404 of the
Sarbanes-Oxley Act are expected to be lower in the full-year 2005 compared to
2004.
Former Coal Operations
Costs of former coal operations included in continuing operations
Three Months
Ended March 31, %
(In millions) 2005 2004 change
- ---------------------------------------------------------------------------------------------------
Company-sponsored postretirement benefits
other than pensions $ 9.4 9.4 -
Black lung 1.2 1.5 (20)
Pension 1.0 0.6 67
Administrative, legal and other expenses, net 2.1 2.5 (16)
Idle and closed mine expense 0.2 0.2 -
Gains on sales of property and equipment and other income (0.7) (1.7) (59)
- ---------------------------------------------------------------------------------------------------
$ 13.2 12.5 6
===================================================================================================
Administrative, legal and other expenses, net
Administrative, legal and other expenses, net, are expected to decline as
administrative functions are reduced and residual assets are sold. Expenses
related to residual assets include property taxes, insurance and lease payments.
Gains on sale of property and equipment
The Company sold substantially all of its remaining coal-related assets in West
Virginia in the fourth quarter of 2003 for $28.8 million of proceeds, including
$14.8 million of liabilities contractually assumed by the buyer. The transfer of
many of these liabilities to the buyer is not considered final until the buyer
replaces the Company's bonds with surety bonds of its own and the state releases
the Company's bonds. Accordingly, the Company is recording gains associated with
the sale of these properties as its surety bonds are released. The Company
recorded a $0.3 million gain related to liability transfers in the first quarter
of 2004. No additional bonds were replaced in 2004 or in the first quarter of
2005. The Company may record additional gains up to approximately $6 million in
2005 as remaining bonds are replaced. The timing of the bond replacements is not
within the Company's control, however, so these gains could be deferred to later
periods or may not be realized.
21
Foreign Operations
The Company operates in more than 100 countries, each with a local currency
other than the U.S. dollar. Because the financial results of the Company are
reported in U.S. dollars, its results are affected by changes in the value of
the various foreign currencies in relation to the U.S. dollar. Changes in
exchange rates may also affect transactions which are denominated in currencies
other than the functional currency of the affected subsidiary. 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 Company's consolidated
results. The Company, from time to time, uses foreign currency forward contracts
to hedge transactional risks associated with foreign currencies. Translation
adjustments of net monetary assets and liabilities denominated in the local
currency relating to operations in countries with highly inflationary economies
are included in net income, along with all transaction gains or losses for the
period.
Brink's Venezuelan subsidiaries were considered to be operating in a highly
inflationary economy during 2002. However, effective January 1, 2003, the
economy in Venezuela was no longer considered to be highly inflationary. 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 the
effects of inflation on costs;
o adverse economic conditions in the highly inflationary country may
discourage business growth which could affect the demand for the
Company's services; and
o the devaluation of the currency may exceed the rate of inflation and
reported U.S. 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 such risks on the Company cannot be
predicted.
Other Operating Income, Net
The line items below are recorded within operating profit of the three business
segments, or within corporate or former coal operation expenses.
Three Months
Ended March 31, %
(In millions) 2005 2004 change
- --------------------------------------------------------------------------------
Gains on sales of operating assets, net $ 1.2 1.4 (14)
Foreign currency transaction gains (losses), net (0.5) 0.1 NM
Share in earnings of equity affiliates 0.7 0.8 (13)
Royalty income 0.5 0.5 -
Other 1.2 0.7 71
- --------------------------------------------------------------------------------
$ 3.1 3.5 (11)
================================================================================
Gains on sales of operating assets, net, in 2005 are primarily the result of the
sale of an aircraft by BAX Global. In 2004, gains are primarily the result of
disposing of assets related to the Company's former coal operations.
22
Nonoperating Income and Expense
Interest expense
Three Months
Ended March 31, %
(In millions) 2005 2004 change
- --------------------------------------------------------------------------------
Interest expense $ 4.6 5.8 (21)
================================================================================
Interest expense was lower primarily due to lower average borrowings.
Interest and other income (expense), net
Three Months
Ended March 31, %
(In millions) 2005 2004 change
- --------------------------------------------------------------------------------
Interest income $ 1.1 1.1 -
Recognition of gain on investments held by VEBA - 4.4 (100)
Discounts and other fees of accounts receivable
securitization program (0.3) (0.4) 25
Other, net (0.1) (0.7) 86
- --------------------------------------------------------------------------------
$ 0.7 4.4 (84)
================================================================================
As of January 1, 2004, the Company restricted the use of the Voluntary
Employees' Beneficiary Association ("VEBA") trust to pay only benefits
associated with the coal-related postretirement medical benefits plan. Prior to
that time, unrealized gains and losses on securities held by the VEBA were
recorded in other comprehensive income. With the restriction in the use of the
VEBA, the unrealized net appreciation in asset values at the transition date was
recorded as a one-time pretax gain of $4.4 million in the first quarter of 2004.
Minority interest
Three Months
Ended March 31, %
(In millions) 2005 2004 change
- --------------------------------------------------------------------------------
Minority interest $ 3.8 3.3 15
================================================================================
23
Income Taxes
Income tax expense (benefit) Effective tax rate
- ----------------------------------------------------------------------------------------
Three Months Ended March 31, 2005 2004 2005 2004
- ----------------------------------------------------------------------------------------
(in millions) (in percentages)
Continuing operations $ 13.3 11.8 45.7% 40.6%
Discontinued operations (1.2) 4.7 35.3% 35.3%
========================================================================================
The effective income tax rate on continuing operations in the first quarter of
2005 was higher than the 35% U.S. statutory tax rate primarily due to an
increase in the valuation allowance for deferred tax assets related to certain
Brink's European operations and state income taxes, offset by lower taxes
outside the U.S. The effective income tax rate for continuing operations in 2004
was higher than the 35% U.S. statutory tax rate primarily due to state income
taxes, offset by lower taxes outside the U.S.
The Company's effective tax rate may fluctuate materially from period to period
due to changes in the expected geographical mix of earnings, changes in
valuation allowances or accruals for contingencies and other factors. Subject to
the above factors, the Company currently expects that the effective tax rate for
the full year 2005 will approximate 38%.
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 could result in significant adjustments to
the valuation allowances.
The Company does not expect to be able to complete its evaluation of the
repatriation provision of the 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 half 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 materially based on the
passage of technical correction legislation.
As discussed in note 8, up to $27 million in tax benefits could be recognized in
discontinued operations upon the favorable resolution of a tax contingency.
Discontinued Operations
Sale of Natural Gas and Timber Business
In July 2003 the Company agreed to sell its timber business for approximately
$39 million in cash. The Company received $5.4 million in the fourth quarter of
2003, $31.8 million in the first quarter of 2004, and $1.9 million in the second
quarter of 2004. The Company recognized pretax gains of $4.8 million in the
fourth quarter of 2003, $18.8 million in the first quarter of 2004, and $1.9
million in the second quarter of 2004 as it received the proceeds.
24
LIQUIDITY AND CAPITAL RESOURCES
================================================================================
Overview
Cash flows before financing activities decreased by $76.5 million in the first
quarter of 2005 as compared to the first quarter of 2004. The decrease was
primarily due to acquisitions at Brink's and overall higher capital
expenditures, partially offset by improved operating profit in the first quarter
of 2005. In addition, the first quarter of 2004 included $25.6 million of
proceeds from the sale of natural resources business.
Summary of Cash Flow Information
Three Months
Ended March 31, $
(In millions) 2005 2004 change
- ----------------------------------------------------------------------------------------
Cash flows from operating activities $ 61.9 56.0 5.9
Cash flows from investing activities:
Capital expenditures and aircraft heavy
maintenance expenditures (97.2) (53.8) (43.4)
Acquisitions (40.0) (13.2) (26.8)
Net proceeds from sale of timber business - 25.6 (25.6)
Net proceeds from sale of Coal 5.0 - 5.0
Other 5.2 (3.2) 8.4
- ----------------------------------------------------------------------------------------
Investing activities (127.0) (44.6) (82.4)
- ----------------------------------------------------------------------------------------
Cash flows before financing activities $ (65.1) 11.4 (76.5)
========================================================================================
Operating Activities
Cash flows from operating activities were $5.9 million higher in the first
quarter of 2005 compared to the prior-year period primarily due to improved
operating profit and cash provided by an increase in the sale of receivables
sold as part of the securitization program.
Investing Activities
Cash flows from investing activities decreased by $82.4 million in the 2005
period versus 2004, primarily due to acquisitions and higher capital
expenditures. Cash from investing activities in the first quarter of 2004
included $25.6 million of net cash proceeds from the sale of the timber
business.
Capital expenditures and aircraft heavy maintenance expenditures were as
follows:
Three Months
Ended March 31, $
(In millions) 2005 2004 change
- ----------------------------------------------------------------------------------------
Capital expenditures:
Brink's $ 31.4 16.1 15.3
Brink's Home Security 43.2 26.7 16.5
BAX Global 17.1 6.9 10.2
Corporate 0.1 0.3 (0.2)
- ----------------------------------------------------------------------------------------
Capital expenditures $ 91.8 50.0 41.8
========================================================================================
Aircraft heavy maintenance expenditures $ 5.4 3.8 1.6
========================================================================================
25
Capital expenditures for the first quarter of 2005 were $41.8 million higher
than for the same period in 2004. The increase is primarily due to $12.6 million
spent to purchase BHS's headquarters and monitoring facility and one Brink's
branch facility in the U.S., which were previously occupied under operating
leases, and an increase in subscriber installations at BHS. In addition, an
increase in information technology spending and the purchase of two formerly
leased aircraft at BAX Global contributed to this increase.
Capital expenditures for the full-year 2005 are currently expected to range from
$285 million to $295 million versus the $220 million spent in 2004. The expected
increase reflects anticipated growth in customer installations at BHS and higher
information technology spending at Brink's and BAX Global. In addition, BHS's
capital expenditures in 2005 are expected to include approximately $15 million
for the development of a second BHS monitoring center. In addition, the Company
expects to spend between $25 million and $30 million on aircraft heavy
maintenance in 2005.
On April 29, 2005 the Company announced the acquisition by Brink's of security
operations in Eastern Europe for approximately $9 million.
Business Segment Cash Flows
The Company's cash flows before financing activities for each of the operating
segments are presented below:
Three Months
Ended March 31, $
(In millions) 2005 2004 change
- --------------------------------------------------------------------------------
Cash flows before financing activities
Business segments:
Brink's $ (67.6) (13.3) (54.3)
BHS 2.6 16.5 (13.9)
BAX Global 19.0 8.0 11.0
- --------------------------------------------------------------------------------
Subtotal of business segments (46.0) 11.2 (57.2)
Corporate and former operations:
Net proceeds from sale of timber business - 25.6 (25.6)
Net proceeds from sale of Coal 5.0 - 5.0
Other (24.1) (25.4) 1.3
- --------------------------------------------------------------------------------
Cash flows before financing activities $ (65.1) 11.4 (76.5)
================================================================================
Overview
Cash flows before financing activities decreased primarily as a result of
acquisitions in 2005, higher capital expenditures and a reduction in cash
proceeds from the sale of the natural resource business. Offsetting this, cash
from the operation of the business segments was higher in the 2005 period due to
improved year-over-year operating profit at BAX Global and BHS and higher sales
of receivables under the securitization program.
Brink's
Cash flows before financing activities at Brink's decreased by $54.3 million
primarily due to a year-over-year increase in cash used for acquisitions ($40.0
million for the acquisition of Luxembourg, Scotland and Ireland operations in
2005 compared with $12.9 million in 2004 for the acquisition of operations in
Greece) and lower 2005 operating profit. Cash used for working capital needs was
higher in the first three months of 2005 primarily as a result of increased
receivables on a 11% increase in revenue.
BHS
The decrease in BHS' cash flows before financing activities is primarily due to
the purchase of its headquarter facilities for $10.2 million in the first
quarter of 2005 and an increase in capital expenditures reflecting the growth in
installations. Partially offsetting this purchase were higher cash flows from
operations as a result of a larger subscriber base.
26
BAX Global
Cash flows before financing activities at BAX Global improved significantly
reflecting better operating profit in the first quarter of 2005 versus 2004 and
a $42 million increase in cash flow over 2004 because of receivables sold as
part of the Company's securitization program, partially offset by higher working
capital needs and higher capital expenditures.
Financing Activities
Summary of cash flows from financing activities
Three Months
Ended March 31,
(In millions) 2005 2004
- ------------------------------------------------------------------------------------------------
Short-term debt $ 24.5 25.9
Revolving Facility 35.3 (20.9)
Senior Notes (18.3) -
Other (3.9) (5.2)
- ------------------------------------------------------------------------------------------------
Net borrowings (repayments) of debt 37.6 (0.2)
Dividends (1.4) (1.3)
Proceeds from the exercise of stock options 1.0 4.2
Other, net 0.1 0.1
- ------------------------------------------------------------------------------------------------
Financing activities $ 37.3 2.8
================================================================================================
The Company's operating liquidity needs are typically financed by short-term
debt, the Company's accounts receivable securitization facility and the
Company's Revolving Facility, described below.
In the first quarter of 2005 and 2004, the Company paid $0.025 per share regular
quarterly dividends on its common stock (annual rate of $0.10 per share).
Dividends paid on common stock totaled $1.4 million in the first quarter of 2005
($1.3 million in the first quarter of 2004). Future dividends are dependent on
the earnings, financial condition, cash flow and business requirements of the
Company, as determined by the Board.
Proceeds from the exercise of stock options were higher in 2004 period primarily
as a result of a higher stock price.
Capitalization
The Company uses a combination of debt, leases, an asset securitization facility
and equity to capitalize its operations.
Net Debt and Net Financings reconciled to GAAP measures
March 31, December 31,
(In millions) 2005 2004
- ------------------------------------------------------------------------------------------------
Short-term debt and current maturities of long-term debt $ 84.5 62.6
Long-term debt 195.4 181.6
- ------------------------------------------------------------------------------------------------
Debt 279.9 244.2
Less cash and cash equivalents (136.6) (169.0)
- ------------------------------------------------------------------------------------------------
Net Debt 143.3 75.2
Amounts sold under accounts receivable securitization facility 63.0 25.0
- ------------------------------------------------------------------------------------------------
Net Financings $ 206.3 100.2
================================================================================================
27
The Company believes that Net Debt and Net Financings are useful measures of the
Company's financial leverage. Net financings grew by $106 million during the
first quarter of 2005 due primarily to spending for acquisitions and capital
expenditures. The Company spent approximately $40 million to acquire operations
for Brink's in Luxembourg, Scotland and Ireland. In addition, capital
expenditures were $41.8 million higher in 2005 than 2004; such capital
expenditures exceeded depreciation during the quarter by approximately $47
million.
Debt
The Company has an unsecured $400 million revolving bank credit facility with a
syndicate of banks (the "Revolving Facility"). The facility allows the Company
to borrow (or otherwise satisfy credit needs) on a revolving basis over a
five-year term ending in October 2009. As of March 31, 2005, $346.6 million was
available under the revolving credit facility.
The Company also has 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 Company has used
the Letter of Credit Facility to replace surety bonds and other letters of
credit needed to support its activities. As of March 31, 2005, $20.9 million was
available under this Letter of 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, of which approximately $39.2
million was available at March 31, 2005. When rates are favorable, the Company
also borrows from other U.S. 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 outstanding
under these agreements are included in short-term borrowings.
The Company has $76.7 million of Senior Notes outstanding that are scheduled to
be repaid through 2008. The Company paid $18.3 million as scheduled in January
2005. The Company has the option to prepay all or a portion of the Senior 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 and the Senior Notes. The Revolving Facility, the agreements
under which the Senior Notes were issued and the multi-currency revolving bank
credit facilities each contain various financial and other covenants. The
financial covenants, 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 March 31, 2005.
The Company believes it has adequate sources of liquidity to meet its near-term
requirements.
Amounts sold under accounts receivable securitization facility
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. The Company expects to renew or
replace this agreement prior to its expiration in December 2005.
Operating lease
The Company has approximately $60 million of residual value guarantees at March
31, 2005 related to operating leases, principally for trucks and other vehicles.
28
Equity
At March 31, 2005, the Company had 100 million shares of common stock authorized
and 56.7 million shares issued and outstanding. At March 31, 2005, of the
outstanding shares, 0.8 million shares were held by The Brink's Company Employee
Benefit Trust, and have been accounted for similarly 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 purchase up to 1.0 million shares of common stock with an aggregate
purchase price of $19.1 million. No purchases were made under this authority in
2004 or the first three months of 2005.
Other Contingencies
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 $9 million.
Health Benefit Act
The Company is obligated to pay premiums to the UMWA Combined Benefit Fund, as
described in the Company's 2004 Annual Report on Form 10-K. At March 31, 2005,
the Company has $183.3 million recorded for the obligation, reflecting the
recorded liability at December 31, 2004 less payments made in 2005. This
liability is adjusted annually as new historical data is received and
assumptions used to estimate the obligations change.
Withdrawal liability
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 during 2005 to pay a $36.6
million withdrawal liability based on the funded status of the plans at June
2004, the beginning of the plan year. The obligation could change materially if
the Company does not withdraw prior to June 30, 2005.
Other loss contingencies
The Company recorded $3.6 million of additional expense in the first quarter of
2005 to reflect an increase in the cost of reclamation at one of its former coal
mines. The estimate of the cost of reclamation may change in the future. The
Company also has other contingent liabilities, primarily related to former
operations, including those for expected settlement of coal-related workers'
compensation claims and other reclamation obligations.
The Company recorded $2.9 million of additional expense in the first quarter of
2004 associated with the settlement of legal matters related to its former coal
operations.
Gain contingencies
Income taxes
The Company has entered into discussions with a tax authority which, if
concluded favorably, could result in a one-time benefit recorded in discontinued
operations of up to $27 million. The benefit, if any, would not result in any
current cash receipts but would increase the Company's tax credit carryforwards.
29
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. The Company has received refunds including interest of $27.2
million in prior years and 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), as
well as the timing of any additional FBLET refunds, the Company has not
currently recorded receivables for such additional FBLET refunds.
Market Risks and Hedging and Derivative Activities
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 foreign currency exchange rates and interest
rates. In addition, the Company consumes certain commodities in its businesses,
exposing it to the effects of changes in the prices of such commodities. These
financial and commodity exposures are monitored and managed by the Company as an
integral part of its overall risk management program. The diversity of foreign
operations helps to mitigate a portion of the impact that foreign currency rate
fluctuations in any one country may have on the Company's consolidated results.
The Company's risk management program considers this favorable diversification
effect as it measures the Company's exposure to financial markets and as
appropriate, seeks to reduce the potentially adverse effects that the volatility
of certain markets may have on its operating results. The Company has not had
any material change in its market risk exposures in the three months ended March
31, 2005.
Controls and Procedures
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, the
Company carried out an evaluation, with the participation of the Company's
management, including the Company's Chief Executive Officer and Vice President
and Chief Financial Officer, of the effectiveness of the Company's disclosure
controls and procedures (as defined under Rule 13a-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this report. Based
upon that evaluation, the Company's Chief Executive Officer and Vice President
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in ensuring that information required to be disclosed
by the Company in the reports that it files or submits under the Securities
Exchange Act of 1934, is recorded, processed, summarized and reported, within
the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to management, including the
Company's Chief Executive Officer and Vice President and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
There has been no change in the Company's internal control over financial
reporting during the quarter ended March 31, 2005, that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
Forward-looking information
This document 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 outcome of discussions
with governmental authorities regarding the non-payment of customs duties and
value-added tax by a non-U.S. subsidiary of Brink's, Incorporated, the
possibility of a restructuring at Brink's and the incurrence of severance and
other related costs, anticipated revenues from Brink's acquisitions, anticipated
costs at Brink's associated with safety and security, the anticipated effective
tax rate for 2005, changes in the disconnect rate at BHS, BHS' expansion into
the commercial sector and its addition of a second monitoring station, together
with the financial impact of these changes, potential increases in the volume of
BHS' installation business and the possible effect on BHS' performance, 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,
the effects of seasonality and worldwide economies on BAX Global's results, the
anticipated decline of costs related to Section 404 of the Sarbanes-Oxley Act,
the receipt of a subsidy under the Medicare Prescription Drug, Improvement and
Modernization Act, changes in expenses related to former coal operations,
expected tax benefits in discontinued operations, the expectation that the
Company will realize the benefit of deferred tax assets and the impact on the
Company's valuation allowances, the timing of and liability for withdrawal from
coal-related multi-employer pension plans, anticipated reclamation costs at the
Company's former coal mines, the recognition of tax benefits upon the favorable
30
resolution of a tax contingency, the expected recognition of a gain and release
of bonds in 2005 if certain permits are transferred by the state to the buyer of
the West Virginia coal properties, the possibility that Venezuela may be
considered highly inflationary again, expected capital expenditures and aircraft
heavy maintenance expenditures in 2005, information technology expenditures at
Brink's and BAX Global, the adequacy of sources of liquidity to meet the
Company's near term requirements, the impact of exchange rates, the replacement
of the BAX Global receivables program, the amount and timing of additional FBLET
refunds, if any, the outcome of pending litigation, and the impact of the
repatriation provision of the American Jobs Creation Act of 2004, including the
amount that the Company might repatriate and the related tax obligations,
involve forward-looking information. This forward-looking information is subject
to known and unknown risks, uncertainties, and contingencies that could cause
actual results, performance or achievements to differ materially from those that
are anticipated.
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 share 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, 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 alignment
of Brink's resources to address changes in the market and security concerns,
costs associated with any restructuring, the timing of and costs associated with
the integration of the operations acquired by Brink's and the performance of the
acquired operations in 2005, 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 performance of the home building
market, costs associated with the development of BHS' second monitoring center,
BHS' ability to cost-effectively grow the commercial business, 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, positions taken by governmental authorities with
respect to claims for FBLET refunds, interpretation and regulation relating to
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, the financial performance of the Company,
information technology costs and costs associated with ongoing contractual
obligations, overall economic, political, social and business conditions,
foreign currency exchange rates, capital markets performance, mandatory or
voluntary pension plan contributions, the impact of continuing initiatives to
control costs and increase profitability, pricing and other competitive industry
factors, labor relations, fuel prices, new government regulations and
interpretations of existing regulations, legislative initiatives, judicial
decisions, opinions of governmental authorities as to the availability of a
subsidy under the Medicare Prescription Drug, Improvement and Modernization Act,
variations in costs or expenses and the ability of counterparties to perform.
31
Part II - Other Information
---------------------------
Item 6. Exhibits
- ------- --------
Exhibit
Number
-------
31.1 Certification of Michael T. Dan, Chief Executive
Officer (Principal Executive Officer) of The Brink's
Company, pursuant to Rules 13a-14(a) and 15d-14(a)
promulgated under the Securities Exchange Act of
1934, as amended, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Robert T. Ritter, Vice President and
Chief Financial Officer (Principal Financial Officer)
of The Brink's Company, pursuant to Rules 13a-14(a)
and 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Michael T. Dan, Chief Executive
Officer (Principal Executive Officer) of The Brink's
Company, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of Robert T. Ritter, Vice President and
Chief Financial Officer (Principal Financial Officer)
of The Brink's Company, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE BRINK'S COMPANY
May 5, 2005 By: /s/ Robert T. Ritter
----------------------
Robert T. Ritter
(Vice President -
Chief Financial Officer)
(principal financial and
accounting officer)
34