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 June 30, 2005
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[ ] 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
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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
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 August 3, 2005, 58,751,574 shares of $1 par value common stock were
outstanding.
Part I - Financial Information
- ------------------------------
The Brink's Company
and subsidiaries
Consolidated Balance Sheets
June 30, December 31,
(In millions) 2005 2004
- ----------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 161.4 169.0
Accounts receivable, net 753.8 749.5
Prepaid expenses and other 63.6 58.1
Deferred income taxes 90.1 116.0
- ----------------------------------------------------------------------------------------------
Total current assets 1,068.9 1,092.6
Property and equipment, net 962.5 914.0
Goodwill 269.8 259.6
Deferred income taxes 243.0 234.7
Other assets 197.0 177.3
- ----------------------------------------------------------------------------------------------
Total assets $ 2,741.2 2,678.2
==============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 43.7 27.5
Current maturities of long-term debt 37.5 35.1
Accounts payable 346.3 357.0
Accrued liabilities 535.6 612.5
- ----------------------------------------------------------------------------------------------
Total current liabilities 963.1 1,032.1
Long-term debt 214.0 181.6
Accrued pension costs 137.2 117.0
Postretirement benefits other than pensions 327.1 331.2
Deferred revenue 145.5 139.5
Deferred income taxes 26.4 26.0
Other liabilities 240.1 176.8
- ----------------------------------------------------------------------------------------------
Total liabilities 2,053.4 2,004.2
Commitments and contingent liabilities (notes 5 and 8)
Shareholders' equity:
Common stock 58.8 56.7
Capital in excess of par value 521.8 457.4
Retained earnings 377.8 352.9
Accumulated other comprehensive loss (179.0) (148.1)
Employee benefits trust, at market value (91.6) (44.9)
- ----------------------------------------------------------------------------------------------
Total shareholders' equity 687.8 674.0
- ----------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,741.2 2,678.2
==============================================================================================
See accompanying notes to consolidated financial statements.
2
The Brink's Company
and subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
(In millions, except per share amounts) 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------------
Revenues $ 1,314.9 1,131.5 2,539.5 2,226.0
Expenses:
Operating expenses 1,133.6 958.5 2,185.7 1,888.4
Selling, general and administrative expenses 149.3 137.5 288.1 271.9
- -------------------------------------------------------------------------------------------------------------------
Total expenses 1,282.9 1,096.0 2,473.8 2,160.3
Other operating income, net 2.4 2.3 5.5 5.8
- -------------------------------------------------------------------------------------------------------------------
Operating profit 34.4 37.8 71.2 71.5
Interest expense (6.1) (5.8) (10.7) (11.6)
Interest and other income (expense), net 2.9 (0.1) 3.6 4.3
Minority interest (3.0) (1.4) (6.8) (4.7)
- -------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 28.2 30.5 57.3 59.5
Income tax expense 16.2 17.9 29.5 29.7
- -------------------------------------------------------------------------------------------------------------------
Income from continuing operations 12.0 12.6 27.8 29.8
Income from discontinued operations, net of tax 3.3 6.0 1.1 14.6
- -------------------------------------------------------------------------------------------------------------------
Net income $ 15.3 18.6 28.9 44.4
===================================================================================================================
Net income per common share:
Basic:
Continuing operations $ 0.21 0.23 0.50 0.55
Discontinued operations 0.06 0.11 0.02 0.27
- -------------------------------------------------------------------------------------------------------------------
$ 0.27 0.34 0.52 0.82
===================================================================================================================
Diluted:
Continuing operations $ 0.21 0.23 0.49 0.54
Discontinued operations 0.06 0.11 0.02 0.27
- -------------------------------------------------------------------------------------------------------------------
$ 0.27 0.34 0.51 0.81
===================================================================================================================
Cash dividends paid per common share $ 0.025 0.025 0.05 0.05
===================================================================================================================
See accompanying notes to consolidated financial statements.
3
The Brink's Company
and subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Six Months
Ended June 30,
(In millions) 2005 2004
- ---------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 28.9 44.4
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations, net of tax (1.1) (14.6)
Depreciation and amortization 92.2 85.3
Impairment charges from subscriber disconnects 19.6 18.9
Amortization of deferred revenue (13.7) (12.7)
Aircraft heavy maintenance expense 11.2 13.3
Deferred income taxes 16.6 17.1
Provision for uncollectible accounts receivable 1.1 2.5
Postretirement benefit funding (more) less than expense:
Pension 24.5 18.4
Other than pension (3.5) (3.3)
Other operating, net 19.1 8.8
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (35.8) (54.3)
Accounts payable and accrued liabilities 14.5 26.3
Deferred subscriber acquisition costs (11.0) (9.4)
Deferred revenue from new subscribers 19.8 16.8
Prepaid and other current assets (13.4) (13.7)
Other, net (4.5) (7.4)
Discontinued operations, net - 0.2
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 164.5 136.6
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (163.4) (99.5)
Aircraft heavy maintenance expenditures (11.7) (10.9)
Acquisitions (51.3) (11.9)
Proceeds from disposal of:
Coal business 5.0 -
Timber business - 33.7
Less purchase of equipment formerly leased - (6.2)
Gold business - 1.1
Property and equipment and other assets 4.5 7.0
Other, net 0.4 (5.2)
Discontinued operations, net - (0.8)
- ---------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (216.5) (92.7)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Long term debt:
Additions 84.9 29.0
Repayments (49.5) (69.7)
Short-term borrowings, net 19.9 10.9
Dividends paid to BCO shareholders (2.7) (2.7)
Dividends paid to minority interest shareholders (5.2) (2.7)
Proceeds from exercise of stock options 3.2 11.4
Other 0.1 0.2
- ---------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 50.7 (23.6)
- ---------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (6.3) (3.6)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (7.6) 16.7
Cash and cash equivalents at beginning of period 169.0 128.7
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 161.4 145.4
===============================================================================================================
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 Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock Based Compensation," net income and net income
per share would have approximated the pro forma amounts indicated below:
Three Months Six Months
Ended June 30, Ended June 30,
(In millions, except per share amounts) 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------------
Net income:
As reported $ 15.3 18.6 28.9 44.4
Less: share-based compensation expense determined
under fair-value method, net of related tax effects (0.7) (0.9) (1.7) (1.4)
- -------------------------------------------------------------------------------------------------------------------
Pro forma $ 14.6 17.7 27.2 43.0
===================================================================================================================
Net income per share:
Basic, as reported $ 0.27 0.34 0.52 0.82
Basic, pro forma 0.26 0.33 0.49 0.80
Diluted, as reported $ 0.27 0.34 0.51 0.81
Diluted, pro forma 0.26 0.32 0.48 0.79
- -------------------------------------------------------------------------------------------------------------------
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 six months ended June 30, 2004 are below.
There were no options granted in the six months ended June 30, 2005.
Six Months Ended
June 30, 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
The Company granted options for 0.7 million shares in July 2005 with a
weighted-average exercise price of $35.80 per share.
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 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.
During the second quarter of 2005, Brink's recorded restructuring and severance
costs of $10.9 million, an increase of approximately $10 million over the level
of similar expenses recorded last year. In addition, lease expense for the
second quarter of 2005 was $1.5 million higher than in 2004 primarily to record
expense on a straight-line basis for certain of its leases that have fixed
escalation rent clauses. In last year's second quarter, Brink's recorded $4.1
million of expenses related to tax matters, including $2.1 million of expenses
related to unpaid value-added taxes and customs duties.
The Company recorded a $2.1 million reduction to expenses in its BHS unit during
the second quarter of 2005 to reflect a revision to the estimate for the
allowance for doubtful accounts.
During the second quarter of 2005, the Company recorded approximately $2.1
million of charges in the Americas portion of BAX Global covering ancillary
costs which management has concluded cannot be billed back to customers.
During the most recently completed quarter, the Company received a $2 million
dividend from a real estate investment and recorded additional interest expense
of approximately $1 million relating to contingent income tax matters.
7
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 Six Months
Ended June 30, Ended June 30,
(In millions of shares) 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------------
Weighted-average shares outstanding:
Basic 56.0 54.4 55.9 54.1
Effect of dilutive stock options 0.6 0.7 0.6 0.7
- -------------------------------------------------------------------------------------------------------------------
Diluted 56.6 55.1 56.5 54.8
===================================================================================================================
Antidilutive stock options excluded from computation 0.1 0.3 - 0.3
===================================================================================================================
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. During the second quarter of 2005, the Board of Directors
approved an additional 2.1 million shares of common stock to be issued to the
Trust, which were issued in June 2005. The Trust held 2.5 million unallocated
shares at June 30, 2005 and 2.0 million unallocated shares at June 30, 2004.
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 was as follows:
U.S. Plans Non-U.S. Plans Total
- ---------------------------------------------------------------------------------------------------------------
(In millions) 2005 2004 2005 2004 2005 2004
- ---------------------------------------------------------------------------------------------------------------
Three months ended June 30,
Service cost $ 7.1 5.6 2.6 2.1 9.7 7.7
Interest cost on projected benefit obligation 11.0 10.3 2.7 2.3 13.7 12.6
Return on assets - expected (12.5) (12.4) (2.6) (2.1) (15.1) (14.5)
Other amortization, net 5.9 3.6 0.8 0.7 6.7 4.3
- ---------------------------------------------------------------------------------------------------------------
Net pension cost $ 11.5 7.1 3.5 3.0 15.0 10.1
===============================================================================================================
Six months ended June 30,
Service cost $ 14.1 12.3 5.1 4.3 19.2 16.6
Interest cost on projected benefit obligation 21.8 20.6 5.4 4.7 27.2 25.3
Return on assets - expected (25.0) (24.8) (5.0) (4.3) (30.0) (29.1)
Other amortization, net 11.2 7.3 1.7 1.6 12.9 8.9
- ---------------------------------------------------------------------------------------------------------------
Net pension cost $ 22.1 15.4 7.2 6.3 29.3 21.7
===============================================================================================================
8
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 to its non-U.S. pension plans of $2.0 million in the second
quarter of 2005 and $4.7 million in the first half of 2005.
Other postretirement benefits
Company-Sponsored Plans
The Company provides certain postretirement 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:
Coal-related plans Other plans Total
- ---------------------------------------------------------------------------------------------------------------
(In millions) 2005 2004 2005 2004 2005 2004
- ---------------------------------------------------------------------------------------------------------------
Three months ended June 30,
Service cost $ - - 0.2 0.4 0.2 0.4
Interest cost on accumulated
postretirement benefit
obligations ("APBO") 8.4 8.0 0.4 0.5 8.8 8.5
Return on assets - expected (3.8) (2.3) - - (3.8) (2.3)
Amortization of losses 3.8 3.3 0.1 0.1 3.9 3.4
- ---------------------------------------------------------------------------------------------------------------
Net postretirement benefit costs $ 8.4 9.0 0.7 1.0 9.1 10.0
===============================================================================================================
Six months ended June 30,
Service cost $ - - 0.5 0.6 0.5 0.6
Interest cost on accumulated
postretirement benefit
obligations ("APBO") 17.0 16.2 0.8 0.9 17.8 17.1
Return on assets - expected (7.5) (4.6) - - (7.5) (4.6)
Amortization of losses 8.2 6.8 0.2 0.1 8.4 6.9
- ---------------------------------------------------------------------------------------------------------------
Net postretirement benefit costs $ 17.7 18.4 1.5 1.6 19.2 20.0
===============================================================================================================
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 Six Months
Ended June 30, Ended June 30,
(In millions) 2005 2004 2005 2004
- ----------------------------------------------------------------------------------------------
Interest cost on APBO $ 0.7 0.8 1.5 1.8
Amortization of losses 0.3 0.4 0.7 0.9
- ----------------------------------------------------------------------------------------------
Net periodic postretirement costs $ 1.0 1.2 2.2 2.7
==============================================================================================
9
Note 4 - Acquisitions
In the first half of 2005, Brink's acquired security operations in Luxembourg,
Scotland, Ireland, Hungary, Poland and the Czech Republic. The aggregate
purchase price for these acquisitions was $51.3 million. During the same period
last year, Brink's acquired security operations in Greece.
Acquisition completed Purchase price
Location in three months ended (in millions)
- --------------------------------------------------------------------------------
Greece March 31, 2004 $ 11.9
================================================================================
Ireland, Luxembourg and Scotland March 31, 2005 $ 41.4
Poland, Hungary and the Czech Republic June 30, 2005 9.9
- --------------------------------------------------------------------------------
$ 51.3
================================================================================
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 balance sheets include the respective fair values
of assets acquired and liabilities assumed of these operations. The consolidated
statements of operations include the results of operations for the acquired
operations since the date of acquisition. The results of the acquired operations
were not material to the Company's consolidated statements of 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.
Note 5 - Discontinued operations
Three Months Six Months
Ended June 30, Ended June 30,
(In millions) 2005 2004 2005 2004
- ----------------------------------------------------------------------------------------------------------
Gain (loss) on sales of:
Timber $ - 1.9 - 20.7
Gold - - - (0.9)
Loss from operations:
Timber - - - (0.5)
Gold - - - (1.2)
Adjustments to contingent liabilities of former
operations (see note 8):
Withdrawal liability 6.1 8.1 6.1 8.1
Other (1.0) (0.7) (4.4) (3.6)
- ----------------------------------------------------------------------------------------------------------
Income from discontinued operations
before income taxes 5.1 9.3 1.7 22.6
Income tax expense 1.8 3.3 0.6 8.0
- ----------------------------------------------------------------------------------------------------------
Income from discontinued operations $ 3.3 6.0 1.1 14.6
==========================================================================================================
10
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 a $20.7 million pretax gain in discontinued operations in the
first half of 2004 including $1.9 million 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.
Loss from 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
Six Months
Ended June 30,
(In millions) 2005 2004
- ----------------------------------------------------------------------------------------------------
Cash paid for:
Interest $ 14.0 9.7
Income taxes, net of refunds 32.2 9.7
====================================================================================================
Other noncash financing activities - settlement of employee benefits
with Company common shares $ 12.8 10.2
====================================================================================================
Note 7 - Comprehensive income (loss)
Three Months Six Months
Ended June 30, Ended June 30,
(In millions) 2005 2004 2005 2004
- --------------------------------------------------------------------------------------------------------
Net income $ 15.3 18.6 28.9 44.4
Other comprehensive income (loss), net of
reclasses and taxes:
Foreign currency translation adjustments (13.4) (7.5) (30.9) (11.5)
Cash flow hedges - 0.5 - 0.3
Marketable securities (0.1) 0.1 - (2.7)
Minimum pension liability - (0.5) - (0.5)
- --------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 1.8 11.2 (2.0) 30.0
========================================================================================================
11
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 customs duties and value-added taxes. To date no
penalties have been asserted. The business unit has commenced discussions with
the appropriate governmental authorities in the affected jurisdiction regarding
this matter and the Company has made payments covering its calculated unpaid
value-added taxes.
As a result of its investigation, the Company recorded charges in 2004 of $1.3
million to operating profit and $0.8 million to interest expense in the second
quarter of 2004. In the third quarter of 2004 the Company recorded $0.2 million
reduction in the amount charged to operating expense and $0.1 million reduction
in the amount charged to interest expense as a result of updated information.
The summary impact on earnings is provided below.
Three Months Six Months
Ended June 30, Ended June 30,
(In millions) 2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------
Penalties on unpaid value-added taxes $ - 0.4 - 0.4
Duties - 0.9 - 0.9
- ------------------------------------------------------------------------------------------------------
Amount charged to operating expenses - 1.3 - 1.3
Interest expense on unpaid value-added taxes
and customs duties - 0.8 - 0.8
- ------------------------------------------------------------------------------------------------------
$ - 2.1 - 2.1
======================================================================================================
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
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.
12
Health Benefit Act
The Company is obligated to pay premiums to the United Mine Workers of America
("UMWA") Combined Benefit Fund, as described in the Company's 2004 Annual Report
on Form 10-K. At June 30, 2005, the Company had $181.2 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 withdrew from the UMWA 1950 and 1974 pension plans in June 2005 as
the last employees working under UMWA labor agreements left the Company. In
addition, during the quarter the UMWA reduced the estimate of the underfunded
status of the plans, and accordingly, the Company reduced its estimated $36.6
million withdrawal liability by $6.1 million to $30.5 million. As a result of
the withdrawal from these coal-related plans, the Company expects to be
obligated to pay the plans $30.5 million, which represents the Company's portion
of the underfunded status of the plans as of June 30, 2004, as determined by the
plan agreements and by law.
In the second quarter of 2004, the Company reduced its estimate of the
withdrawal liability by $8.1 million to reflect changes in estimates at that
time.
Income taxes
The Company and its subsidiaries are subject to tax examinations in various U.S.
and foreign jurisdictions and the Company has accrued approximately $19 million
for related contingencies. While it is difficult to predict the final outcome of
the various issues that may arise during an examination, the Company believes
that it has adequately provided for all contingent income tax liabilities and
interest.
Other loss contingencies
The Company recorded $1.2 million expense in the second quarter of 2005 and $4.8
million in the first half of 2005, to reflect an increase in the estimated cost
of reclamation at 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 $3.6 million expense in the first six months 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.
13
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 its former coal operations. The Company has funded a portion of its
postretirement benefit obligation using a Voluntary Employees' Beneficiary
Association trust (the "VEBA"). The VEBA is reflected in the Company's balance
sheets as a reduction of the postretirement benefit obligations.
14
RESULTS OF OPERATIONS
================================================================================
Overview
Three Months Six Months
Ended June 30, Ended June 30,
(In millions) 2005 2004 2005 2004
- --------------------------------------------------------------------------------
Income from:
Continuing operations $ 12.0 12.6 27.8 29.8
Discontinued operations 3.3 6.0 1.1 14.6
- --------------------------------------------------------------------------------
Net income $ 15.3 18.6 28.9 44.4
================================================================================
The income items in the above table are reported after tax.
Income from continuing operations declined in the second quarter of 2005 versus
the prior year's period primarily due to lower operating profits. Operating
profits were slightly lower in the second quarter of 2005 as lower operating
profit at Brink's primarily related to $10 million in higher restructuring and
severance costs was partially offset by improved operating profit from BHS and
BAX Global. BAX Global's performance for 2005 improved from the prior year on
higher operating profit in Asia-Pacific as a result of higher volumes and
improved margins. Income from continuing operations in the second quarter of
2005 also included a $2.0 million dividend from a real estate investment.
Income from continuing operations in the first half of 2004 included 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.
Income from continuing operations was lower for the first half of 2005 versus
2004 because of this 2004 gain and due to higher minority interest costs and a
slightly higher effective tax rate in 2005.
Income from discontinued operations includes net favorable adjustments to
contingent liabilities in the second quarters of both 2005 and 2004 and a $20.7
million pretax gain on the sale of the timber business in the first half of last
year. 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 customs duties and value-added taxes. To date no
penalties have been asserted. The business unit has commenced discussions with
the appropriate governmental authorities in the affected jurisdiction regarding
this matter and the Company has made payments covering its calculated unpaid
value-added taxes.
As a result of its investigation, the Company recorded charges in 2004 of $1.3
million to operating profit and $0.8 million to interest expense in the second
quarter of 2004. In the third quarter of 2004 the Company recorded $0.2 million
reduction in the amount charged to operating expense and $0.1 million reduction
in the amount charged to interest expense as a result of updated information.
The summary impact on earnings is provided below.
15
Three Months Three Months Six Months
Ended June 30, Ended June 30,
(In millions) 2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------
Penalties on unpaid value-added taxes $ - 0.4 - 0.4
Duties - 0.9 - 0.9
- -----------------------------------------------------------------------------------------------------
Amount charged to operating expenses - 1.3 - 1.3
Interest expense on unpaid value-added taxes
and customs duties - 0.8 - 0.8
- -----------------------------------------------------------------------------------------------------
$ - 2.1 - 2.1
=====================================================================================================
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
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 Six Months
Ended June 30, % Ended June 30, %
(In millions) 2005 2004 change 2005 2004 change
- ---------------------------------------------------------------------------------------------------
Revenues:
Brink's $ 536.7 465.3 15 $ 1,045.9 923.3 13
BHS 96.8 85.9 13 188.7 167.9 12
BAX Global 681.4 580.3 17 1,304.9 1,134.8 15
- ---------------------------------------------------------------------------------------------------
Revenues $ 1,314.9 1,131.5 16 $ 2,539.5 2,226.0 14
===================================================================================================
Operating profit:
Brink's $ 15.1 25.3 (40) $ 45.4 58.1 (22)
BHS 23.3 19.8 18 45.8 39.2 17
BAX Global 16.8 12.4 35 25.0 15.5 61
- ---------------------------------------------------------------------------------------------------
Business segments 55.2 57.5 (4) 116.2 112.8 3
Former coal operations (10.9) (10.1) 8 (24.1) (22.6) 7
Corporate (9.9) (9.6) 3 (20.9) (18.7) 12
- ---------------------------------------------------------------------------------------------------
Operating profit $ 34.4 37.8 (9) $ 71.2 71.5 -
===================================================================================================
16
The Company's operating profits decreased 9% in the second quarter of 2005
compared to the same period last year as a result of 40% lower operating profit
at Brink's due primarily to the recognition in this year's quarter of
approximately $10 million higher restructuring and severance costs. The
operating profit decrease was partially offset by the effects of BHS' continued
steady growth and higher operating profit at BAX Global. BHS reported 18% higher
operating profit for the current quarter over the same quarter last year. BAX
Global's 35% increase in operating profit for the current quarter as compared to
last year's levels resulted from higher volumes and margins in Asia Pacific.
The Company's operating profit for the first half of 2005 was essentially flat
in comparison to the prior-year period as improved operating profit at BAX
Global and continued growth by BHS was offset by lower operating profit at
Brink's.
Expenses related to former coal operations were higher in the 2005 periods
compared to the prior year primarily due to the recording of higher gains in the
2004 periods related to sales of residual coal 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 second
quarter and first six months of 2005 over the same prior-year periods so growth
at constant-currency exchange rates was lower than growth computed using actual
currency exchange rates. Changes in currency exchange rates did not materially
affect period-to-period comparisons of segment operating profit for the periods
presented herein.
17
The following table provides supplemental information related to 2005 Organic
Revenue Growth extracted from the consolidated financial information which is
not required to be presented in the consolidated financial statements by GAAP.
The Company defines its 2005 Organic Revenue Growth as the change in its 2005
revenue from 2004 because of factors such as change in prices for its products
and services (including the effect of fuel surcharges), changes in volumes of
business and changes in the product mix. Excluded from 2005 Organic Revenue
Growth are changes in translation rates and the effects of new acquisitions.
Three Months % change Six Months % change
(In millions) Ended June 30, from 2004 Ended June 30, from 2004
- -------------------------------------------------------------------------------------------------------------------
2004 revenues as reported:
Brink's $ 465.3 N/A 923.3 N/A
BHS 85.9 N/A 167.9 N/A
BAX Global 580.3 N/A 1,134.8 N/A
- -------------------------------------------------------------------------------------------------------------------
$ 1,131.5 N/A 2,226.0 N/A
===================================================================================================================
Effects on 2005 revenue of acquisitions
and dispositions:
Brink's $ 23.4 5 42.7 5
BHS - - - -
BAX Global - - - -
- -------------------------------------------------------------------------------------------------------------------
$ 23.4 2 42.7 2
===================================================================================================================
Currency translation effects on 2005 revenue:
Brink's $ 16.5 4 29.4 3
BHS 0.1 - 0.2 -
BAX Global 13.3 2 25.0 2
- -------------------------------------------------------------------------------------------------------------------
$ 29.9 3 54.6 2
===================================================================================================================
2005 Organic Revenue Growth:
Brink's $ 31.5 7 50.5 5
BHS 10.8 13 20.6 12
BAX Global 87.8 15 145.1 13
- -------------------------------------------------------------------------------------------------------------------
$ 130.1 11 216.2 10
===================================================================================================================
2005 revenues as reported:
Brink's $ 536.7 15 1,045.9 13
BHS 96.8 13 188.7 12
BAX Global 681.4 17 1,304.9 15
- -------------------------------------------------------------------------------------------------------------------
$ 1,314.9 16 2,539.5 14
===================================================================================================================
The supplemental information presented above related to the 2005 Organic Revenue
Growth is non-GAAP information that management believes is an important measure
to evaluate results of existing operations without the effects of acquisitions,
dispositions and currency exchange rates. This supplemental non-GAAP information
does not affect net income or any other reported figures. It should be viewed in
addition to, not in lieu of, the Company's consolidated statement of operations.
18
Brink's, Incorporated
Three Months Six Months
Ended June 30, % Ended June 30, %
(In millions) 2005 2004 change 2005 2004 change
- -----------------------------------------------------------------------------------------------------------------
Revenues:
North America (a) $ 192.2 180.9 6 $ 378.2 361.0 5
International (b) 344.5 284.4 21 667.7 562.3 19
- -----------------------------------------------------------------------------------------------------------------
$ 536.7 465.3 15 $ 1,045.9 923.3 13
=================================================================================================================
Operating profit:
North America (a) $ 9.4 13.0 (28) $ 22.1 25.9 (15)
International (b) 5.7 12.3 (54) 23.3 32.2 (28)
- -----------------------------------------------------------------------------------------------------------------
$ 15.1 25.3 (40) $ 45.4 58.1 (22)
=================================================================================================================
Cash flow information:
Depreciation and amortization $ 22.9 19.4 18 $ 44.1 38.5 15
Capital expenditures 18.0 16.2 11 49.4 32.3 53
=================================================================================================================
(a) U.S. and Canada.
(b) Europe, South America and Asia-Pacific.
Overview
Revenues at Brink's were higher in the second quarter and first half of 2005
compared to the prior-year periods as a result of a combination of the effects
of underlying business growth, newly acquired businesses and changes in currency
exchange rates. Operating profit decreased in the second quarter and first half
of 2005 compared to the same periods last year primarily as a result of
approximately $10 million higher restructuring and severance costs.
North America
North American revenues increased 6% in the second quarter and 5% in the first
six months of 2005 compared to the prior-year periods primarily as the result of
improved U.S. and Canadian armored car services, U.S. Cash Logistics operations
and Global Services. Operating profit in the second quarter and first half of
2005 was lower than in the same periods in 2004 due primarily to higher costs
for facilities, pension benefits and safety and security. As a result of these
items, the U.S. armored car operations provided a lower contribution to
operating profit in 2005, which was partially offset by slightly improved
performance from Cash Logistics and Global Services operations. Lease expense
for the quarter was $1.5 million higher than in 2004 primarily to record expense
on a straight-line basis for certain leases that have fixed rent escalation
clauses.
International
Revenues improved in the second quarter and first six months of 2005 over prior
year periods due to higher revenues from Europe and South America. Operating
profit in the second quarter and first half of 2005 was lower in Europe
partially offset by improved operating profit in South America.
Europe. Revenues increased 24% in the second quarter and 21% for the first six
months of 2005 when compared to the prior-year periods. On a constant currency
basis, 2005 revenues were 19% higher in the second quarter and 16% higher in the
first six months compared to the prior year periods, partially as a result of
acquisitions. Operating profit was lower in 2005 due to higher restructuring and
severance expenses in Europe (primarily in Belgium) and the effects of a
reduction in volumes in the Netherlands and Belgium. The Company expects to
record an additional $2 million to $3 million in severance costs in the second
half of 2005. The Company expects approximately $6 million to $7 million in cost
savings in 2006 related to the restructuring.
19
Brink's acquired operations in Greece in the first half of 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 increased
revenues by approximately $23 million in the second quarter of 2005 and $43
million in the first half of 2005. These acquisitions are expected to increase
revenue by approximately $100 million on an annualized basis.
South America. Revenues and operating profit in the second quarter and first six
months of 2005 were higher than the prior-year periods primarily reflecting
higher volumes and better operating performance particularly in Venezuela,
Columbia, Argentina and Chile. These improvements were partially offset by
weakened operating performance in Brazil as a result of the continuing
competitive environment.
Asia-Pacific. Asia-Pacific operating profit in the second quarter of 2005 was
about the same as the prior-year period; operating profit for the first half of
2005 was slightly lower than 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. Costs for safety and security
were higher in the second quarter and first half of 2005 than in the
corresponding periods of 2004. Management expects that costs for safety and
security will continue to be higher in 2005 than in 2004. The Company expects
Brink's operating profit as a percentage of revenues (before restructuring and
severance costs of up to $15 million) to approximate 7% for the full-year 2005.
Brink's Home Security
Three Months Six Months
Ended June 30, % Ended June 30, %
(In millions) 2005 2004 change 2005 2004 change
- -----------------------------------------------------------------------------------------------------------------
Revenues $ 96.8 85.9 13 $ 188.7 167.9 12
Operating profit:
Recurring services (a) $ 43.7 35.7 22 $ 85.2 70.8 20
Investment in new subscribers (b) (20.4) (15.9) 28 (39.4) (31.6) 25
- -----------------------------------------------------------------------------------------------------------------
$ 23.3 19.8 18 $ 45.8 39.2 17
=================================================================================================================
Monthly recurring revenues (c) $ 27.7 24.5 13
=================================================================================================================
Cash flow information:
Depreciation and amortization (d) $ 14.3 12.6 13 $ 28.2 25.1 12
Impairment charges from
subscriber disconnects 10.8 10.2 6 19.6 18.9 4
Amortization of deferred revenue (e) (7.2) (6.6) 9 (13.7) (12.7) 8
Deferral of subscriber acquisition
costs (current year payments) (6.0) (4.7) 28 (11.0) (9.4) 17
Deferral of revenue from new
subscribers (current year receipts) 10.2 8.7 17 19.8 16.8 18
Capital expenditures (f) (37.8) (29.4) 29 (81.0) (56.1) 44
=================================================================================================================
(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) Capital expenditures in the first quarter of 2005 included $10.2 million
for the purchase of its headquarters in Irving, Texas. The facility was
formerly leased.
20
Revenues
The increase in BHS' revenues for the second quarter and first half of 2005 over
the comparable 2004 periods (13% for the quarter and 12% for the first half) was
primarily due to an increase in the subscriber base. The increase in the
subscriber base also contributed to a 13% increase in monthly recurring revenues
for June 2005 as compared to June 2004.
Operating profit
Operating profit increased $3.5 million for the second quarter and $6.6 million
for the first half of 2005 compared to the same periods 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. Additionally, a
reduction in the estimate for allowance for doubtful accounts resulted in a $2.1
million increase in operating profit during the second quarter of 2005.
BHS intends to expand its presence in commercial alarm installation and
monitoring, as well as increase the volume of its installation business as a
result of 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
construction of a second monitoring center expected to be in operation in the
first quarter of 2006. The new monitoring center will provide additional service
capacity for the existing subscriber base, increase capacity to sustain BHS'
continued growth and provide enhanced security and disaster recovery
capabilities. Operating the new facility is expected to result in additional
administrative expense. 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 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 which in most cases have contracted with
BHS.
Subscriber activity
Three Months Six Months
Ended June 30, % Ended June 30, %
(Subscriber data in thousands) 2005 2004 change 2005 2004 change
- ----------------------------------------------------------------------------------------------------------------
Number of subscribers:
Beginning of period 947.1 854.1 921.4 833.5
Installations (a) 42.3 35.6 19 81.6 69.7 17
Disconnects (a) (16.4) (15.6) 5 (30.0) (29.1) 3
- ----------------------------------------------------------------------------------------------------------------
End of period 973.0 874.1 11 973.0 874.1 11
================================================================================================================
Average number of subscribers 960.3 864.5 11 947.0 854.0 11
Annualized disconnect rate (b) 6.8% 7.2% 6.3% 6.8%
================================================================================================================
(a) Customers who move from one location and then initiate a new service
agreement at a new location are not included in either installations or
disconnects. Dealer accounts cancelled and charged back to the dealer are
also excluded from installations and disconnects. Inactive sites that are
returned to service reduce disconnects.
(b) 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 move from one location
and then inititate a new service agreement at a new location, accounts
charged back to the dealers because the customers cancelled service during
the specified contractual term, and inactive sites that are returned to
active service during the period.
21
Installations were 19% higher in the second quarter of 2005 and 17% higher in
the first six months of 2005 as compared to the same periods 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 and home builder
activity. 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 by improving
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.
Reconciliation of Non-GAAP Measures - Monthly Recurring Revenues
Six Months
Ended June 30,
(In millions) 2005 2004
- --------------------------------------------------------------------------------
June:
Monthly recurring revenues ("MRR") (a) $ 27.7 24.5
Amounts excluded from MRR:
Amortization of deferred revenue 2.6 2.4
Other revenues (b) 2.7 2.5
- --------------------------------------------------------------------------------
Revenues on a GAAP basis $ 33.0 29.4
================================================================================
Revenues on a GAAP basis:
June $ 33.0 29.4
January - May 155.7 138.5
- --------------------------------------------------------------------------------
January - June $ 188.7 167.9
================================================================================
(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.
22
BAX Global
Three Months Six Months
Ended June 30, % Ended June 30, %
(In millions) 2005 2004 change 2005 2004 change
- ----------------------------------------------------------------------------------------------------------------
Revenues:
Americas (a) $ 312.2 279.3 12 $ 605.6 544.0 11
International (b) 396.3 321.3 23 751.0 630.4 19
Eliminations (27.1) (20.3) 33 (51.7) (39.6) 31
- ----------------------------------------------------------------------------------------------------------------
$ 681.4 580.3 17 $ 1,304.9 1,134.8 15
================================================================================================================
Operating profit (loss):
Americas (a) $ 3.7 6.1 (39) $ 0.3 4.2 (93)
International (b) 18.7 11.2 67 32.9 19.9 65
Corporate and other (5.6) (4.9) 14 (8.2) (8.6) (5)
- ----------------------------------------------------------------------------------------------------------------
$ 16.8 12.4 35 $ 25.0 15.5 61
================================================================================================================
Cash flow information:
Depreciation and amortization $ 9.6 10.6 (9) $ 19.7 21.3 (8)
Capital expenditures (c) 15.7 3.8 200+ 32.8 10.7 200+
================================================================================================================
Intra-America revenue (d) $ 139.8 133.7 5 $ 275.6 258.8 6
Worldwide expedited freight
services (e):
Revenues $ 517.7 437.2 18 $ 983.0 852.8 15
Weight in pounds 469.1 443.9 6 900.4 861.9 4
================================================================================================================
(a) U.S., Mexico, Latin America and Canada.
(b) Europe-Middle East-Africa ("EMEA") and Asia-Pacific.
(c) Includes the purchase of three airplanes.
(d) U.S. and Canada excluding Intra-Canada.
(e) Includes U.S. deferred freight services.
Overview
BAX Global's operating profit in the second quarter of 2005 was $4.4 million
above that of the same quarter last year on a 17% increase in revenues (15%
increase in revenues on a constant currency basis). Operating profit in the
first half was $9.5 million better than last year on a 15% increase in revenues
(13% on a constant currency basis). Operating profit was better in 2005 than
2004 primarily due to higher volumes and improved margins in the Asia-Pacific
region partially offset by the effects of a decrease in U.S. expedited air
freight volumes.
Americas
BAX Global's operating profit in the Americas region in the second quarter and
first half of 2005 was lower than the same 2004 periods despite a 12% second
quarter and a 11% first half increase in revenues.
23
Intra-America. Revenues improved over the prior-year periods primarily due to an
increase in BAX Global's wholesale freight-forwarding product and deferred
freight volumes. Partially offsetting this increase were lower overnight and
second day freight volumes, which on average have higher revenue per pound.
Operating profit in the Americas was lower in the second quarter and first half
of 2005 compared to 2004 due partially to the shift in volumes of overnight and
second-day air products to ground products. The shift from air to ground
products by customers has been affected by offerings by BAX Global and other
service providers of expedited ground products that are significantly less
expensive than air transportation. Higher fuel surcharges on air transportation,
driven by higher fuel costs, also exacerbated the shift to ground products.
Intra-America continued to see strong growth in its wholesale freight-forwarding
business.
The impact of higher fuel costs in the 2005 period was not significant to
performance primarily as a result of BAX Global's ability to pass through a
portion of higher fuel costs to customers using fuel surcharge adjustments to
billings. The effectiveness of the fuel surcharge, however, is somewhat
dependent on expedited volumes, because as volumes become lower some of the
effects of higher fuel costs are absorbed by the Company. The fuel surcharge
represents approximately 10.7% of revenues in the Americas region for the first
half of 2005 compared with 9.7% in the first half of 2004.
Other. U.S. air export volumes were higher in the second quarter and first six
months of 2005 compared to the same 2004 periods, and revenue per pound
(excluding fuel and other surcharges) was about even with 2004. Charter activity
was also higher in the 2005 periods compared to the prior year. Volumes for
ocean freight in the U.S. were slightly higher in the second quarter and first
half of 2005 compared to 2004 periods. Americas operating profit in the second
quarter of 2005 includes approximately $2.1 million of charges reflecting
ancillary costs which management has concluded cannot be billed back to
customers.
International
International operating profits increased 67% for the second quarter of 2005
compared to the 2004 period on a 23% increase in revenues (20% increase in
revenues on a constant currency basis). For the first half of 2005 operating
profit was 65% higher on a 19% increase in revenues (16% on a constant currency
basis).
Asia-Pacific. Revenue increased 30% in the second quarter and 25% in the first
half of 2005 compared to the same periods last year. Operating profit increased
61% in the second quarter and 60% in the first six months of 2005 compared to
the same periods in 2004. Revenues and operating profit for the 2005 periods
benefited from an increase in Asia-Pacific air export volumes, particularly from
China, Hong Kong and Singapore due to their strong economies and solid growth by
local operating units. Margins were also strong as a result of increased volumes
and flat overhead costs.
EMEA. Revenues increased by 10% in the second quarter and 9% in the first half
of 2005 compared to the same periods last year. On a constant currency basis
2005 revenues were 6% higher in the second quarter and 4% higher in the first
half of 2005 than the same periods last year. Operating profit more than doubled
from a low base in the second quarter and was higher in the first half of 2005
compared with 2004 periods due to slightly improved performance in the UK and
the Benelux region despite weak business conditions and continuing competitive
market pressures in the region.
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.
24
Corporate Expense - The Brink's Company
Three Months Six Months
Ended June 30, % Ended June 30, %
(In millions) 2005 2004 change 2005 2004 change
- --------------------------------------------------------------------------------
Corporate expense $ 9.9 9.6 3 $ 20.9 18.7 12
================================================================================
Corporate expense was higher in the second quarter and first half of 2005
periods primarily resulting from higher long-term incentive accruals and
professional fees. Costs related to section 404 of the Sarbanes Oxley Act of
2002 are expected to be lower in the second half of 2005 compared to the same
period in 2004.
Former Coal Operations
Former coal operations included in continuing operations
Three Months Six Months
Ended June 30, % Ended June 30, %
(In millions) 2005 2004 change 2005 2004 change
- -----------------------------------------------------------------------------------------------------------
Company-sponsored postretirement
benefits other than pensions $ 8.6 9.2 (7) $ 18.0 18.6 (3)
Black lung 1.0 1.2 (17) 2.2 2.7 (19)
Pension 1.2 0.5 140 2.2 1.1 100
Administrative, legal and other
expenses, net 1.3 1.8 (28) 3.4 4.3 (21)
Idle and closed mine expense 0.1 0.2 (50) 0.3 0.4 (25)
Gains on sales of property and
equipment and other income (1.3) (2.8) (54) (2.0) (4.5) (56)
- -----------------------------------------------------------------------------------------------------------
$ 10.9 10.1 8 $ 24.1 22.6 7
===========================================================================================================
Administrative, legal and other expenses, net
Administrative, legal and other expenses, net, are expected to decline as
administrative functions are reduced and remaining 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 reclamation liabilities contractually assumed by the buyer. The
Company recorded a $0.3 million gain related to liability transfers in the first
quarter of 2004. The Company may record additional gains of up to approximately
$6 million as liabilities related to reclamation are formally transferred to the
buyer. As the transfer of the liabilities to the buyer is not within the
Company's control the timing and realizability of additional gains remains
uncertain.
25
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 Six Months
Ended June 30, % Ended June 30, %
(In millions) 2005 2004 change 2005 2004 change
- -------------------------------------------------------------------------------------------------------------------
Gains on sales of operating
assets, net $ 0.4 3.0 (87) $ 1.6 4.4 (64)
Foreign currency transaction losses, net (1.1) (0.1) 200+ (1.5) - NM
Share in earnings (loss) of equity affiliates 0.6 (1.0) NM 1.3 (0.2) NM
Royalty income 0.4 0.5 (20) 0.9 1.0 (10)
Penalties on unpaid value-added taxes - (0.4) (100) - (0.4) (100)
Other 2.1 0.3 200+ 3.2 1.0 200+
- -------------------------------------------------------------------------------------------------------------------
$ 2.4 2.3 4 $ 5.5 5.8 (5)
===================================================================================================================
Gains on sales of operating assets, net, in 2005 are primarily the result of the
sale of an aircraft by a subsidiary of BAX Global and, to a lesser extent,
continuing sales of residual coal assets. In 2004, gains are primarily the
result of disposing of assets related to the Company's former coal operations.
26
Nonoperating Income and Expense
Interest expense
Three Months Six Months
Ended June 30, % Ended June 30, %
(In millions) 2005 2004 change 2005 2004 change
- --------------------------------------------------------------------------------
Interest expense $ 6.1 5.8 5 $ 10.7 11.6 (8)
================================================================================
Interest expense was higher primarily due to additional estimated interest
expense related to prior-year contingent income tax matters.
Interest and other income (expense), net
Three Months Six Months
Ended June 30, % Ended June 30, %
(In millions) 2005 2004 change 2005 2004 change
- -------------------------------------------------------------------------------------------------------------
Interest income $ 1.2 1.0 20 $ 2.4 2.1 14
Dividend income from real estate
investment 2.0 - NM 2.0 - NM
Recognition of gain on investments
held by VEBA - - - - 4.4 (100)
Discounts and other fees of
accounts receivable
securitization program (0.7) (0.6) 17 (1.1) (1.0) 10
Other, net 0.4 (0.5) NM 0.3 (1.2) NM
- -------------------------------------------------------------------------------------------------------------
$ 2.9 (0.1) NM $ 3.6 4.3 (16)
=============================================================================================================
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 Six Months
Ended June 30, % Ended June 30, %
(In millions) 2005 2004 change 2005 2004 change
- --------------------------------------------------------------------------------
Minority interest $ 3.0 1.4 114 $ 6.8 4.7 45
================================================================================
27
Income Taxes
Income tax expense (benefit) Effective tax rate
- -----------------------------------------------------------------------------------------
Six Months Ended June 30, 2005 2004 2005 2004
- -----------------------------------------------------------------------------------------
(in millions) (in percentages)
Continuing operations $ 29.5 29.7 51.5% 49.9%
Discontinued operations 0.6 8.0 35.3% 35.4%
=========================================================================================
The effective income tax rate on continuing operations in 2005 was higher than
the 35% U.S. statutory tax rate primarily due to $9.2 million increase in the
valuation allowance for deferred tax assets related to certain Brink's European
and South American operations. These increases were partially 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 $5.2
million net tax adjustments related to the establishment of valuation allowances
on deferred tax assets of certain European operations.
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 41% or 42%.
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 expects to complete its evaluation of the repatriation provision of
the American Jobs Creation Act of 2004 during the third quarter of 2005. The
range of possible amounts that the Company is considering for repatriation under
this provision is between zero and $150 million. The Company estimates that the
related potential range of additional income tax payments is between zero and
$10 million.
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.
28
LIQUIDITY AND CAPITAL RESOURCES
================================================================================
Overview
Cash flows before financing activities decreased by approximately $96 million in
the first half of 2005 as compared to the first half of 2004. The decrease was
primarily due to acquisitions by Brink's and overall higher capital
expenditures. In addition, the first half of 2004 included $27.5 million of
proceeds from the sale of natural resources business.
Summary of Cash Flow Information
Six Months
Ended June 30, $
(In millions) 2005 2004 change
- -----------------------------------------------------------------------------------------
Cash flows from operating activities $ 164.5 136.6 27.9
Cash flows from investing activities:
Capital expenditures and aircraft heavy
maintenance expenditures (175.1) (110.4) (64.7)
Acquisitions (51.3) (11.9) (39.4)
Net proceeds from sale of timber business - 27.5 (27.5)
Net proceeds from sale of coal business 5.0 - 5.0
Other 4.9 2.1 2.8
- -----------------------------------------------------------------------------------------
Investing activities (216.5) (92.7) (123.8)
- -----------------------------------------------------------------------------------------
Cash flows before financing activities $ (52.0) 43.9 (95.9)
=========================================================================================
Operating Activities
Cash flows from operating activities were $27.9 million higher in the first half
of 2005 compared to the same period in 2004 primarily due to cash provided by an
increase in the amount of receivables sold as part of the Company's
securitization program.
Investing Activities
Cash flows from investing activities decreased by $123.8 million in the 2005
period versus 2004, primarily due to $39.4 million of higher cash outflows for
acquisitions and $63.9 million for higher capital expenditures. Cash from
investing activities in the first half of 2004 included $27.5 million of net
cash proceeds from the sale of the timber business.
Capital expenditures and aircraft heavy maintenance expenditures were as
follows:
Six Months
Ended June 30, $
(In millions) 2005 2004 change
- --------------------------------------------------------------------------------
Capital expenditures:
Brink's $ 49.4 32.3 17.1
Brink's Home Security 81.0 56.1 24.9
BAX Global 32.8 10.7 22.1
Corporate 0.2 0.4 (0.2)
- --------------------------------------------------------------------------------
Capital expenditures $ 163.4 99.5 63.9
================================================================================
Aircraft heavy maintenance expenditures $ 11.7 10.9 0.8
================================================================================
29
Capital expenditures for the first half of 2005 were $63.9 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. Also contributing to
the increase were higher capital expenditures at Brink's for vehicles and at BAX
Global for information technology spending and the purchase of three aircraft.
Capital expenditures for the full-year 2005 are currently expected to range from
$290 million to $300 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. BHS's capital
expenditures in 2005 are expected to include approximately $15 million for the
development of a second monitoring center. In addition to capital expenditures,
the Company expects to spend between $25 million and $30 million on aircraft
heavy maintenance in 2005.
Business Segment Cash Flows
The Company's cash flows before financing activities for each of the operating
segments are presented below:
Six Months
Ended June 30, $
(In millions) 2005 2004 change
- --------------------------------------------------------------------------------------------
Cash flows before financing activities
Business segments:
Brink's $ (35.3) 40.0 (75.3)
BHS 8.6 24.6 (16.0)
BAX Global 23.0 (3.3) 26.3
- --------------------------------------------------------------------------------------------
Subtotal of business segments (3.7) 61.3 (65.0)
Corporate and former operations:
Net proceeds from sale of timber business - 27.5 (27.5)
Net proceeds from sale of Coal 5.0 - 5.0
Other (53.3) (44.9) (8.4)
- --------------------------------------------------------------------------------------------
Cash flows before financing activities $ (52.0) 43.9 (95.9)
============================================================================================
Brink's
Cash flows before financing activities at Brink's decreased by $75.3 million
primarily due to a year-over-year $39.4 million increase in cash used for
acquisitions ($51.3 million for the acquisition of operations in Europe in 2005
compared with $11.9 million in 2004 for the acquisition of operations in
Greece). Cash used for working capital needs was higher in the first six months
of 2005 primarily as a result of increased receivables on a 13% increase in
revenue. In addition, a $17.1 million increase in capital expenditures also
contributed to the decrease in cash flows before financing activity.
30
BHS
The decrease in BHS' cash flows before financing activities is primarily due to
the purchase of BHS' headquarter facilities for $10.2 million in the first half
of 2005 and an increase in capital expenditures reflecting the growth in
installations. Partially offsetting this decrease was higher cash flows from
operations as a result of a larger subscriber base.
BAX Global
Cash flows before financing activities at BAX Global improved reflecting higher
operating profit in the first half of 2005 versus 2004 and a $63 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
Six Months
Ended June 30,
(In millions) 2005 2004
- -------------------------------------------------------------------------------
Short-term debt $ 19.9 10.9
Revolving Facility 63.9 (30.9)
Senior Notes (18.3) -
Other (10.2) (9.8)
- -------------------------------------------------------------------------------
Net borrowings (repayments) of debt 55.3 (29.8)
Dividends to shareholders of the Company (2.7) (2.7)
Dividends to minority interests in subsidiaries (5.2) (2.7)
Proceeds from the exercise of stock options 3.2 11.4
Other, net 0.1 0.2
- -------------------------------------------------------------------------------
Financing activities $ 50.7 (23.6)
===============================================================================
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 half of 2005 and 2004, the Company paid two $0.025 per share
regular quarterly dividends on its common stock (annual rate of $0.10 per
share). Dividends paid on common stock totalled $2.7 million in the first half
of 2005 and 2004. Future dividends are dependent on the earnings, financial
condition, cash flow and business requirements of the Company, as determined by
the Board of Directors (the "Board").
Proceeds from the exercise of stock options were higher in the 2004 period
primarily due to an increase in the number of options exercised.
31
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
June 30, December 31,
(In millions) 2005 2004
- ----------------------------------------------------------------------------------------------
Short-term debt and current maturities of long-term debt $ 81.2 62.6
Long-term debt 214.0 181.6
- ----------------------------------------------------------------------------------------------
Debt 295.2 244.2
Less cash and cash equivalents (161.4) (169.0)
- ----------------------------------------------------------------------------------------------
Net Debt 133.8 75.2
Amounts sold under accounts receivable securitization facility 61.0 25.0
- ----------------------------------------------------------------------------------------------
Net Financings $ 194.8 100.2
==============================================================================================
The Company believes that Net Debt and Net Financings are useful measures of the
Company's financial leverage. Net financings grew by $94.6 million during the
first half of 2005 due primarily to spending for acquisitions and capital
expenditures. The Company spent approximately $51.3 million to acquire
operations for Brink's in Luxembourg, Scotland, Ireland, Hungary, Poland, and
the Czech Republic. In addition, capital expenditures were $63.9 million higher
in the first half of 2005 than 2004.
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 June 30, 2005, $319 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 June 30, 2005, $6 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 $122 million in available credit, of which approximately $44
million was available at June 30, 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.
32
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 June 30, 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 Company can sell up to $90 million,
provided it has sufficient eligible receivables available, and at June 30, 2005,
$61 million, the maximum then available for sale, had been sold. 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 $65 million of residual value guarantees at June
30, 2005 related to operating leases, principally for trucks and other vehicles.
Equity
At June 30, 2005, the Company had 100 million shares of common stock authorized
and 58.8 million shares issued and outstanding. Of the outstanding shares, 2.5
million shares were held by The Brink's Company Employee Benefits Trust (the
"Trust") at June 30, 2005, and have been accounted for similarly to treasury
stock for earnings per share purposes. During the second quarter of 2005, the
Board approved an additional 2.1 million shares of common stock to be issued to
the Trust, which were issued in June 2005. 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 six 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 United Mine Workers of America
("UMWA") Combined Benefit Fund, as described in the Company's 2004 Annual Report
on Form 10-K. At June 30, 2005, the Company had $181.2 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.
33
Withdrawal liability
The Company withdrew from the UMWA 1950 and 1974 pension plans in June 2005 as
the last employees working under UMWA labor agreements left the Company. In
addition, during the quarter the UMWA reduced the estimate of the underfunded
status of the plans, and accordingly, the Company reduced its estimated $36.6
million withdrawal liability by $6.1 million to $30.5 million. As a result of
the withdrawal from these coal-related plans, the Company expects to be
obligated to pay the plans $30.5 million, which represents the Company's portion
of the underfunded status of the plans as of June 30, 2004, as determined by the
plan agreements and by law.
In the second quarter of 2004, the Company reduced its estimate of the
withdrawal liability by $8.1 to reflect changes in estimates at that time.
Income taxes
The Company and its subsidiaries are subject to tax examinations in various U.S.
and foreign jurisdictions and the Company has accrued approximately $19 million
for related contingencies. While it is difficult to predict the final outcome of
the various issues that may arise during an examination, the Company believes
that it has adequately provided for all contingent income tax liabilities and
interest.
Other loss contingencies
The Company recorded $1.2 million of additional expense in the second quarter of
2005 and $4.8 million in the first half of 2005, to reflect an increase in the
estimated cost of reclamation at 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 $3.6 million of additional expense in the first six months
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.
34
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 six months ended June
30, 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 June 30, 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, anticipated
revenues from Brink's acquisitions, anticipated costs at Brink's associated with
safety and security and with restructuring and severance, expected cost savings
related to Brink's restructuring, expectations regarding Brink's operating
profit for the full year 2005, BHS' expansion into the commercial sector,
potential increases in the volume of its installation business driven by
relationships with major home builders, and its addition of a second monitoring
station, together with the financial impact of these changes, changes in the
disconnect rate at BHS, 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, changes in expenses related to former coal
operations, anticipated reclamation costs at the Company's former coal mines,
obligations associated with the withdrawal from multiemployer plans, 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 recognition of tax benefits upon the favorable
resolution of a tax contingency, fluctuations in the Company's effective tax
rate, the outcomes of federal, state and foreign tax examinations, 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, 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, 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,
and the outcome of pending litigation, 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.
35
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, 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, negotiations
with organized labor in Belgium and the Netherlands, 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 (including federal, state and foreign tax authorities)
to claims for FBLET refunds, interpretation of existing regulations and the
promulgation of new regulations relating to the repatriation provisions 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 demand for the Company's services, the financial performance of the Company,
information technology costs and costs associated with ongoing contractual
obligations, overall economic, political, social and business conditions,
seasonality, 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, variations in costs or expenses and the ability
of counterparties to perform.
36
Part II - Other Information
---------------------------
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
- --------------------------------------------------------------------
The following table provides information about common stock repurchases by the
Company during the quarter ended June 30, 2005.
(d) Maximum Number
(c) Total Number (or approximate
of Shares Purchased Dollar Value) of
(a) Total Number as Part of Publicly Shares that May Yet
of Shares (b) Average Price Announced Plans be Purchased Under
Period Purchased (1) Paid per Share or Programs the Plans or Programs
- ------------------------------------------------------------------------------------------------
June 2005 54,401 $ 36.28 - -
================================================================================================
(1) Stock-for-stock exchanges for payments of option exercise costs.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Registrant's annual meeting of shareholders was held on May 6, 2005.
The following person was elected for a term expiring in 2006, by the following
vote:
------------------------------------------------
| | For | Withheld |
|------------------|-------------|-------------|
| Ronald M. Gross | 48,931,750 | 3,511,979 |
------------------------------------------------
The following persons were elected for terms expiring in 2008, by the following
votes:
--------------------------------------------------------
| | For | Withheld |
|-----------------------|--------------|---------------|
| Marc C. Breslawsky | 50,783,973 | 1,659,756 |
|-----------------------|--------------|---------------|
| John S. Brinzo | 50,988,533 | 1,455,196 |
|-----------------------|--------------|---------------|
| Michael T. Dan | 50,040,136 | 2,403,593 |
--------------------------------------------------------
The selection of KPMG LLP as independent certified public accountants to audit
the accounts of the Registrant and its subsidiaries for the year 2005 was
approved by the following vote:
------------------------------------------------
| For | Against | Abstentions |
|---------------|--------------|---------------|
| 51,306,982 | 1,013,562 | 123,185 |
------------------------------------------------
The material terms of the performance goals under the Registrant's Management
Performance Improvement Plan were approved by the following vote:
------------------------------------------------
| For | Against | Abstentions |
|---------------|--------------|---------------|
| 49,240,507 | 2,403,266 | 799,956 |
------------------------------------------------
The Registrant's 2005 Equity Incentive Plan was approved by the following vote:
-------------------------------------------------------------------
| For | Against | Abstentions | Broker Non-Votes |
|--------------|-------------|---------------|--------------------|
| 34,367,305 | 9,238,327 | 805,695 | 8,032,402 |
-------------------------------------------------------------------
37
Item 6. Exhibits
- ------- --------
Exhibit
Number
- ------
10.1 Directors' Stock Accumulation Plan, as amended and restated as of July 8,
2005.*
10.2 Non-Employee Directors' Stock Option Plan, as amended and restated as of
July 8, 2005.*
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.
- ----------------
* Management contract or compensatory plan or arrangement.
38
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
August 5, 2005 By: /s/ Robert T. Ritter
----------------------
Robert T. Ritter
(Vice President -
Chief Financial Officer)
(principal financial and
accounting officer)
39