EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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OPERATIONS
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The Brink's Company
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Executive Overview
The Brink's Company (along with its subsidiaries, the "Company") conducts
business in the security industry through two wholly owned subsidiaries:
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"), the deploying and
servicing of safes and safe control
devices, including its patented
CompuSafe(R) service and transporting,
sorting and destroying sensitive
information ("Secure Data Solutions").
o Brink's Home Security, Inc. ("BHS") BHS offers monitored security services
in North America primarily for
owner-occupied, single-family
residences. To a lesser extent, BHS
offers security services for
commercial and multi-family
properties. BHS typically installs and
owns the on-site security systems and
charges fees to monitor and service
the systems.
Management's approach to each of its security businesses is similar, with a
focus on quality service, the brand, risk management and a patient and
disciplined approach to markets. Management believes each business is a premium
provider of services in the markets that it serves. The Company's marketing and
sales efforts are enhanced by its brands so the Company seeks to protect their
value. Since the Company's services focus on handling, transporting, and
protecting valuables, its employees strive to understand and manage risk.
Overlaying management's approach is an understanding that the Company must be
disciplined and patient enough to charge fair prices that reflect the value
provided, the risk assumed and the need for an adequate return for the Company's
investors.
The business environments in which the Company's security businesses operate
around the world are constantly changing. Management must continually adapt to
changes in the competitive landscapes, economies in different parts of the world
and even each customer's level of business. To be successful, management must be
able to balance requirements of local laws and regulations, risk and the effects
of changing demand on the utilization of its resources. As a result, the Company
operates largely on a decentralized basis so local management can adjust
operations to its unique circumstances.
For the same reasons that the Company operates on a decentralized basis,
short-term forecasts of performance are difficult to make with precision. As a
result, the Company does not provide detailed earnings forecasts.
18
The Company measures financial performance on a long-term basis. The key
financial factors on which it focuses are:
o Growth in revenues and earnings
o Generation of cash flow
o Creation of value through solid returns on capital
These and similar measures are critical components of the Company's incentive
compensation programs and performance evaluations.
The Company sold BAX Global Inc. ("BAX Global"), a wholly owned freight
transportation subsidiary, in January 2006 for $1.1 billion in cash. Net
after-tax proceeds are expected to approximate $1.0 billion. The Company
immediately contributed $225 million of the proceeds to a Voluntary Employees'
Beneficiary Association Trust ("VEBA") designated to pay retiree medical
obligations of former coal operations and paid down $46 million of short-term
debt. The Company expects to use the remaining after-tax proceeds to:
o repay up to approximately $140 million of debt,
o repurchase between $400 million and $600 million of the Company's
common stock, subject to approval of the Company's Board of
Directors, and
o support future growth and other activities of the Company.
The Company initially retained ownership of Air Transport International, LLC
("ATI"), BAX Global's former airline subsidiary, pending receipt of required
regulatory approvals. Regulatory approval was obtained and ATI was sold on
February 28, 2006.
BAX Global's results of operations, including ATI, have been reported as
discontinued operations for all years reported. The Company has indemnified the
purchaser for various liabilities and contingencies associated with BAX Global's
operations prior to the date of sale. These indemnities are not expected to
generate significant ongoing expenses or cash flows, although the Company
expects to pay $23 million for retained tax liabilities over the next two or
three years.
The Company previously sold its natural resource businesses and has retained
significant liabilities associated with former coal operations. Since these
liabilities are expected to generate ongoing expenses and require significant
cash outflows, the Company considers liability management and funding to be an
important activity.
Information about the Company's liabilities and assets related to its former
businesses is contained in a number of sections of this report, including:
o Retained Liabilities and Assets of Former Operations
o Application of Critical Accounting Policies
Disclosures in the first section show five-year projections for estimated
ongoing payments and expense associated with the retained obligations of the
former operations and reconcile a Company-defined measure of these retained
obligations, "Legacy Value," to corresponding measures under U.S. generally
accepted accounting principles ("GAAP"). The second section discusses critical
estimates used and provides a sensitivity analysis for these estimates.
19
RESULTS OF OPERATIONS
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Overview of Results
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Years Ended December 31, % change
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(In millions) 2005 2004 2003 2005 2004
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Income (loss) from:
Continuing operations $ 42.3 71.5 37.9 (41) 89
Discontinued operations 105.5 50.0 (8.5) 111 NM
Cumulative effect of change in
accounting principle (5.4) - - NM -
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Net income $ 142.4 121.5 29.4 17 200+
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The income (loss) items in the above table are reported after tax.
Continuing Operations
2005
Income from continuing operations was lower in 2005 compared to 2004 as a result
of a lower operating profit and a higher-than-normal 2005 effective tax rate.
Operating profit declined in 2005 versus 2004 as lower operating profit at
Brink's was partially offset by higher operating profit at BHS. Brink's
operating profit decreased due primarily to higher operating costs including
restructuring charges in several European countries, U.S. pension costs and
increased safety and security costs. BHS operating profit increased due to
growth in revenues resulting primarily from increases in the number of
subscribers. The effective tax rate was higher than normal in 2005, as a result
of the recording of valuation allowances against tax assets in certain countries
and a higher level of losses in countries for which the Company does not record
tax benefit from such losses.
2004
Income from continuing operations in 2004 was higher than in 2003 primarily due
to a $40.1 million increase in operating profit as a result of improvements in
Brink's and BHS and lower expenses of $23.6 million related to former coal
operations. In addition, the return to a more-normal effective tax rate in 2004
contributed to the improved results. The 2003 tax rate was higher due primarily
to recording valuation allowances related to deferred tax assets for foreign tax
jurisdictions. Offsetting these factors was an increase in 2004 corporate
expenses of $14.9 million partially due to costs related to internal controls
documentation and testing mandated by section 404 of the Sarbanes-Oxley Act of
2002. Costs related to incentive compensation were also higher in 2004 than in
2003. The Company recorded a one-time $4.4 million pretax gain within other
income (expense), net during 2004 upon conversion of the Company's VEBA from a
general corporate asset to one specifically restricted to pay certain
coal-related postretirement liabilities. In addition, 2003 included a one-time
$10.4 million pretax gain on the sale of an equity interest in a natural
resource business.
20
Business Segments
Brink's operating profit in 2005 was lower than 2004, but 2004 operating profit
was higher than 2003. BHS reported improved operating profit in both 2005 and
2004 over prior-year periods.
Brink's. Revenues in 2005 increased from 2004 primarily as a result of
acquisitions and growth in existing operations. Exchange rate fluctuations had
little impact on revenues in 2005, however, revenues in 2004 benefited from the
effects of the weaker U.S. dollar in 2004 compared to 2003. Operating profits
were lower in 2005 compared to 2004, largely due to higher costs in Europe,
increased restructuring and severance costs in various European countries,
higher U.S. pension costs and higher safety and security costs.
BHS. BHS reported 13% growth in revenues in 2005 and 11% in 2004. BHS
experienced strong growth in operating profit in 2005 (8%) and 2004 (13%)
resulting primarily from subscriber growth and improved efficiency from the
providing of recurring services to a larger subscriber base. The average number
of subscribers increased 11% in 2005 over 2004 and 10% in 2004 over 2003. Growth
in operating profit in 2005 over 2004 was not as strong as the prior year
primarily as a result of higher costs related to the home technology business.
Former Operations
Expenses related to former operations in 2005 were $6.7 million lower than 2004
primarily as a result of gains from the sale of substantially all of the
Company's remaining mining interests in Kentucky and the recognition of a gain
on previously sold West Virginia coal assets due to the transfer of liabilities
to the buyer.
Expenses related to former operations were $23.6 million lower in 2004 compared
to 2003. The decrease in 2004 was due to:
o recording a benefit from enactment of the Medicare reform bill in
December 2003,
o recording the benefit from projected investment income from the
Company's VEBA trust after the restriction of the VEBA to pay certain
retiree medical benefit obligations, and
o a reduction in coal-related administration and other expenses as the
related operations wound down.
In 2003, the Company recorded a $10.4 million pretax gain on the sale of shares
in an Australian gold and nickel exploration and mining company.
Income Taxes
The Company's effective tax rate on income from continuing operations was 54% in
2005, 36% in 2004 and 49% in 2003. The effective tax rate varied from statutory
rates in these periods primarily due to changes in valuation allowances for
deferred tax assets and the resolution of contingent tax matters. The effective
tax rate in 2005 was unusually high due to $10.0 million in new valuation
allowances, a higher amount of pretax losses being incurred in countries for
which the Company does not recognize a tax benefit from losses, and the
recording of $3 million in additional tax on the repatriation of $49 million in
dividends under the American Jobs Creation Act. Valuation allowance increases in
2005 primarily related to three international operations. Valuation allowance
increases of $2.1 million were recorded in 2004 for deferred tax assets. The
effective income tax rate on continuing operations in 2003 was higher than the
U.S. statutory tax rate primarily due to recording income tax expense of $15.5
million for net valuation allowance adjustments for a portion of Brink's foreign
deferred tax assets.
The Company currently estimates its 2006 effective tax rate will approximate 39%
to 41%. The actual 2006 tax rate could be materially different from the
Company's estimate.
21
Discontinued Operations
In November 2005, the Company's Board of Directors approved the sale of BAX
Global. Accordingly, BAX Global's results of operations have been reported as a
component of income (loss) from discontinued operations for all periods
presented. On January 31, 2006, the Company sold BAX Global for $1.1 billion in
cash resulting in an approximate $600 million pretax gain. This figure will be
revised in later quarters to reflect post-closing adjustments.
Income (loss) from discontinued operations also includes operating results of
the Company's former natural resource businesses through the date of sale and
gains and losses from the sale including:
o Coal business - recognized additional pretax gains of $5.0 million
in late 2004 under sales agreements from prior years.
o Gold business - sold in early 2004 for a pretax loss of $0.9 million.
Pretax impairment losses of $1.7 million were recognized in 2003.
o Timber business - sold a small portion in December 2003 and completed
the sale in early 2004 for a $25.5 million pretax gain ($4.8 million
recognized in 2003 and $20.7 million in 2004).
o Natural gas business - sold in August 2003 for a $56.2 million pretax
gain.
The Company has accrued for significant contingencies related to benefits for
former coal employees. Revisions to estimated amounts related to these
contingent liabilities, including those related to obligations under the Coal
Industry Retiree Health Benefit Act of 1992 ("the Health Benefit Act") and
multi-employer pension plan withdrawal liabilities, are recorded in discontinued
operations and have been significant in each of the last three years.
Cumulative Effect of a Change in Accounting Principle
In December 2005, the Company adopted the Financial Accounting Standard Board
("FASB") Interpretation 47, "Accounting for Conditional Asset Retirement
Obligations" ("FIN 47"). As a result, the Company recorded the cumulative effect
of a change in accounting principle of $5.4 million, net of tax, for conditional
asset retirement obligations primarily associated with leased facilities. See
note 1 to the consolidated financial statements.
22
Consolidated Review
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Revenues Operating Profit
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Years Ended December 31, % change Years Ended December 31, % change
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(In millions) 2005 2004 2003 2005 2004 2005 2004 2003 2005 2004
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Business Segments
Brink's $ 2,156.9 1,931.9 1,689.0 12 14 $ 111.9 144.7 112.5 (23) 29
BHS 392.1 345.6 310.4 13 11 87.4 80.8 71.2 8 13
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Business segments 2,549.0 2,277.5 1,999.4 12 14 199.3 225.5 183.7 (12) 23
Corporate - - - - - (44.7) (42.2) (27.3) 6 55
Gain on sale of equity
interest - - - - - - - 10.4 - (100)
Former operations - - - - - (39.2) (45.9) (69.5) (15) (34)
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$ 2,549.0 2,277.5 1,999.4 12 14 $ 115.4 137.4 97.3 (16) 41
=============================================================================================================
Revenues in 2005 were 12% higher than 2004 as a result of acquisitions and
growth in existing operations at Brink's and a larger subscriber base at BHS.
The Company's operating profit in 2005 was 16% lower than in 2004 as a result of
23% lower operating profit at Brink's due primarily to lower operating profit
from Europe compared to the strong prior year, partially offset by 8% higher
operating profit at BHS on continued subscriber growth.
Revenues in 2004 were 14% higher than 2003 because of growth at Brink's and BHS
and changes in currency exchange rates. Operating profit increased 41% in 2004
due to improved operating performance by Brink's and BHS and lower expenses
related to former coal operations. These improvements were partially offset by
higher corporate expenses and the nonrecurrence of the 2003 gain on the sale of
an equity investment.
Effective December 31, 2005, the Company elected to freeze U.S. defined benefit
pension plan benefits. Effective January 1, 2006, the Company elected to enhance
benefits for its U.S. defined contribution 401(k) plan.
Estimated net lower expense in 2006 is as follows:
o Brink's between $13 million and $14 million
o BHS between $3 million and $4 million
o Corporate approximately $2 million.
The lower expense is estimated and could change significantly as a result of
items such as changes in defined benefit pension plan assumptions and U.S.
401(k) plan participation rates.
Revenue growth rates for operations outside the U.S. 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 currency
exchange rates in order to provide information about growth rates without the
impact of changing foreign currency exchange rates. Growth at constant-currency
exchange rates equates to growth as measured in local currency. This measurement
of growth using constant-currency exchange rates is higher than growth computed
using actual currency exchange rates when the U.S. dollar is strengthening and
lower when the U.S. dollar is weakening. Changes in currency exchange rates did
not materially affect period-to-period comparisons of segment operating profit
for the periods presented herein. Relative to most European currencies relevant
to the Company, the U.S. dollar in 2005 was about even with 2004, but was weaker
in 2004 compared to 2003. Currencies in most Asia-Pacific and South American
countries, other than Venezuela, strengthened against the U.S. dollar in both
2005 and 2004 versus the prior years. The Venezuelan bolivar weakened against
the U.S. dollar in both 2005 and 2004 as compared to the prior years.
23
The following table provides supplemental information related to Organic Revenue
Growth which is not required by U.S. generally accepted accounting principles
("GAAP"). The Company defines Organic Revenue Growth as the change in revenue
from the prior year due to factors such as changes in prices for products and
services (including the effect of fuel surcharges), changes in business volumes
and changes in product mix. Estimates of changes due to fluctuations in foreign
currency translation rates and the effects of new acquisitions are excluded from
Organic Revenue Growth.
Year Ended % change
(In millions) December 31, from 2004
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2004 revenues as reported:
Brink's $ 1,931.9 N/A
BHS 345.6 N/A
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$ 2,277.5 N/A
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Effects on revenue of acquisitions
and dispositions, net:
Brink's $ 104.0 5
BHS - -
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$ 104.0 5
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Effects on revenue of changes in
currency translation rates:
Brink's $ 18.2 1
BHS 0.4 -
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$ 18.6 1
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Organic Revenue Growth:
Brink's $ 102.8 5
BHS 46.1 13
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$ 148.9 7
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2005 revenues as reported:
Brink's $ 2,156.9 12
BHS 392.1 13
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$ 2,549.0 12
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The supplemental Organic Revenue Growth information presented above is non-GAAP
financial information that management believes is an important measure to
evaluate results of existing operations without the effects of acquisitions,
dispositions and currency exchange rates. The limitation of this measure is that
the effects of acquisitions, dispositions and changes in values of foreign
currencies cannot be completely separated from changes in prices and volume of a
unit's base business. This supplemental non-GAAP information does not affect net
income or any other reported amounts. This supplemental non-GAAP information
should be viewed in conjunction with the Company's consolidated statements of
operations.
24
Brink's, Incorporated
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Executive Overview
Brink's provides multiple services related to cash and other valuables to the
financial community, retailers and other businesses. These services include
securely transporting and handling valuable assets, processing currency and
deposits and the increasingly important preparing and transmitting related
information.
The Company believes that Brink's has significant competitive advantages
including:
o brand name recognition,
o reputation for high-quality service,
o proprietary cash processing and information systems,
o high-quality insurance coverage and general financial strength,
o risk management capabilities, and
o the ability to serve a customer in multiple markets through a global
network.
Because of Brink's emphasis on managing the risks inherent in handling valuables
and the high level of service provided, Brink's believes it spends more than its
competitors on training and retaining people and on facilities and processes
needed to provide quality services to customers.
As a result of management's emphasis on high-quality services and risk
management, Brink's focuses its marketing and selling efforts on customers who
appreciate the value and breadth of the services delivered and the information
capabilities and financial strength underlying the Brink's approach to business.
In order to earn an adequate return on capital employed in the business, Brink's
focuses on the effective and efficient use of its resources and the adequacy of
pricing. First, Brink's attempts to maximize the amount of business which flows
through its branches, vehicles and systems in order to obtain the lowest costs
possible without compromising safety, security or service. Due to its higher
costs of people and processes, Brink's generally charges higher prices than
competitors that may not provide the same level of service and risk management.
The Company believes that Brink's operations are capable of generating operating
profit margins near or above 7% on an annual basis. This level is necessary to
earn what management believes is an appropriate return on its cost of capital.
The industries to which Brink's provides services have been consolidating. As a
result, the strength of customers in these industries has been increasing.
Customers are seeking suppliers, such as Brink's, with broad geographic
solutions, sophisticated outsourcing capabilities and financial strength.
Operationally, Brink's performance may vary from period to period. Since
revenues are generated from charges per service performed as well as on an ad
valorem basis, revenues can be affected by the level of activity in economies
and the volume of business for specific customers. As contracts generally run
for one or more years, there are costs which must be incurred to prepare to
service a new customer or to transition away from one. Brink's also periodically
incurs costs to reduce operations when volumes decline, including costs to
reduce the number of employees and close or consolidate branch and
administrative facilities. In addition, safety and security costs can vary from
period to period depending on Company and industry performance and cost of
insurance coverage. Further, Brink's operating profit and related revenues are
generally higher in the second half of the year, and in particular in the fourth
quarter, because of the generally higher economic activity associated with the
holiday season. As a result, margins are typically lower in the first half than
in the second half of the year.
25
Summary of Brink's Results
Years Ended December 31, % change
(In millions) 2005 2004 2003 2005 2004
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Revenues
North America (a) $ 778.2 733.7 716.2 6 2
International 1,378.7 1,198.2 972.8 15 23
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$ 2,156.9 1,931.9 1,689.0 12 14
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Operating Profit
North America (a) $ 49.4 55.2 53.4 (11) 3
International 62.5 89.5 59.1 (30) 51
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$ 111.9 144.7 112.5 (23) 29
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Cash Flow Information
Depreciation and amortization $ 90.5 81.0 70.6 12 15
Capital expenditures 109.0 76.2 80.9 43 (6)
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(a) U.S. and Canada.
2005
Overview
Revenues at Brink's were 12% higher in 2005 compared to 2004 as a result of a
combination of the effects of newly acquired businesses, core business growth
and changes in currency exchange rates. Operating profit in 2005 was lower than
2004 despite additional profits on higher revenues, largely as a result of:
o higher costs in Europe including restructuring and severance expenses
to scale down operations in several markets with lower volume,
o higher pension expenses in the U.S., and
o higher safety and security expenses.
North America
Revenues increased in 2005 compared to 2004 primarily as the result of increased
volumes in U.S. armored car, U.S. Cash Logistics services, U.S. Global Services
and substantially all Canadian lines of business. Operating profit in 2005 was
lower than 2004 primarily due to $6.0 million in higher U.S. pension costs due
to higher amortization of actuarial losses, and higher safety and security
costs, partially offset by additional profits from revenue growth.
In addition U.S. revenues and operating profit were affected by the effects of
Hurricane Katrina. The Company anticipates that lost revenue in 2005 and 2006
will be recovered under business interruption insurance coverage. The Company
expects to collect $1.0 million to $1.5 million of insurance proceeds when its
claim is ultimately settled. The Company will record a gain when the business
interruption insurance claim is settled.
As previously discussed, Brink's expenses in 2006 related to retirement benefit
plans are expected to be reduced by $13 million to $14 million as a result of
the Company's decision to freeze U.S. defined benefit pension plan benefits as
of December 31, 2005.
26
International
Revenues increased in 2005 over 2004 in all regions. Increased revenue in the
Europe, Middle East, and Africa region ("EMEA") was primarily the result of
acquisitions. Revenue increases in South America and Asia-Pacific were primarily
due to organic revenue growth. Operating profit in 2005 was lower than 2004 in
EMEA, while operating profits in South America and Asia-Pacific were higher as
compared to 2004. International operating profit in 2004 was reduced by charges
of approximately $3.1 million due to adjustments to non-income tax accruals.
EMEA. Revenues increased to $952.0 million in 2005 from $826.7 million in 2004,
an increase of $125.3 million or 15% (15% on a constant currency basis) largely
as a result of acquisitions and, to a lesser extent, organic revenue growth in a
few markets, which was largely offset by declines in the Netherlands and
Belgium. In addition, 2005 revenues were affected by competitive pressures and
weak European economies. Brink's acquired operations in:
o Greece in the first quarter of 2004,
o Luxembourg, Scotland and Ireland in the first quarter of 2005, and
o Poland, Hungary, and the Czech Republic in the second quarter of
2005,
These acquisitions increased revenues by approximately $104 million in 2005 over
2004 but did not have a significant impact on operating profit.
Operating profit decreased by approximately $32 million in 2005 compared to 2004
due to:
o Lower volumes in Belgium and Netherlands as a result of the loss of
locally significant customers,
o $8.6 million higher restructuring and severance expenses primarily in
Belgium, the United Kingdom and the Netherlands,
o lower volumes in Greece in the year after the Athens Olympics,
o higher safety and security costs in the region, and
o higher fuel costs.
The Company is highly focused on improving performance in Europe and expects to
improve operating margins in 2006. The Company expects to ultimately realize
approximately $8 million to $9 million in annual cost savings related to
restructuring, of which $6 million should be realized in 2006.
South America. Revenues increased to $355.1 million in 2005 from $303.5 million
in 2004, an increase of 17% (13% on a constant currency basis). This increase
was due primarily to higher volumes, particularly in Venezuela, Colombia,
Argentina and Chile. The increase in revenues is a reflection of the overall
improvement in South American economies.
Operating profit in 2005 was 21% higher than 2004 due to the above-mentioned
volume increases, and cost reduction and productivity improvements across the
region. The increase in operating profit in the region was partially offset by
operating losses in Brazil caused by intense price competition.
Asia-Pacific. Revenues increased to $71.6 million in 2005 from $68.0 million in
2004, an increase of 5% (3% on a constant currency basis). This increase was
primarily due to exceptionally strong performance in Hong Kong partially offset
by weaker performance in Korea. Operating profit in 2005 was about the same as
2004, reflecting improved performance in most countries, but offset by lower
volumes in Korea and Australia.
27
Other. As discussed in "Liquidity and Capital Resources - Contingent Matters -
Value-added taxes ("VAT") and customs duties" below and in note 22 to the
consolidated financial statements, international operating profit was reduced by
expense of approximately $1.1 million in 2004 related to unpaid VAT and customs
duties, including an estimate of related penalties. At any time, the Company
could be assessed penalties materially in excess of those accrued.
2004
Overview
Revenues and operating profit increased modestly in North America and more
significantly in the International region during 2004. Internationally,
improvements occurred in both EMEA and South America. Operating profit in EMEA
in 2004 improved because of higher revenues on a constant currency basis as a
result of improved economic performance and operational changes made in 2003.
Operating profit in EMEA in the first half of 2003 reflected reduced volumes of
business due to the effects of generally slow economies and the buildup to the
conflict in the Middle East along with approximately $4.7 million in severance
costs. Operating profit in South America in the first half of 2003 was depressed
due to poor economic and political conditions. In 2004, operating profit
benefited from improved conditions.
North America
Revenue increased in 2004 primarily due to increased revenues from Global
Services and Canadian armored transportation and ATM services, offset by lower
revenues from U.S. armored transportation and ATM services. Operating profit
increased in 2004 primarily due to improved performance in coin wrapping
services, Cash Logistics services, and Canadian armored transportation
operations, partially offset by a lower contribution from the U.S. armored car
transportation operations. In 2003, a $5.5 million gain on the sale of operating
assets was largely offset by severance and other costs related to the transfer
of the Company's headquarters from Darien, Connecticut, to Richmond, Virginia,
and Dallas, Texas.
International
Revenues in 2004 increased 23% over 2003 (16% on a constant currency basis). The
increase in revenues and operating profit was primarily due to better
performance in South America and Europe.
EMEA. Revenues increased 26% in 2004 (15% on a constant currency basis) due to
increased volumes in armored transportation, ATM servicing, currency processing
and Global Services operations. Operating profit improved due to higher volumes
as a result of improved business conditions and competitor difficulties,
particularly in France, and the impact of an acquisition of security operations
in Greece. Operating profit was higher than normal at the newly acquired Greek
subsidiary due to additional revenue from the 2004 Athens Olympic Games.
Revenues in 2003, particularly in the first quarter, were adversely affected by
a generally weak economy and uncertainty related to the then-impending conflict
in the Middle East. European operating results began to improve in the last half
of 2003 partially as a result of management changes and workforce reductions
made to align resources to business needs.
28
South America. Revenues and operating profits in 2004 improved due to better
operating performance throughout the region and particularly in Venezuela. This
improved operating performance was primarily due to higher volumes of armored
transportation business, which was driven in part by the exit of competitors
from the market. Improved operating performance in Brazil was the result of
increased volumes as well as the benefit of cost reductions made in late 2003.
However, the operating environment in Brazil remained highly competitive.
Asia-Pacific. Revenues and operating profits in 2004 were above the prior year
reflecting improved results, particularly in Australia and Hong Kong.
Other. International operating profit in 2004 was reduced by $3.1 million of
higher expense as a result of the previously mentioned VAT and customs duties
matter and unfavorable determinations in Brazil and Mexico related to non-income
tax issues.
Brink's Home Security
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Executive Overview
BHS has reported strong growth in revenues and earnings for several years due to
its ability to attract and retain customers through brand reputation and quality
service while operating as efficiently as possible consistent with the desired
level of service.
In order to achieve higher efficiency and effectiveness, BHS focuses on
controlling initial marketing and installation costs by matching sales
representative staffing levels with the number of sales opportunities and the
size of the technician workforce with available installation volume. BHS then
strives to keep customer service and monitoring costs as low as possible without
detracting from its high-quality service levels.
The Company believes customer retention is driven by customer selection and high
customer service levels. In order to obtain customers who are less likely to
disconnect, the Company seeks to attract customers with solid credit scores and
the willingness to pay reasonable up-front fees. Once there is agreement to
install an alarm system, the Company provides a high-quality installation
followed up with continuing high-quality customer service and alarm monitoring.
BHS believes its disconnect rate benefits from consistently following this
strategy.
The Company believes that the performance of the U.S. economy may affect the
performance of BHS. However, the Company believes this effect is not as
significant as it is for industries with close ties to economic performance. In
addition, there is some seasonality in performance as disconnect expenses can
impact operating earnings. Since more household moves take place during the
second and third quarters of each year, the disconnect rate and related expenses
are typically higher in those quarters than in the first and fourth quarters.
29
Summary of Brink's Home Security's Results
Years Ended December 31, % change
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(In millions) 2005 2004 2003 2005 2004
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Revenues $ 392.1 345.6 310.4 13 11
================================================================================
Operating Profit
Recurring services (a) 167.5 147.8 125.9 13 17
Investment in new subscribers (b) (80.1) (67.0) (54.7) (20) (22)
- --------------------------------------------------------------------------------
$ 87.4 80.8 71.2 8 13
================================================================================
Monthly recurring revenues (c) $ 29.1 26.1 23.3 11 12
================================================================================
Cash Flow Information
Depreciation and amortization (d) $ 58.1 51.5 47.9 13 8
Impairment charges from subscriber
disconnects 45.2 38.4 34.3 18 12
Amortization of deferred revenue (e) (29.5) (26.1) (25.0) 13 4
Deferred subscriber acquisition costs
(current year payments) (22.9) (19.5) (18.4) 17 6
Deferred revenue from new subscribers
(current year receipts) 40.7 34.6 28.2 18 23
Capital expenditures (f) 162.2 117.6 98.0 38 20
================================================================================
(a) Reflects operating profit generated from the existing subscriber base
including the amortization of deferred revenues.
(b) Primarily marketing and selling expenses, net of the deferral of direct
selling expenses (primarily a portion of sales commissions), incurred
in the acquisition of new subscribers.
(c) This measure is reconciled below under the caption "Reconciliation of
Non-GAAP Measures."
(d) Includes amortization of deferred subscriber acquisition costs.
(e) Includes amortization of deferred revenue related to active subscriber
accounts as well as acceleration of amortization of deferred revenue
related to subscriber disconnects.
(f) Capital expenditures in 2005 include $10.2 million for the purchase of
BHS's headquarters in Irving, Texas, which was formerly leased, and $7.4
million for the construction of a second monitoring center in Knoxville,
Tennessee. The Knoxville facility became operational on February 28, 2006.
Overview
Operating profit comprises recurring services minus the cost of the investment
in new subscribers. Recurring services reflect the monthly monitoring and
service earnings generated from the existing subscriber base, including the
amortization of deferred revenues. Impairment charges from subscriber
disconnects and depreciation and amortization expenses, including the
amortization of deferred direct costs from installations, are also charged to
recurring services. Operating profits from recurring services are affected by
the size of the subscriber base, the amount of operational costs including
depreciation, the level of subscriber disconnect activity and changes in the
average monthly monitoring fee per subscriber.
30
Investment in new subscribers is the net expense (primarily marketing and
selling expenses) incurred to add to the subscriber base every year. The amount
of the investment in new subscribers charged to income may be influenced by
several factors, including the growth rate of new subscriber installations and
the level of costs incurred to attract new subscribers. As a result, increases
in the rate of investment (the addition of new subscribers) may have a negative
effect on current operating profit but a positive impact on long-term operating
profit, cash flow and economic value.
Capital expenditures are primarily for the equipment, labor and related overhead
costs associated with system installations for new subscribers.
Subscriber Activity
Years Ended December 31, % change
- --------------------------------------------------------------------------------
(Subscriber data in thousands) 2005 2004 2003 2005 2004
- --------------------------------------------------------------------------------
Number of subscribers:
Beginning of period 921.4 833.5 766.7
Installations (a) 167.3 146.0 121.9 15 20
Disconnects (a) (69.9) (58.1) (55.1) 20 5
- --------------------------------------------------------------------------------
End of period 1,018.8 921.4 833.5 11 11
================================================================================
Average number of subscribers 972.8 875.5 797.5 11 10
Disconnect rate (b) 7.2% 6.6% 6.9%
================================================================================
(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
during the specified contract term are also excluded from installations and
disconnects. Inactive sites that are returned to service reduce
disconnects. 2005 disconnects include 4,700 disconnects as a result of
Hurricane Katrina.
(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 customers during the period. The gross number of
customer cancellations is reduced for customers who move from one location
and then initiate 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.
Installations increased 15% for 2005 and 20% for 2004 as compared to the
prior-year periods due primarily to growth in traditional installation volume
and, to a lesser extent, from installations through the growing dealer network
and home builder activity. The annualized disconnect rate for 2005 increased to
7.2% compared to 6.6% for 2004. Excluding the effects of Hurricane Katrina, the
annualized disconnect rate would have been 6.7% for 2005. BHS has maintained a
low disconnect rate in recent years by improving subscriber selection and
retention processes. The disconnect rate may not materially improve in the
future since some disconnects cannot be prevented because of factors beyond the
Company's control, including customers moving and cancelling service.
2005
The 13% increase in BHS' revenues in 2005 over 2004 was primarily due to the
larger subscriber base and slightly higher average monitoring rates. These
factors also contributed to an 11% increase in monthly recurring revenues for
2005 as compared to 2004. The Company intends to selectively raise monitoring
prices in the future.
31
Operating profit increased $6.6 million in 2005 compared to 2004 as higher
profit from recurring services was partially offset by increased investment in
new subscribers. Higher profit from recurring services in 2005 was primarily due
to incremental revenues and cost efficiencies generated from the larger
subscriber base. Higher investment in new subscribers was primarily due to
increased volume and higher costs of installation activity. As a result of a
sharp increase in home technology installations for major homebuilders, costs
were higher in 2005 compared to 2004, although future revenue should benefit
when a portion of these pre-wired sites are activated by new subscribers.
Additionally, reductions in the estimate for allowance for doubtful accounts
resulted in an increase to operating profit of $3.3 million in 2005. However
this increase was partially offset by increased costs associated with subscriber
disconnects, as discussed below.
As of December 31, 2005, approximately 3,700 disconnects were caused by
Hurricane Katrina and the Company accrued an additional 1,000 subscriber
disconnects. Accordingly, 4,700 subscriber disconnects (0.5% of subscriber base)
have been included in 2005 disconnects and are a component of the disconnect
rate in 2005. BHS anticipates filing insurance claims related to Hurricane
Katrina for property damage insurance coverage for losses sustained in 2005 and
claims under its business interruption policy for lost revenues. BHS believes
claims will range from approximately $3 million to $5 million. The Company
expects $2.2 million of property losses to be fully covered by insurance and has
recognized insurance recoveries to the extent of recorded property losses.
Because the Company's insurance coverage provides for replacement value, it may
record proceeds in excess of realized losses when its claim is ultimately
settled. Insurance proceeds for business interruption insurance will be
recognized as a gain when claims are settled.
In 2006, BHS expects double-digit growth rates in subscribers, revenues and
operating profit, however, BHS expects the operating profit margin to be
somewhat lower in the first half of 2006 than the 22% achieved in 2005 and the
23% achieved in 2004. The expected lower operating profit margin is due to
higher anticipated investment in new subscribers primarily for installation
activity at major home builders and a projected increase in selling, general and
administrative expenses due to the opening of a new monitoring center in
Knoxville, Tennessee, as discussed below.
BHS continues to increase its presence in commercial alarm installation and
monitoring business, and to increase the volume of its installation business in
new homes by expanding relationships with major home builders. As a result, the
cost of investment in new subscribers continues to grow faster than monitored
activations. The construction of a second monitoring center in Knoxville,
Tennessee, is substantially complete and the facility began operations on
February 28, 2006. The Knoxville 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 will result in additional
administrative expense. These initiatives are expected to have a positive impact
on future growth and productivity.
As previously discussed, BHS's expenses in 2006 related to retirement plans are
expected to be between $3 million and $4 million lower primarily as a result of
the Company's decision to freeze U.S. defined benefit pension plan benefits at
December 31, 2005.
2004
Revenues increased 11% in 2004 primarily due to a 10% larger average subscriber
base, higher average monitoring rates, higher revenues from home builders and
higher service revenues. The slight increase in average monitoring rates was
primarily due to new customers initiating service at higher average monitoring
rates than the average rates being paid by existing customers. These factors
also contributed to a 12% increase in monthly recurring revenues as measured at
year-end.
32
Operating profit for 2004 increased 13% as higher profit from recurring services
was partially offset by an increased investment in new subscribers. Higher
profit from recurring services was primarily due to increased monitoring and
service revenues resulting from a larger average subscriber base and, to a
lesser extent, from improved service margins. These increases were partially
offset by increased depreciation and other costs associated with the larger
subscriber base. Investment in new subscribers increased 22% on 20% higher
installations during 2004, reflecting an investment in additional sales and
branch infrastructure to support expansion of installation services offered
across most lines of business, partially offset by more cost-effective marketing
efforts.
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, future results of operations for BHS could be
adversely affected. In cities that have stopped providing police response to
burglar alarms, BHS has offered customers the option of receiving private guard
response from guard companies who, in most cases, have contracted with BHS.
Reconciliation of Non-GAAP Measures - Monthly Recurring Revenues
The purpose of this table is to reconcile monthly recurring revenues, a non-GAAP
measure, to its closest GAAP counterpart, BHS' revenues.
Years Ended December 31,
(In millions) 2005 2004 2003
- --------------------------------------------------------------------------------
Monthly recurring revenues ("MRR") (a) $ 29.1 26.1 23.3
Amounts excluded from MRR:
Amortization of deferred revenue 3.3 2.1 2.0
Other revenues (b) 2.5 1.8 2.4
- --------------------------------------------------------------------------------
Revenues on a GAAP basis:
December 34.9 30.0 27.7
January - November 357.2 315.6 282.7
- --------------------------------------------------------------------------------
January - December $ 392.1 345.6 310.4
================================================================================
(a) MRR is calculated based on the number of subscribers at period end
multiplied by the average fee per subscriber received in the last month of
the period for contracted monitoring and maintenance services.
(b) Revenues that are not pursuant to monthly contractual billings.
The Company uses MRR to evaluate BHS' performance, and 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. This supplemental non-GAAP information should be
viewed in conjunction with the Company's consolidated statements of operations.
33
Corporate Expense - The Brink's Company
- --------------------------------------------------------------------------------
Years Ended December 31, % change
- ------------------------------------------------------------------------------
(In millions) 2005 2004 2003 2005 2004
- ------------------------------------------------------------------------------
Corporate expense $ 44.7 42.2 27.3 6 55
==============================================================================
Corporate expense was higher in 2005 compared to 2004 due to higher professional
fees and higher employee pension and medical benefit costs. As previously
discussed, corporate expenses in 2006 related to retirement benefit plans are
expected to be approximately $2 million lower primarily as a result of the
Company's decision to freeze U.S. defined benefit pension plan benefits at
December 31, 2005. In addition, the Company expects professional fees and other
corporate costs to decline as the Company becomes more efficient and adapts to a
smaller corporate size. These reductions will be partially offset by the
recording of stock option expense of between $8 million and $10 million in 2006,
of which $5 million to $6 million will be recorded in corporate expense. The
Company believes that a significant portion of the estimated 2006 expense will
be recorded in the third quarter.
Corporate expense was $14.9 million higher in 2004 than 2003 primarily as a
result of higher professional fees of approximately $6 million related to the
Company's documentation and testing of internal controls as required by Section
404 of the Sarbanes-Oxley Act of 2002, and due to higher long term
incentive-based compensation expense of approximately $4 million. This increase
excludes higher professional fees related to the documentation and testing of
internal controls at BAX Global, which have been classified as part of
discontinued operations.
Retained Liabilities and Assets of Former Operations
- --------------------------------------------------------------------------------
Executive Overview
The Company retains obligations which arose primarily as the result of its long
history of operating in the coal industry. Since these obligations require
significant annual cash outflows and the recording of significant annual
expenses, management believes it is important to closely monitor and manage
these obligations and address the related financial effects.
Of the various obligations, several have shorter terms and lesser values
(reclamation, advance minimum royalties, workers' compensation and the
multi-employer pension plan withdrawal liability). The Company expects the cash
payments for these obligations to be concentrated over the next few years and
then end or decline significantly.
The other three obligations (retiree medical benefit plan, Health Benefit Act
and Black Lung) have longer terms and have higher estimated costs. Payments
associated with each liability are projected to be made over the next 60 years
or more. Each liability is largely medical benefits-related, so medical
inflation is an important consideration. Each obligation covers a pool of
individuals that is essentially capped since the Company no longer operates
within the coal industry. Further, such individuals are, for the most part,
above or near normal retirement age. Accordingly, these obligations should see a
steady decrease in number of participants and beneficiaries over time. The only
exception to this expected decrease is the potential exposure to an increased
share of the unassigned obligation under the Health Benefit Act.
The net present value of these obligations is a valuable tool for assessing
their fair value as of a point in time. However, such values will fluctuate over
time solely due to changes in market interest rates. The critical factor in
evaluating each obligation is the cash flow needed to satisfy it.
34
The Company employs a team of employees, along with third parties, to monitor
and control these liabilities with a primary goal of reducing future cash
outflows. The primary activities of this group are to verify eligibility of
participants, design and implement plans that provide the required benefits at
the lowest cost, and verify costs charged to the plans.
The Company has established a VEBA to help manage the financial impact of the
retiree medical benefit plan obligation. The VEBA is used as a tax-efficient way
to fund this obligation. A funded VEBA would help insulate the Company's assets,
and eventually its cash flow, from the obligations. The Company contributed $225
million to the VEBA on January 31, 2006, bringing its fair market value at that
time to over $400 million.
Legacy Liabilities and Assets
The Company refers to its various long-term liabilities and assets related to
its former operations as its "legacy" liabilities and assets. Some of the
Company's legacy liabilities and assets are not fully recorded on the balance
sheet because part of the losses have been deferred in accordance with GAAP. In
addition, under GAAP, some of these liabilities are discounted to reflect a
present value, while others are not.
To facilitate an understanding of the total estimated present value of these
liabilities and assets as of December 31, 2005, the following table presents a
Company-defined amount, a "Legacy Value," for the Company's legacy liabilities
and assets. Some of the Legacy Values are considered non-GAAP measures because
they exclude GAAP deferred loss adjustments, or reflect discounts to a present
value for liabilities with extended payment dates that are not recorded at
present value under GAAP. The table reconciles each non-GAAP Legacy Value to its
GAAP counterpart.
The liabilities and assets in the table are based on a variety of estimates,
including actuarial assumptions, as described in the Application of Critical
Accounting Policies and in the notes to the consolidated financial statements.
These estimated liabilities and assets will change in the future to reflect
payments made, investment returns, annual actuarial revaluations, periodic
revaluations of reclamation liabilities and other changes in estimates. Actual
amounts could differ materially from the estimated amounts.
35
Summary of Legacy Liabilities and Assets
December 31, 2005
- ------------------------------------------------------------------------------------------------------------------
Add Back Amounts Not
Legacy Present-Value Yet Recognized GAAP
(In millions) Value Effect Under GAAP Amount
- ------------------------------------------------------------------------------------------------------------------
Legacy liabilities:
Company-sponsored retiree medical (a):
Before Medicare subsidy and VEBA $ 695.2 - (366.2) 329.0
Medicare subsidy value (62.2) - 50.3 (11.9)
VEBA (185.3) - (2.2) (187.5)
- ------------------------------------------------------------------------------------------------------------------
Company-sponsored retiree medical 447.7 - (318.1) 129.6
Health Benefit Act (b) 102.1 72.8 - 174.9
Black lung (c) 51.7 - (12.2) 39.5
Multi-employer pension plans withdrawal liability (d) 30.5 - - 30.5
Workers' compensation 26.0 - - 26.0
Advance minimum royalties 8.6 - - 8.6
Reclamation 5.6 - - 5.6
- ------------------------------------------------------------------------------------------------------------------
Legacy liabilities $ 672.2 72.8 (330.3) 414.7
==================================================================================================================
Legacy assets:
Other assets (e) $ 15.5 - - 15.5
Deferred tax assets (f) 257.0 25.5 (133.2) 149.3
==================================================================================================================
(a) Company-sponsored retiree medical liabilities are accounted for in
accordance with Statement of Financial Accounting Standards ("SFAS") 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
SFAS 106 requires a liability be recorded for the present value of future
obligations; however, under the provisions of SFAS 106, actuarial gains and
losses are deferred. Actuarial gains and losses occur when actual events
differ from assumptions (for example, when the actual health care inflation
rate differs from the assumed inflation rate or when the actual return on
investments is different than the estimated return) or when changes are
made to assumptions used to estimate the liability, including the discount
rate used to compute the present value (5.50% at December 31, 2005),
expected health care inflation rates, expected life expectancy rates, asset
returns and the effect of the Medicare subsidy. Actuarial gains and losses
are not immediately recognized in earnings because SFAS 106 allows
employers to defer these gains and losses and then amortize these gains and
losses into earnings in future periods if the total unrecognized net gains
and losses exceed 10% of the greater of the accumulated postretirement
benefit obligation or plan assets as of the beginning of the year. As a
result, the Company's balance sheet does not reflect these liabilities at
the full present value of the ultimate projected obligations at the end of
the year. The Legacy Value in the table reflects the Company's liability
had the Company's total projected obligations been fully accrued at the end
of the year. The Company discloses the projected amount of its obligation
before the deferral of unrecognized gains and losses as "funded status" in
note 4 to the consolidated financial statements.
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law. The Act provides
for the payment of subsidies to sponsors of retiree medical benefit plans
for a portion of pharmaceutical expenses as long as the plan meets
requirements of the Act. The $62.2 million Legacy Value in the table above
reflects an estimate of the current value of such payments over the life of
the plan.
(b) Health Benefit Act liabilities are accounted for in accordance with
EITF 92-13, "Accounting for Estimated Payments in Connection with the Coal
Industry Retiree Health Benefit Act of 1992" and, accordingly, the Company
has accrued the undiscounted estimate of its projected obligation. The
Company uses various assumptions to estimate its liability to The United
Mine Workers of America ("UMWA") Combined Fund (the "Combined Fund") for
future annual premiums, including the number of assigned and unassigned
beneficiaries in future periods, medical inflation, and the amount of
funding of the Combined Fund premiums to be provided from the Abandoned
Mine Reclamation Fund in future periods. The estimated annual payments are
expected to gradually decline over time as the beneficiary population
declines, and the Company expects payments will be made over the next 60 to
70 years. To determine the Legacy Value of these assets, the Company's
actuaries discounted the estimated future cash flows to a present value
amount using a discount rate of 5.50%. The Company's estimates of annual
payments may change materially due to changes in future assumptions.
Changes to the 1992 law under which benefits are paid also could materially
affect the Company's estimate of its liability. The estimation of the
Legacy Value should not be considered a precise estimate because of the
many variables that have been used to determine the estimate, including the
discount rate and the amount of expected annual cash flows. There are many
factors that may change and cause the amount recorded in the balance sheet
to not be representative of the amount the Company may actually pay.
36
(c) Black lung liabilities are accounted for in accordance with SFAS 106.
Actuarial gains and losses resulting from changes in estimates of the
Company's black lung obligations are deferred and amortized into earnings
in future periods. As a result, the Company's balance sheet does not
reflect these liabilities as if the projected obligation had been fully
accrued at the end of the year. The Legacy Value in the table reflects the
Company's projected obligations had it been fully accrued at the end of the
year. Of the Company's $51.7 million of present value of self-insured black
lung benefit obligations at December 31, 2005, approximately $39.5 million
had been recognized on the balance sheet, with the difference relating to
deferred unrecognized actuarial losses. See note 4 to the consolidated
financial statements for further information.
(d) Multi-employer pension plan withdrawal liabilities are accounted for in
accordance with SFAS 5, "Accounting for Contingencies." 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. 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 unfunded status of the plans as of June 30, 2004, as
determined by the plan agreements and by law.
(e) "Other Assets" in the table is primarily a receivable from the state of
Virginia related to tax benefits earned because of coal produced in prior
years. The Company expects to receive approximately $10 million in 2006, $3
million in 2007 and $1 million in each of 2008 and 2009.
(f) The Company has not yet taken deductions in its tax returns for most of
the retained liabilities associated with the former coal business, and has
recorded a deferred tax asset for this future benefit for these temporary
differences in book and tax bases. The Company's deferred tax benefit on a
Legacy Value basis is different from its GAAP counterpart because the
Company's temporary differences were based on the Legacy Values of the
various coal-related liabilities and assets. In other words, if the Company
had recorded the higher net Legacy Value of the liabilities on its balance
sheet, it would have also recognized a larger deferred tax asset. The
$133.2 million reconciling item represents the additional hypothetical tax
benefit related to the Company-sponsored retiree medical and black lung
obligations. The $25.5 million reconciling item represents the associated
decrease to the deferred tax asset if the Health Benefit Act liability were
recorded on a discounted basis.
Under the Health Benefit Act, the Company and various subsidiaries are jointly
and severally liable for approximately $416 million, at Legacy Value, of
postretirement medical and Health Benefit Act obligations in the above table.
The purchasers of the Company's BAX Global and natural resources assets have
been indemnified by the Company for the related contingent liability.
Projected Payments and Expenses of Retained Retiree Liabilities and
Administrative Costs
The following tables include the actual cash payments and expense (continuing
operations only) related to the Company's liabilities from former operations for
2003, 2004 and 2005 and as projected for the next five years.
The projected payments and expenses are estimated based on the same assumptions
used in determining the estimated Legacy Value and GAAP counterparts at December
31, 2005. The actual amount of payments and expense in future periods may be
materially different than amounts presented. The amounts paid or expensed in the
future depends on many factors, including inflation in health care and other
costs, the ultimate impact of the 2003 Medicare reform bill, discount rates the
market value of postretirement benefit plan assets, the level of contributions
to and the performance of the VEBA, the number of participants in various
benefit programs, the amount of Combined Fund premiums for unassigned
beneficiaries funded by the AML, and the level of administrative costs needed to
manage the retained liabilities.
37
Cash Payments
(In millions) Actual Payments Projected Payments
- -----------------------------------------------------------------------------------------------------------------
Years Ending December 31, 2003 2004 2005 2006 2007 2008 2009 2010
- -----------------------------------------------------------------------------------------------------------------
Postretirement benefits other than pensions:
Company-sponsored medical plans (a):
Before Medicare subsidy $ 30 35 36 $ 42 45 47 50 51
Estimated effect of Medicare subsidy - - - (2) (3) (3) (4) (3)
Benefit payments made from VEBA (b) - - - - - - - -
- -----------------------------------------------------------------------------------------------------------------
Subtotal 30 35 36 40 42 44 46 48
Health Benefit Act 8 9 8 9 12 11 11 10
Black lung 8 7 6 5 5 5 5 4
Withdrawal liability - - - 31 - - - -
Workers' compensation 8 5 5 4 3 3 2 2
Advance minimum royalties 1 1 1 1 1 1 1 1
Reclamation and inactive mine costs 5 3 5 2 1 1 1 1
Administration and other 18 8 5 5 5 4 4 4
Cash proceeds and receipts (3) (6) (2) - - - - -
- -----------------------------------------------------------------------------------------------------------------
Total $ 75 62 64 $ 97 69 69 70 70
=================================================================================================================
VEBA contributions (a) $ 82 50 - $ 225 - - - -
=================================================================================================================
(a) The Company has contributed cash to a VEBA to be used to make future
payments of the Company's retiree medical plans, including a contribution
of $225 million in January 2006. The Company re-evaluates its contribution
policy annually and is not obligated to fund the VEBA. The Company may
elect at any time to use either these assets or its cash from operations to
pay benefits for its retiree medical plans.
(b) Assumes benefit payments are not made from VEBA.
Expenses in Continuing Operations
(In millions) Actual Expense Projected Expense
- -----------------------------------------------------------------------------------------------------------------
Years Ending December 31, 2003 2004 2005 2006 2007 2008 2009 2010
- -----------------------------------------------------------------------------------------------------------------
Postretirement benefits other than pensions:
Company-sponsored medical plans (a):
Before Medicare subsidy and VEBA $ 50 52 54 $ 58 58 57 56 55
Estimated effect of Medicare subsidy - (6) (6) (7) (7) (7) (7) (7)
Estimated investment income in VEBA (a) - (9) (13) (34) (39) (42) (46) (50)
- -----------------------------------------------------------------------------------------------------------------
Subtotal 50 37 35 17 12 8 3 (2)
Black lung 6 5 4 4 4 3 3 3
Pension (b) (1) 2 5 3 1 (3) (5) (7)
Administrative, legal and other coal
expenses, net 18 9 7 6 6 5 5 5
Other income, net (3) (7) (12) - - - - -
- -----------------------------------------------------------------------------------------------------------------
Total $ 70 46 39 $ 30 23 13 6 (1)
=================================================================================================================
(a) Beginning in 2004, the Company accounted for the VEBA as a plan asset of
Company-sponsored medical plans in accordance with SFAS 106 and has
recognized a lower amount of amortization of previously unrecognized losses
due to the effects of the 2003 medical subsidy legislation. The above
projection includes the contribution of $225 million to the VEBA in January
2006 but assumes that there will be no further contributions made to the
VEBA. To the extent contributions are made, projected investment income
will be increased to reflect the long-term rate of return on such
contributions.
(b) Includes U.S. pension costs (credits) for BAX Global in the projection
period. The above projection does not assume that any pension contributions
will be made. If voluntary or required contributions are made, projected
expenses from that year forward would be reduced by the expected long-term
return on those contributions.
38
Following are comments covering the more significant legacy liabilities in the
above tables. For additional information, please see note 4 to the consolidated
financial statements. Each of these liabilities and assets is affected by
estimates and judgments. More information is available at "Application of
Critical Accounting Policies" later in Management's Discussion and Analysis.
Company-Sponsored Retiree Medical Benefits Obligations and VEBA
The Company provides postretirement health care benefits to eligible former coal
miners and their dependents. With the assistance of actuaries, the Company
annually reevaluates the estimated future cash flows, expenses and current
values of the obligations. Projected payments are expected to increase each year
for the next five years as a result of medical inflation and as eligible
participants attain retirement age. This increase will be partially offset by
reductions in the number of participants through mortality.
The Legacy Value, which equals the funded status at December 31, 2005, increased
to $448 million from $445 million at December 31, 2004 primarily due to a
decrease in the discount rate by 25 basis points to 5.50% and an increase in the
assumed medical inflation rate partially offset by the effects of converting to
an updated mortality table.
A VEBA has been established by the Company under Internal Revenue Code Section
501(c)(9). In general, a contribution made to the VEBA becomes deductible for
federal income tax purposes in the year in which it is made. Investment earnings
within the VEBA and distributions from the VEBA to pay designated benefits or to
reimburse the Company for designated benefit payments are not subject to federal
income tax from the Company's perspective. The Company can determine the timing
and size of any payment from the VEBA to cover expenses of eligible
participants.
The following table summarizes the activity in the VEBA for the last three
years:
Balance at Benefit Balance at
(In millions) January 1, Contributions Earnings Payments December 31,
- --------------------------------------------------------------------------------
2003 $ 18 82 5 - 105
2004 105 50 17 - 172
2005 172 - 13 - 185
================================================================================
In January 2006, the Company contributed $225 million to the VEBA upon
completion of the sale of BAX Global. The VEBA's assets are allocated among
active investment managers of equities and fixed income securities.
Approximately 70% of the trust assets are invested in equities, and 30% are
invested in fixed income securities. The VEBA's assets are being invested in a
similar fashion to the Company's primary U.S. pension plan and the Company has
estimated the same expected long-term rate of return of 8.75% per year.
Health Benefit Act Obligations
In October 1992, The Coal Industry Retiree Health Benefit Act of 1992 (the
"Health Benefit Act") was enacted as part of the Energy Policy Act of 1992. The
Health Benefit Act established rules for the payment of future health care
benefits for thousands of retired union mine workers and their dependents. The
Health Benefit Act established a trust fund, The United Mine Workers of America
Combined Benefit Fund (the "Combined Fund"), to which "signatory operators" and
"related persons," including The Brink's Company and some of its subsidiaries
and former subsidiaries (collectively, the "Brink's Companies"), are jointly and
severally liable to pay annual premiums for those beneficiaries directly
assigned to a signatory operator and its related persons, on the basis set forth
in the Health Benefit Act.
39
In addition, the Health Benefit Act provides that assigned companies, including
the Brink's Companies, are required to fund, pro rata according to the total
number of assigned beneficiaries, a portion of the health benefits for
unassigned beneficiaries if these benefits are not funded from other designated
sources. To date, almost all of the funding for unassigned beneficiaries has
been provided from transfers from the Abandoned Mine Reclamation Fund (the "AML
Fund") or other government sources.
The Company's liability for Health Benefit Act obligations is equal to the
undiscounted estimated amount of future annual premiums the Company expects to
pay to the Combined Fund. The Company's estimated annual premium is equal to the
total number of beneficiaries (including assigned beneficiaries and an allocated
percentage of the total unassigned beneficiaries) at October 1, the beginning of
the plan year, multiplied by the premium per beneficiary for that year. The
Company expects to pay annual premiums over the next 60 to 70 years, but it
expects these annual premiums to gradually decline over time as the number of
beneficiaries decreases.
Since the passing of the Health Benefit Act, the vast majority of the costs for
unassigned beneficiaries have been paid with transfers of cash from the AML Fund
or other government sources. From the inception of the Combined Fund through
December 31, 2005, the Company has paid only $1.1 million to the Combined
Benefit Fund for premiums related to the unassigned pool, including $0.5 million
in 2005.
In 2005, the authority for continued transfers from the AML Fund was extended
for another year, but this authority may expire in 2006. Since the continued
transfers of funds are not sufficiently assured, the Company's estimate of its
obligation assumes that no transfers beyond the current plan year will be
available to offset future Company payments. There may be a legislative or
regulatory extension to the transfer authority. If the transfer authority is
extended, the Company may decrease its estimate of the probable liability for
future premiums payments by a material amount.
Moreover, the Company's estimate of its contingent liability for unassigned
beneficiaries could increase materially in the future if other responsible coal
operators become insolvent. This liability could also change materially if the
percentage of unassigned beneficiaries that are allocated to the Company changes
due to relative mortality rates of the Company's assigned beneficiaries compared
to the total assigned beneficiaries.
The Company uses Legacy Value, a non-GAAP value, to assess the fair value of
obligations under the Health Benefit Act. The Company believes that Legacy Value
information is useful to investors and creditors as an estimate of the fair
value of a series of payments to be made over an extended period of time for
these obligations.
Legacy Add-Back GAAP
Value Present-Value basis
(discounted) Effect (undiscounted)
- ------------------------------------------------------------------------------
(In millions) 2005 2004 2005 2004 2005 2004
- ------------------------------------------------------------------------------
Assigned and other $ 65 67 45 53 110 120
Unassigned 37 37 28 29 65 66
- ------------------------------------------------------------------------------
Total $ 102 104 73 82 175 186
==============================================================================
40
The Legacy Value (representing the present value of the obligation) of the
Company's Health Benefit Act obligations at December 31, 2005, was slightly
lower than the $104 million of a year earlier. The Company made $8 million of
payments in 2005. In addition, a slightly lower number of beneficiaries were
assigned to the Brink's Companies in 2005 than was projected last year. Both of
these factors also explain the decrease in the GAAP basis measurement, which is
undiscounted. In addition, the Legacy Value increased from the prior year due to
the reduction in the discount rate used by 25 basis points to 5.50%, and the
accretion of interest for 2005.
Payments related to the Health Benefit Act are projected to rise in 2007 to
reflect the current assumption that the previous sources of funding for the
unassigned pool will not continue beyond 2006. If future funding of all of the
unassigned benefits becomes available through the AML Fund or other sources,
projections for 2007 and later years may be reduced by up to $4 million per
year.
Any changes to expected future obligations determined during annual
reevaluations are recorded as expenses or benefits within discontinued
operations.
Black Lung Obligation
The Company makes payments to former miners who have been determined to have
pneumoconiosis (black lung disease). Such payments primarily cover disability
payments and condition-related medical expenses. These payments stretch out over
many years and have been discounted to a net present value. Actuarial gains and
losses are deferred and amortized into continuing expense over the average
remaining life expectancy of all participants (approximately 10 years).
The Legacy Value, which equals the accumulated projected benefit obligation, of
the black lung obligations decreased to $51.7 million in 2005 from $55.2 million
in 2004 largely due to $6.1 million of cash benefit payments made in 2005. This
decrease was partially offset by the effect of reducing the discount rate by 25
basis points to 5.50% as of December 31, 2005.
Future cash payments are expected to gradually decline as the number of
participants declines through mortality. Future expense levels are also expected
to decline as the remaining value of the obligation declines.
Withdrawal Liabilities
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. 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 unfunded status of the plans as of June 30, 2004, as determined
by the plan agreements and by law.
Primary U.S. Pension Plan
- --------------------------------------------------------------------------------
The Company maintains a noncontributory defined benefit pension plan covering
substantially all non-union employees in the U.S. who meet vesting and other
requirements. In October 2005, the Company announced that benefit levels for the
primary U.S. defined benefit pension plan would be frozen effective December 31,
2005. As a result, participants in the plan will cease to earn additional
benefits after 2005, although participants who have not met requirements for
vesting will continue to accrue vesting service in accordance with terms of the
plans. Using actuarial assumptions as of December 31, 2005, this plan had an
accumulated benefit obligation ("ABO") of approximately $746 million. The ABO is
an estimate of the benefits earned through December 31, 2005. Since the plan is
frozen and no additional benefits will accrue, the Projected Benefit Obligation
("PBO") is now the same as the ABO.
41
The ABO represents the net present value of expected future cash flows
discounted to December 31, 2005 at 5.50%. The Company selects a discount rate
for its pension liability after reviewing published long-term yield information
for a small number of high-quality fixed-income securities (Moody's AA bond
yields). The Company, with the aid of its advisors, also calculates an average
yield for a broader range of long-term high-quality securities with maturities
in line with expected benefit payments. As market interest rates fluctuate, the
net present value of the Company's obligation will change. The impact of a one
percentage point (100 basis points) change in the discount rate used at December
31, 2005 would have been as follows:
Discount Rates
- --------------------------------------------------------------------
Increased Decreased
(In millions) by 1.0% by 1.0%
- --------------------------------------------------------------------
Increase (decrease) in:
ABO at December 31, 2005 $ (101) $ 128
2006 expense (10) 12
- --------------------------------------------------------------------
At December 31, 2005, the fair value of the plan's assets approximated $620
million. The Company uses a long-term rate of return assumption to determine
annual income from plan assets. This expected income reduces plan expense. The
Company's expected long-term rate of return in 2006 is 8.75%. If the Company
were to use a different long-term rate of return assumption it would affect
annual pension expense.
The historical and projected benefit payments and expense for the U.S. plan are
set out in the table below. The projected benefit payments and expense reflect
assumptions used in the valuation at year-end 2005. These assumptions are
reviewed annually, and it is likely that they will change in future years.
(In millions) Actual Projected
- -------------------------------------------------------------------------------
Years Ending December 31, 2003 2004 2005 2006 2007 2008
- -------------------------------------------------------------------------------
Payment of benefits (paid from plan trust) $ 23 25 26 $ 28 29 31
Expense (income) 18 27 42 5 1 (7)
- -------------------------------------------------------------------------------
As can be noted from reviewing the above tables, changes in discount rates
significantly affect the amount of expense recorded. The level of expense
increased over the last several years largely due to a reduction in the discount
rate assumption used as a result of decreasing market interest rates. Also
contributing to the increase in expense has been the poor performance of
investment markets from 2000 to 2002, although this has been moderated by the
performance from 2003 to 2005. The above expense amounts were charged to the
business segments in approximately the following proportions: Brink's - 45%, BHS
- - 15%; Corporate, BAX Global and former operations - 40%.
The amount of cash the Company may have to contribute in the future for the
Company's primary U.S. pension plan is determined using a different set of
assumptions than is used for financial accounting purposes.
Based on December 31, 2005 data, assumptions and funding regulations, the
Company expects to make up to a $1 million contribution to the plan for the 2006
plan year. Under existing regulations and using the same assumptions for 2006
activity, a contribution of approximately $54 million could be required for the
2007 plan year but the actual payment could be delayed until as late as
September 2008. Up to $31 million could be required for the 2008 plan year.
42
The above estimated contributions are likely to change. Congress and the
Executive Branch of the federal government are expected to evaluate changes to
pension funding requirements. As part of this evaluation they may adopt changes
to the definition of the discount rate to be used for funding purposes and to
the amount of time required to fund the full liability. Any changes to the
discount rate used for funding through an extension of the current relief are
expected to reduce required contributions. In addition, actual investment
returns and interest rates are likely to differ from those assumed at December
31, 2005. Voluntary contributions have the effect of reducing and potentially
delaying later required contributions. The Company has made voluntary
contributions aggregating $31 million over the last three years.
The pension plan's benefits will be paid out over an extended period of time.
Accordingly, the Company takes a long-term approach to funding levels and
contribution policies. Historically, long-term returns on assets invested have
significantly exceeded the discount rate for pension liabilities so it is
expected that a portion of the future liability will be funded by investment
returns. As a result, the Company's funding target over the medium-term is to
cover only a portion of the ABO, essentially the obligations already earned as
of a given measurement date. Under this approach, the plan was 83% funded at
December 31, 2005.
Discontinued Operations
- --------------------------------------------------------------------------------
Years Ended December 31,
(In millions) 2005 2004 2003
- -------------------------------------------------------------------------------
Gain (loss) on sale of
BAX Global (costs associated with the sale) $ (2.8) - -
Timber - 20.7 4.8
Gold - (0.9) -
Natural Gas - - 56.2
Coal - 5.0 -
Results from operations
BAX Global 86.8 49.5 (0.4)
Timber - (0.5) (0.2)
Gold - (1.2) (4.1)
Natural Gas - - 11.2
Adjustments to contingent liabilities of former operation
Litigation settlement gain 15.1 - -
Health Benefit Act liabilities 2.3 3.2 (31.3)
Withdrawal liabilities 6.1 15.4 (17.0)
Reclamation liabilities (6.2) (0.1) (3.2)
Workers' compensation liabilities 0.4 (4.9) 0.2
Recovery of environmental costs - - 5.3
Other 0.1 (3.3) (2.7)
- --------------------------------------------------------------------------------
Income from discontinued operation before income taxes 101.8 82.9 18.8
Income tax (expense) benefit 3.7 (32.9) (27.3)
- --------------------------------------------------------------------------------
Income (loss) from discontinued operations $ 105.5 50.0 (8.5)
================================================================================
43
The operating results of BAX Global and former natural resource operations have
been reclassified to discontinued operations for all periods presented.
BAX Global
In November 2005, the Company's Board of Directors approved the sale of BAX
Global, a wholly owned freight transportation subsidiary, and on January 31,
2006, the Company sold BAX Global for $1.1 billion in cash. See note 5 to the
consolidated financial statements. Accordingly, BAX Global's results of
operations have been reported herein as discontinued operations for all periods
presented. BAX Global's assets and liabilities have been classified as held for
sale on the Company's consolidated balance sheet for 2005.
Years Ended December 31, % change
- --------------------------------------------------------------------------------------------------
(In millions) 2005 2004 2003 2005 2004
- --------------------------------------------------------------------------------------------------
Revenues $ 2,899.4 2,440.6 1,999.2 19 22
Operating profit $ 91.4 52.6 2.6 74 200+
Interest and other nonoperating expense, net (4.6) (3.1) (3.0) 48 3
- --------------------------------------------------------------------------------------------------
Pretax income (loss) $ 86.8 49.5 (0.4) 75 NM
==================================================================================================
BAX Global's revenues increased 19% in 2005 compared to 2004 due to improved
volumes in all regions and in particular Asia-Pacific. BAX Global's operating
profit in 2005 was $38.8 million higher compared to 2004 primarily due to an
increase in air export volumes and improved margins in Asia-Pacific. In
addition, depreciation and amortization of BAX Global's long-lived assets ceased
during November 2005 as a result of the assets being classified as held for
sale, which reduced 2005 expense by $4.9 million. The increase in 2005 operating
profit was partially offset by a $2.9 million charge covering ancillary costs
which management concluded could not be billed back to customers.
BAX Global 2004 revenues were higher than 2003 as a result of the strengthening
of economies in the Americas region, improving economic conditions and new
business in several Asia-Pacific countries and the favorable effect of currency
changes in Europe. Operating profit in 2004 was $50 million above 2003 as a
result of higher volumes from the Intra America network and Asia-Pacific
primarily associated with the high technology industry. In addition, the 2004
operating profit benefited from charters under contract for the U.S. government
and other charter activity for both government and commercial customers.
Operating profit in 2004 includes a $5.0 million impairment charge to cover the
abandonment of capitalized transportation logistics software.
Former Natural Resource Operations
The Company sold a portion of its timber business for $5.4 million in cash in
2003 and recognized a $4.8 million pretax gain. In 2004, the Company received an
additional $33.7 million for the remaining portion of its timber business. After
deducting the book value of related assets and the payment of $6.2 million in
2004 to purchase equipment formerly leased, the Company recognized a $20.7
million pretax gain in 2004.
In February 2004, the Company sold its gold operations for approximately $1.1
million in cash plus the assumption of liabilities and recognized a $0.9 million
loss.
In August 2003, the Company sold its natural gas business and received $81.2
million in cash and recognized a $56.2 million gain.
44
Adjustments to Contingent Liabilities of Former Operations
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 the Company, ruling
that the Federal Black Lung Excise Tax ("FBLET") is unconstitutional as applied
to export coal sales. Through December 31, 2004, the Company had received
refunds including interest of $27.2 million, including $2.8 million received in
2003. In December 2005, the Company reached a final settlement agreement related
to all claims for FBLET refunds and recorded a pretax gain of $15.1 million. The
Company has received payments covering this refund during the first quarter of
2006.
Health Benefit Act Liabilities. The Company has obligations under the Coal
Industry Retiree Health Benefit Act of 1992 (the "Health Benefit Act"), as
described in note 4 to the consolidated financial statements. The estimated
liability is reduced each year as payments are made. In addition, the Company
reduced the estimated liability by $2.3 million in 2005 and $3.2 million in 2004
and increased the estimated liability by $31.3 million in 2003 to reflect
changes in the estimates of the undiscounted liability. This estimated liability
will be adjusted in future periods as assumptions change.
The $2.3 million reduction in the liability in 2005 was primarily related to a
one-year extension of funding by the AML of unassigned benefits and a
lower-than-projected per-beneficiary health care premium rate, partially offset
by a higher number of unassigned beneficiaries attributed to the Company.
The $3.2 million reduction in the liability in 2004 was primarily related to a
slight decrease in the number of beneficiaries assigned to the Company at
October 1, 2004 compared to the amount estimated at the end of 2003. As a
result, the estimate of assigned beneficiaries in future periods was also lower.
The $31.3 million charge in 2003 was primarily related to the assumed increase
in the number of unassigned beneficiaries allocated to the Company. The
increased allocation was due to two factors. First, the Company increased its
allocation percentage because of a change in the way the Company interprets the
statute governing the allocation, based on findings of court cases in 2003.
Second, other coal operations became insolvent during the period and their
assigned beneficiaries were transferred to the unassigned pool. These actions
reduced the denominator (the total assigned pool) in the computation of the
allocation percentage, increasing the Company's allocation assumption, and
increased the unassigned pool.
Withdrawal Liabilities. 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. 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 unfunded status of the plans as of June
30, 2004, as determined by the plan agreements and by law.
The Company's estimate of the obligation in 2004 and 2003 was based on the
funded status of the multi-employer plans for the most recent measurement date.
The change in the Company's liability in the last three years was due to changes
in the UMWA plans' unfunded liabilities.
Other. The Company recorded $6.2 million in 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.
In 2004, the Company recognized $4.9 million of expense to reflect an increase
in the expected settlement of coal-related workers' compensation claims. In 2004
the Company settled legal and other contingencies related to its former coal
operations and recognized additional expense of $3.3 million.
45
In 2003, the Company and a third party reached an agreement that establishes the
allocation of costs related to an environmental remediation project, and as a
result, the Company recognized a $5.3 million pretax gain. The Company estimates
its portion of the remaining clean-up and operational and maintenance costs
related to the environmental matter to be $2.7 million.
Other operating income, net
- --------------------------------------------------------------------------------
Other operating income, net, is a component of the operating segments'
previously discussed operating profits.
Years Ended December 31, % change
- --------------------------------------------------------------------------------------------------
(In millions) 2005 2004 2003 2005 2004
- --------------------------------------------------------------------------------------------------
Gain on sale of equity interest $ - - 10.4 - (100)
Gains on sale of operating assets and
interests, net 9.6 5.7 7.7 68 (26)
Share in earnings of equity affiliates 3.4 1.0 0.3 200+ 200+
Royalty income 2.0 1.6 1.7 25 (6)
Foreign currency transaction losses, net (3.1) (0.2) - 200+ NM
Impairment loss (1.3) (0.3) - 200+ NM
Penalties on unpaid value-added taxes - (0.4) - (100) NM
Other 4.4 3.7 1.9 19 95
- --------------------------------------------------------------------------------------------------
Total $ 15.0 11.1 22.0 35 (50)
==================================================================================================
Other operating income in 2005 includes the recognition of a $5.8 million gain
on a 2003 West Virginia coal asset sale. The gain was recognized in 2005 due to
the formal transfer of liabilities to the buyer in 2005. In addition, a $3.1
million gain on the sale of residual assets and mineral rights related to former
mining operations in Kentucky was recognized in 2005.
Other operating income in 2004 included $5.7 million of gains on sale of
operating assets, net, which were primarily the result of disposing of residual
assets of the Company's former coal operations.
In October 2003, the Company sold its 23.3% equity interest in MPI Mines Ltd.,
an Australian exploration and development company with interests in gold and
nickel, for $18.8 million in cash and recognized a $10.4 million pretax gain in
continuing operations.
Other operating income in 2003 included a $5.5 million gain on the sale of
operating assets of Brink's and gains of $2.2 million from the sale of residual
assets of the former coal operations.
46
Nonoperating Income and Expense
- --------------------------------------------------------------------------------
Interest Expense
Years Ended December 31, % change
- ------------------------------------------------------------------------------
(In millions) 2005 2004 2003 2005 2004
- ------------------------------------------------------------------------------
Interest expense $ 18.6 20.8 23.6 (11) (12)
==============================================================================
Interest expense in 2005 was lower than 2004 as a result of repaying a portion
of the Senior notes and because of lower interest accruals for contingent income
tax matters. In addition, interest expense in 2004 included $0.7 million
interest expense related to value-added tax matters as discussed in note 22 to
the consolidated financial statements. Interest expense was lower in 2004
compared to 2003 primarily due to lower average borrowings and interest rates.
Interest and Other Income, Net
Years Ended December 31, % change
- --------------------------------------------------------------------------------------------------
(In millions) 2005 2004 2003 2005 2004
- --------------------------------------------------------------------------------------------------
Interest income $ 4.7 3.8 5.4 24 (30)
Dividend income from real estate investment 4.1 - - NM -
Gains (losses) on sales of marketable
securities, net 0.2 4.3 (0.2) (95) NM
Gain on monetization of coal royalty agreement - - 2.6 - (100)
Other, net 0.3 (0.2) 1.2 NM NM
- --------------------------------------------------------------------------------------------------
Total $ 9.3 7.9 9.0 18 (12)
==================================================================================================
Interest income declined in 2004 from 2003 primarily as a result of the
Company's decision to restrict the VEBA in early 2004. After the restriction,
investment income from the VEBA that was recorded in interest and other income
in 2003 was treated as an offset to postretirement medical benefit expense,
which is a component of operating income.
Dividend income in 2005 was higher than 2004 primarily due to $4.1 million of
dividends collected in 2005 from a real estate investment. Dividend income
related to this investment is projected to be up to $9 million in 2006.
Upon the restriction of the VEBA to pay benefits under the postretirement
medical plans of the Company, unrealized gains of $4.4 million were recorded as
income in 2004.
Minority Interest
Years Ended December 31, % change
- --------------------------------------------------------------------------------
(In millions) 2005 2004 2003 2005 2004
- --------------------------------------------------------------------------------
Minority interest $ 14.3 12.4 8.4 15 48
================================================================================
The increase in minority interest in the last two years is primarily due to
increases in the earnings of the Company's Venezuelan and Colombian subsidiaries
of Brink's.
47
Income Taxes
- --------------------------------------------------------------------------------
Income tax expense (benefit) Effective tax rate
- --------------------------------------------------------------------------------
Years Ended December 31, 2005 2004 2003 2005 2004 2003
- --------------------------------------------------------------------------------
(in millions) (in percentages)
Continuing operations $ 49.5 40.6 36.4 53.9% 36.2% 49.0%
Discontinued operations (3.7) 32.9 27.3 (3.6)% 39.7% 145.2%
================================================================================
Overview
The Company's effective tax rate has varied in the past three years from the
statutory U.S. federal rate due to various factors, including:
o changes in circumstances resulting in the need for valuation
allowances,
o the amount of pretax losses in jurisdictions with existing valuation
allowances,
o other changes in the geographical mix of earnings,
o timing of benefit recognition for uncertain tax positions,
o state income taxes,
o repatriation of earnings in 2005, and
o the initial recognition of a net deferred tax benefit recorded as a
result of its decision to sell the stock of BAX Global.
The Company establishes or reverses valuation allowances for deferred tax assets
depending on all available information including historical and expected future
operating performance of its subsidiaries. Changes in judgment about the future
realization of deferred tax assets can result in significant adjustments to the
valuation allowances. Based on the Company's historical and future expected
taxable earnings, management believes it is more likely than not that the
Company will realize the benefit of the deferred tax assets, net of valuation
allowances.
The Company currently believes its effective income tax rate in 2006 will be
approximately 39% to 41%, excluding the potential effects of changes in
judgments as to the realizability of deferred tax assets and the status of
contingent tax matters. The Company expects to use a substantial amount of its
U.S. tax credit carryforwards in 2006 to offset tax amounts owed related to the
sale of BAX Global.
48
Continuing Operations
2005
The effective income tax rate on continuing operations in 2005 was higher than
the 35% U.S. statutory tax rate primarily as a result of new valuation
allowances in various countries in South America and Europe, the effects of
losses in tax jurisdictions for which the Company does not record a tax benefit
for such losses and $3 million of tax expense related to the repatriation of
non-U.S. earnings. This was partially offset by the favorable resolution of
contingent state income tax matters. The Company repatriated cash of $49 million
from Brink's entities in 2005 under the repatriation provision of the American
Jobs Creation Act of 2004. The Company expects to pay additional income tax of
$3 million related to the 2005 repatriation, which amount was recognized as tax
expense in 2005.
2004
The effective income tax rate on continuing operations in 2004 was higher than
the U.S. statutory tax rate primarily as a result of state income taxes and the
recording of income tax expense of $2.1 million for net valuation allowance
adjustments.
2003
The effective income tax rate on continuing operations in 2003 was higher than
the U.S. statutory tax rate primarily due to recording income tax expense of
$15.5 million for net valuation allowance adjustments for a portion of Brink's
foreign deferred tax assets.
Adjustments to income tax expense
The Company has recorded adjustments in each of the last three years based on an
ongoing analysis of its U.S. and non-U.S. current and deferred income tax asset
and liability accounts. The Company has included in income from continuing
operations the effect of these adjustments because they did not aggregate to a
material amount in any individual year. The income tax benefit related to these
adjustments was $0.9 million in 2005, $0.3 million in 2004 and $5.8 million in
2003.
Discontinued Operations
Discontinued operations includes the tax provision or benefit associated with
the Company's BAX Global and former natural resource businesses, including the
resolution of associated contingent tax matters.
The effective tax rate in 2005 was lower than the 35% U.S. statutory tax rate
primarily as a result of an income tax benefit of $27.4 million recorded upon
the resolution of income tax matters with the Internal Revenue Service related
to the former natural resource business. In addition, the Company recognized a
$7.0 million deferred tax benefit in 2005 for the excess of the tax basis over
the carrying value of the Company's investment in BAX Global as a result of the
Company's decision to sell BAX Global's stock.
The effective tax rate in 2004 was higher than the U.S. statutory tax rate due
to state income tax expense. The effective tax rate in 2003 was higher than the
U.S. statutory rate due to state deferred tax valuation allowances related to
BAX Global and additional accruals made in 2003 for tax contingencies related to
the natural resource business.
Other
As of December 31, 2005, the Company has not recorded U.S. federal deferred
income taxes on approximately $145 million of undistributed earnings of foreign
subsidiaries and equity affiliates. It is expected that these earnings will be
permanently reinvested in operations outside the U.S. It is not practical to
compute the estimated deferred tax liability on these earnings.
49
Foreign Operations
- --------------------------------------------------------------------------------
The Company operates in approximately 50 countries outside the U.S., each with a
local currency other than the U.S. dollar. Because the financial results of the
Company are reported in U.S. dollars, they are affected by changes in the value
of various foreign currencies in relation to the U.S. dollar. Changes in
exchange rates may also affect transactions which are denominated in currencies
other than the functional currency. The diversity of foreign operations helps to
mitigate a portion of the impact that foreign currency fluctuations in any one
country may have on the translated results.
The Company, from time to time, uses foreign currency forward contracts to hedge
transactional risks associated with foreign currencies, as discussed under
"Market Risk Exposures" below.
Brink's Venezuelan subsidiaries ("Brink's Venezuela") were considered to be
operating in a highly inflationary economy in 2002. For the years ended December
31, 2005, 2004 and 2003, Venezuela's economy was not considered highly
inflationary. It is possible that Venezuela's economy may be considered highly
inflationary again at some time in the future.
The Company is exposed to certain risks when it operates in highly inflationary
economies, including the risk that
o the rate of price increases for services will not keep pace with cost
inflation;
o adverse economic conditions in the highly inflationary country may
discourage business growth which could affect demand for the
Company's services; and
o the devaluation of the currency may exceed the rate of inflation and
reported U.S dollar revenues and profits may decline.
Brink's Venezuela is also subject to local laws and regulatory interpretations
that determine the exchange rate at which repatriating dividends may be
converted. It is possible that Brink's Venezuela may be subject to less
favorable exchange rates on dividend remittances at some time in the future. The
Company's reported U.S. dollar revenues, earning and equity could be adversely
affected if the Company were to change to a less favorable currency exchange
rate to translate Brink's Venezuela financial results and financial position.
The Company is also subject to other risks customarily associated with doing
business in foreign countries, including labor and economic conditions,
political instability, controls on repatriation of earnings and capital,
nationalization, expropriation and other forms of restrictive action by local
governments. The future effects, if any, of these risks on the Company cannot be
predicted.
50
LIQUIDITY AND CAPITAL RESOURCES
================================================================================
Overview
- --------------------------------------------------------------------------------
Over the last three years, the Company has used the cash generated from
operations and the divestiture of the natural resources businesses to acquire
security operations in Europe and to strengthen its balance sheet by reducing
debt and making contributions to the VEBA and its primary U.S. pension plan.
Cash flows before financing activities in the last three years were also used in
part to make significant cash payments associated with retained liabilities of
the former coal operations. Net cash proceeds from the sale of natural resource
businesses totaled $179 million over the last three years.
During the past three years, the Company acquired security operations for an
aggregate purchase price of $75 million. Debt repayments, net, aggregated $64
million and the Company has contributed $132 million to the VEBA and $31 million
to the primary U.S. pension plan over the last three years.
In January 2006, the Company received $1.1 billion in cash from the sale of BAX
Global. The Company immediately used the proceeds to contribute $225 million to
the VEBA and pay down $46 million of short-term debt. In addition, the Company
expects to use proceeds to pay down up to a further $140 million of debt and
repurchase between $400 million and $600 million of Company common stock.
The Company may elect to pay up to $30.5 million to satisfy a former coal
multi-employer pension withdrawal liability in 2006.
In addition, in conjunction with the Company's decision to freeze U.S. defined
benefit pension plan benefit levels and enhance the benefits associated with the
U.S. 401(k) plan, the Company announced that the funding of the Company's U.S.
defined contribution matching expense would be in cash rather than Company
stock. Using the rates of salary and employee participation in effect during
2005, the Company expects $13 million to $15 million higher cash outflows in
2006 as a result of this change.
51
Summary of Cash Flow Information
- --------------------------------------------------------------------------------
Years Ended December 31, $ change
- --------------------------------------------------------------------------------------------------------------------
(In millions) 2005 2004 2003 2005 2004
- --------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Continuing operations:
Before changes in operating assets and liabilities $ 266.3 199.5 184.4 $ 66.8 15.1
Changes in assets and liabilities, including working capital (6.5) 32.4 39.8 (38.9) (7.4)
- --------------------------------------------------------------------------------------------------------------------
Subtotal 259.8 231.9 224.2 27.9 7.7
Discontinued operations:
BAX Global 54.2 52.8 60.3 1.4 (7.5)
Natural gas, timber and gold - 0.2 19.2 (0.2) (19.0)
- --------------------------------------------------------------------------------------------------------------------
Operating activities 314.0 284.9 303.7 29.1 (18.8)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Continuing operations:
Capital expenditures (271.7) (194.9) (179.1) (76.8) (15.8)
Net proceeds from:
Disposal of former natural resource interests 5.0 28.6 119.4 (23.6) (90.8)
Notes receivable and settlement of royalty agreement - - 26.0 - (26.0)
- --------------------------------------------------------------------------------------------------------------------
Subtotal of natural resource cash proceeds 5.0 28.6 145.4 (23.6) (116.8)
Contributions to VEBA (a) - - (82.0) - 82.0
Acquisitions (53.2) (14.8) (7.2) (38.4) (7.6)
Other (2.5) 7.7 16.6 (10.2) (8.9)
- --------------------------------------------------------------------------------------------------------------------
Subtotal (322.4) (173.4) (106.3) (149.0) (67.1)
Discontinued operations:
BAX Global (72.8) (48.3) (47.1) (24.5) (1.2)
Natural gas, timber and gold - (0.8) (8.8) 0.8 8.0
- --------------------------------------------------------------------------------------------------------------------
Investing activities (395.2) (222.5) (162.2) (172.7) (60.3)
- --------------------------------------------------------------------------------------------------------------------
Cash flows before financing activities $ (81.2) 62.4 141.5 $(143.6) (79.1)
====================================================================================================================
(a) In 2004, the VEBA was restricted to pay coal-related retiree medical
benefits. As a result, the Company began to account for the VEBA as an
offset to the postretirement obligation (see note 4 to the consolidated
financial statements). Accordingly, $50 million of net cash contributions
in 2004 have been classified within operating activities. In 2003, $82
million of contributions were classified within investing activities.
Operating Activities
- --------------------------------------------------------------------------------
2005
Operating cash flow from continuing operations increased by $27.9 million in
2005 compared to 2004 primarily due to lower contributions to U.S. pension plans
and VEBA in 2005. This was partially offset by lower operating profit and more
cash used for working capital needs as a result of increased receivables.
2004
Operating cash flow from continuing operations increased by $7.7 million in 2004
from the prior period primarily as a result of improved cash flow from operating
performance of the Company's business segments. Partially offsetting this
increase was a $50 million contribution to the VEBA in 2004. Contributions to
the VEBA were classified as investing activities in 2003.
Operating cash flow from discontinued operations decreased by $26.5 million in
2004 from the prior period primarily as a result of the Company's natural
resource business generating less cash in 2004, since these businesses were sold
in 2003 and early 2004.
52
Investing Activities
- --------------------------------------------------------------------------------
Continuing Operations
Cash used for investing activities by continuing operations increased by $149.0
million in 2005 compared to 2004 primarily due to higher cash outflows of $76.8
million for capital expenditures and $38.4 million for acquisitions. Cash from
investing activities in 2004 included $23.6 million of higher net proceeds from
the disposition of assets compared to 2005.
Capital Expenditures
Years Ended December 31, $ change
- --------------------------------------------------------------------------------
(In millions) 2005 2004 2003 2005 2004
- --------------------------------------------------------------------------------
Capital Expenditures
Brink's $ 109.0 76.2 80.9 $ 32.8 (4.7)
BHS 162.2 117.6 98.0 44.6 19.6
Corporate and other 0.5 1.1 0.2 (0.6) 0.9
- --------------------------------------------------------------------------------
Capital expenditures $ 271.7 194.9 179.1 $ 76.8 15.8
================================================================================
Capital expenditures for 2005 were $76.8 million higher than 2004. The increase
includes $14.0 million spent to purchase the BHS headquarters and monitoring
facility and two Brink's branch facilities in the U.S. that were previously
leased. In addition, 2005 capital expenditures includes $7.4 million for the
development of BHS' new Knoxville monitoring facility and $7.0 million for the
construction of a Brink's branch facility. Also contributing to the increase in
capital expenditures is the growth in subscriber installations at BHS, increased
information technology spending and higher expenditures for vehicles at Brink's.
Higher capital expenditures at BHS in 2004 as compared to 2003 were primarily
due to an increase in subscriber installations.
Capital expenditures in 2006 are currently expected to range from $270 million
to $280 million. Expected capital expenditures for 2006 reflect an increase in
customer installations at BHS and information technology spending at Brink's.
Proceeds from Disposition of Assets and Investments
Cash flows from investing activities included cash proceeds of $5.0 million in
2005 and $28.6 million in 2004 from the sale of natural resource businesses.
Cash flows from investing activities in 2003 included cash proceeds of $119.4
million from the sale of natural resource businesses and equity interests and
the realization of $26.0 million of cash related to the monetization of notes
receivable from the 2002 sale of the Company's former Virginia coal operations.
VEBA
The Company made contributions of $82 million to its VEBA in 2003, which, as
noted above, were classified as an investing activity. The Company classified
$50 million of contributions in 2004 as an operating activity. No contributions
were made to the VEBA in 2005 but the Company contributed $225 million in
January 2006 using proceeds from the sale of BAX Global.
Acquisitions
As previously described, Brink's has made a number of acquisitions in the last
three years including several operations in Europe for $53.2 million in 2005 and
$22.0 million in the prior two years.
53
Discontinued Operations
Cash used for investing activities increased by $23.7 million in 2005 from 2004
primarily as a result of higher capital expenditures at BAX Global.
Business Segment Cash Flows
- --------------------------------------------------------------------------------
The Company's cash flows before financing activities for each of the operating
segments are presented below.
Years Ended December 31, $ change
- ---------------------------------------------------------------------------------------------------------
(In millions) 2005 2004 2003 2005 2004
- ---------------------------------------------------------------------------------------------------------
Cash flows before financing activities
Continuing operations:
Business segments:
Brink's $ (11.5) 108.5 66.5 $ (120.0) 42.0
BHS 14.6 47.6 28.8 (33.0) 18.8
- ---------------------------------------------------------------------------------------------------------
Subtotal of business segments 3.1 156.1 95.3 (153.0) 60.8
Corporate and former operations:
Proceeds from sale of natural resource interests 5.0 28.6 145.4 (23.6) (116.8)
Contributions to the VEBA, net - (50.0) (82.0) 50.0 32.0
Contributions to primary U.S. pension plan - (11.0) (20.0) 11.0 9.0
Other (70.7) (65.2) (20.8) (5.5) (44.4)
- ---------------------------------------------------------------------------------------------------------
Subtotal of continuing operations (62.6) 58.5 117.9 (121.1) (59.4)
Discontinued operations:
BAX Global (18.6) 4.5 13.2 (23.1) (8.7)
Natural gas, timber and gold - (0.6) 10.4 0.6 (11.0)
- ---------------------------------------------------------------------------------------------------------
Cash flows before financing activities $ (81.2) 62.4 141.5 $ (143.6) (79.1)
=========================================================================================================
Overview
Cash flows before financing activities from the Company's business segments have
averaged $85 million over the last three years. Sales of natural resource
interests also provided $179 million in cash over that period. Using this cash
flow, the Company made $163 million in voluntary contributions to its VEBA and
primary U.S. pension plan over the last three years. Cash flows before financing
activities in the last three years were also used in part to make significant
annual cash payments associated with retained liabilities of the former coal
operations.
Brink's
Cash flows before financing activities at Brink's decreased by $120.0 million in
2005 primarily due to a $38.4 million increase in cash used for acquisitions
($53.2 million for the acquisition of operations in Europe in 2005 compared with
$14.8 million for acquisitions in 2004) and a $32.8 million increase in capital
expenditures. Lower operating profit in 2005 also reduced cash from operations.
In addition, cash used for working capital needs was higher in 2005 primarily as
a result of increased receivables on a 12% increase in revenue.
Cash before financing activities increased in 2004 over 2003 primarily due to
higher operating profits partially offset by an increase in cash used for
acquisitions.
54
BHS
The decrease in BHS' cash flows before financing activities is primarily due to
$10.2 million spent for the purchase of BHS' headquarter facilities, $7.4
million for the development of the Knoxville facility and a $25.0 million
increase in capital expenditures reflecting the growth in installations of
security systems. This was partially offset by higher cash flows from operations
as a result of higher operating profit.
The year-over-year increase in cash flows before financing activities at BHS in
2004 is primarily due to higher operating results partially offset by an
increase in capital expenditures reflecting growth in installations of security
systems.
Corporate and Former Operations
The Company received $179.0 million in net proceeds during the last three years
from the sale of substantially all of its natural resource interests. In the
last three years, the Company contributed $132.0 million to its VEBA and $31.0
million to its primary U.S. pension plan. The $44.4 million increase in 2004
other cash outflows reflects higher corporate expenses compared to 2003 and the
collection of the remaining receivables from the coal business in 2003. The
Company may elect to pay up to approximately $30.5 million in 2006 to satisfy
its liability related to withdrawing from the 1950 and 1974 multiemployer
pension plans at the former coal business.
Discontinued Operations
Cash flows before financing activities from discontinued operations in 2005
decreased primarily due to a decrease in the sale of accounts receivable as a
result of the termination of the securitization program and an increase in
capital expenditures partially offset by improved operating results at BAX
Global.
Cash flow before financing activities from discontinued operations was lower in
2004 as a result of the sale of $52.0 million less accounts receivable at BAX
Global at year end 2004 versus the prior year, partially offset by improved
operating results at BAX Global. In addition, the natural resource businesses
were sold in 2003 and 2004.
55
Financing Activities
- --------------------------------------------------------------------------------
Summary of Financing Activities
Years Ended December 31,
(In millions) 2005 2004 2003
- --------------------------------------------------------------------------------
Net borrowings (repayments) of debt:
Short-term debt $ 14.0 (7.9) (14.3)
Revolving Facility 107.1 (12.5) (98.1)
Senior Notes (18.3) - -
Other (16.2) (16.4) (1.8)
- --------------------------------------------------------------------------------
Net borrowings (repayments) of debt 86.6 (36.8) (114.2)
Dividends (5.5) (5.4) (5.3)
Dividends to minority interests in subsidiaries (6.7) (4.8) (2.9)
Proceeds from exercise of stock options and other 26.9 22.4 1.1
Discontinued operations, net (7.7) (2.3) (4.6)
- --------------------------------------------------------------------------------
Cash flows from financing activities $ 93.6 (26.9) (125.9)
================================================================================
The Company's day-to-day operating liquidity needs are typically financed by
short-term debt, the accounts receivable securitization facility (through
December 15, 2005 when the facility expired), and the Company's Revolving
Facility and Letter of Credit Facility, both of which are described below in
"Capitalization."
With proceeds from the sale of BAX Global, the Company paid $46 million of debt
in January 2006. The Company expects to make a self-tender offer for a portion
of its outstanding common stock, which is expected to result in significant cash
outflows of between $400 million and $600 million during 2006.
The Company paid quarterly dividends on its common stock at an annual rate of
$0.10 per share in each of the last three years. Dividends paid on common stock
totaled $5.5 million in 2005, $5.4 million in 2004 and $5.3 million in 2003.
Future dividends are dependent on the earnings, financial condition, cash flow
and business requirements of the Company, as determined by the Board. On January
26, 2006, the Board declared a quarterly cash dividend of $0.025 per share of
common stock, payable on March 1, 2006 to shareholders of record on February 8,
2006.
56
Capitalization
- --------------------------------------------------------------------------------
The Company uses a combination of debt, operating leases and equity to
capitalize its operations. As of December 31, 2005, debt as a percentage of
capitalization (total debt and shareholders' equity) was 27% compared to 26% at
December 31, 2004. The increase resulted from higher debt of $68.7 million
partially offset by the impact of higher equity of $149.0 million. Equity
increased in 2005 primarily as a result of net income of $142.4 million and the
issuance of shares related to employee benefit plans, partially offset by other
comprehensive losses.
Summary of Debt, Equity and Other Liquidity Information
Amount available
under credit facilities Outstanding Balance
- ----------------------------------------------------------------------------------------------------
December 31, December 31,
(In millions) 2005 2005 2004 $ change (a)
- ----------------------------------------------------------------------------------------------------
Debt:
Short-term debt:
Multi-currency revolving facility
and other committed facilities $ 51 $ 25.5 27.5 $ (2.0)
Long-term debt:
Revolving Facility 276 123.6 18.4 105.2
Letter of Credit Facility 6 - - -
Senior Notes 76.7 95.0 (18.3)
Dominion Terminal
Associates ("DTA") bonds 43.2 43.2 -
Other 43.9 60.1 (16.2)
- ----------------------------------------------------------------------------------------------------
Debt $ 333 $ 312.9 244.2 $ 68.7
====================================================================================================
Shareholders' equity $ 837.5 688.5 $ 149.0
====================================================================================================
Other Liquidity Information:
Cash and cash equivalents $ 96.2 169.0 $ (72.8)
Amount sold under accounts receivable
securitization facility - 25.0 (25.0)
Net Debt (b) 216.7 75.2 141.5
Net Financings (b) 216.7 100.2 116.5
====================================================================================================
(a) In addition to cash borrowings and repayments, the change in the debt
balance also includes changes in currency exchange rates and borrowings
under new capital leases.
(b) Net Debt and Net Financings are non-GAAP measures. Net Debt is equal to
short-term debt plus the current and noncurrent portion of long-term debt,
("Debt" in the tables), less cash and cash equivalents. Net Financings are
equal to Net Debt plus the amount sold under the accounts receivable
securitization facility. See reconciliation below.
57
Reconciliation of Net Debt and Net Financings to GAAP Measures
December 31,
- --------------------------------------------------------------------------------
(In millions) 2005 2004 2003 2002 2001
- --------------------------------------------------------------------------------
Short-term debt $ 25.5 27.5 35.8 41.8 27.8
Long-term debt 287.4 216.7 238.7 317.5 270.1
DTA bonds - - - - 43.2
- --------------------------------------------------------------------------------
Debt 312.9 244.2 274.5 359.3 341.1
Less cash and cash equivalents (96.2) (169.0) (128.7) (102.3) (86.7)
- --------------------------------------------------------------------------------
Net Debt 216.7 75.2 145.8 257.0 254.4
Amounts sold under accounts receivable
securitization facility - 25.0 77.0 72.0 69.0
- --------------------------------------------------------------------------------
Net Financings $ 216.7 100.2 222.8 329.0 323.4
================================================================================
The supplemental Net Debt and Net Financing information is non-GAAP financial
information that management believes is an important measure to evaluate the
Company's financial leverage. This supplemental non-GAAP information does not
affect any reported amounts. This supplemental non-GAAP information should be
viewed in conjunction with the Company's consolidated balance sheets.
Debt
The Company has an unsecured $400 million revolving bank credit facility
("Revolving Facility") with a syndicate of banks upon which it may borrow (or
otherwise satisfy credit needs) on a revolving multi-currency basis over a
five-year term ending in October 2009. At December 31, 2005, $276.4 million was
available for use under the Revolving Facility. The Company has the option to
borrow based on LIBOR plus a margin, prime rate or a competitive bid among the
individual banks.
The Company 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 costs of these letters of
credit are expected to be approximately the same as borrowings under its $400
million facility discussed above. As of December 31, 2005, $5.9 million was
available for use under this revolving credit facility. The Revolving Facility
and the multi-currency revolving credit facilities described below are also used
for the issuance of letters of credit and bank guarantees.
The Company has three unsecured multi-currency revolving bank credit facilities
totaling $121.4 million at December 31, 2005, of which $50.8 million was unused.
When rates are favorable, the Company also borrows from other banks under
short-term uncommitted agreements. Various foreign subsidiaries maintain other
secured and unsecured lines of credit and overdraft facilities with a number of
banks. Amounts borrowed under these agreements are included in short-term
borrowings.
At December 31, 2005, the Company had $76.7 million of Senior Notes outstanding
that are scheduled to be repaid in 2006 through 2008, including $18.3 million
which was paid as scheduled in January 2006. Interest on each series of the
Senior Notes is payable semiannually, and the Company has the option to prepay
all or a portion of the Senior Notes prior to maturity subject to a make-whole
provision. The Senior Notes are unsecured. On February 28, 2006, the Company
gave notice to the holders of the Senior Notes that the Company would elect to
prepay the remaining $58.4 million outstanding in the first quarter of 2006. A
make-whole payment of approximately $1.7 million is expected to be paid in
connection with this prepayment.
58
The Company's Brink's, BHS and BAX Global subsidiaries have guaranteed the
Revolving Facility, the Letter of Credit Facility and the Senior Notes. As of
January 31, 2006, BAX Global is no longer a guarantor. The Revolving Facility,
the Letter of Credit Facility, the agreement under which the Senior Notes were
issued and the multi-currency revolving bank credit facilities each contain
various financial and other covenants. The financial covenants, among other
things, limit the Company's total indebtedness, limit the use of proceeds on
sales of assets (including the sale of BAX Global), provide for minimum coverage
of interest costs, and require the Company to maintain a minimum level of net
worth. The credit agreements do not provide for the acceleration of payments
should the Company's credit rating be reduced. If the Company were not to comply
with the terms of its various loan agreements, the repayment terms could be
accelerated and the commitment could be withdrawn. An acceleration of the
repayment terms under one agreement could trigger the acceleration of the
repayment terms under the other loan agreements. The Company was in compliance
with all financial covenants at December 31, 2005.
In 2003, at the Company's request, the Peninsula Ports Authority of Virginia
issued a new series of bonds to replace the previous bonds related to Dominion
Terminal Associates, a deep water coal terminal in which the Company no longer
has an interest. The Company continues to pay interest on and guarantee payment
of the $43.2 million principal of the new bonds and ultimately will have to pay
for the retirement of the new bonds in accordance with the terms of the
guarantee. The new bonds bear a fixed interest rate of 6.0% and mature in 2033.
The new bonds may mature prior to 2033 upon the occurrence of specified events
such as the determination that the bonds are taxable or the failure of the
Company to abide by the terms of its guarantee.
The Company believes it has adequate sources of liquidity to meet its near-term
requirements.
Equity
At December 31, 2005, the Company had 100 million shares of common stock
authorized and 58.7 million shares issued and outstanding. Of the outstanding
shares at December 31, 2005, 1.2 million shares were held by The Brink's Company
Employee Benefit Trust and have been accounted for in a manner similar to
treasury stock for earnings per share purposes. The Company has the authority to
issue up to 2.0 million shares of preferred stock, par value $10 per share.
The Company has the authority to repurchase up to 1.0 million shares of common
stock with an aggregate purchase price limitation of $19.1 million. The Company
made no repurchases under this program during 2005 or 2004.
Off Balance Sheet Arrangements
- --------------------------------------------------------------------------------
The Company has various off-balance sheet arrangements that are described in the
notes to the consolidated financial statements. See note 13 for the BAX Global
accounts receivable securitization program, which expired December 15, 2005, and
note 14 for operating leases that have residual value guarantees or other terms
that cause the agreement to be considered a variable interest. The Company uses
these off-balance sheet arrangements to lower its cost of financings and to
provide access to a broader pool of lenders. The Company believes its
off-balance sheet arrangements are an important component of its capital
structure.
59
Contractual Obligations
- --------------------------------------------------------------------------------
The following table includes the contractual obligations of the Company as of
December 31, 2005.
Estimated Payments Due by Period
- --------------------------------------------------------------------------------------------------------------
Later
(In millions) 2006 2007 2008 2009 2010 Years Total
- --------------------------------------------------------------------------------------------------------------
Contractual obligations
Long-term debt obligations:
Senior notes (a) $ 76.7 - - - - - 76.7
Other 2.9 11.2 1.8 124.4 0.8 45.5 186.6
Capital lease obligations 7.6 5.3 3.9 3.5 2.2 1.6 24.1
Operating lease obligations 66.7 54.1 41.0 28.7 20.1 47.2 257.8
Purchase obligations:
Service contracts 11.9 1.1 0.9 0.7 0.5 0.2 15.3
Other 7.5 0.1 0.1 - - - 7.7
Other long-term liabilities reflected on the
Company's balance sheet under GAAP -
non-coal related workers compensation
and other claims 28.1 15.0 8.2 4.9 3.4 8.2 67.8
- --------------------------------------------------------------------------------------------------------------
Subtotal 201.4 86.8 55.9 162.2 27.0 102.7 636.0
Legacy liabilities (b) 92.0 64.0 65.0 66.0 66.0 1,337.0 1,690.0
- --------------------------------------------------------------------------------------------------------------
Total $ 293.4 150.8 120.9 228.2 93.0 1,439.7 2,326.0
==============================================================================================================
Contractual obligations of BAX Global (c) $ 123.9 57.5 42.9 29.8 21.2 96.1 371.4
==============================================================================================================
(a) The Company expects to prepay the Senior Notes in 2006 with the proceeds of
the sale of BAX Global.
(b) The projected payments for liabilities related to former coal operations
(legacy liabilities) are discussed in "Results of Operations - Retained
Liabilities and Assets of Former Operations." A portion of the projected
payments may ultimately be paid by the VEBA. The Company may elect at any
time to use either these assets or its cash from operations to pay benefits
for its retiree medical plans. Estimated payments above exclude
administration and other payments.
(c) Contractual obligations related to BAX Global of $371.4 million have been
segregated in the above table. These obligations were assumed by a third
party in early 2006 as a result of the sale of BAX Global described in note
5 to the consolidated financial statements.
Other Potential Use of Credit
- --------------------------------------------------------------------------------
Surety Bonds
The Company is required by various state and federal laws to provide security
with regard to its obligations to pay workers' compensation, to reclaim lands
used for mining by the Company's former coal operations and to satisfy other
obligations. As of December 31, 2005, the Company had outstanding surety bonds
with third parties totaling approximately $71.8 million that it has arranged in
order to satisfy various security requirements. Most of these bonds provide
financial security for previously recorded liabilities. The Company expects $9.4
million of the outstanding surety bonds to be replaced with surety bonds
provided by the purchaser of BAX Global. Surety bonds are typically renewable on
a yearly basis; however, there can be no assurance the bonds will be renewed or
that premiums in the future will not increase.
If the remaining surety bonds are not renewed, the Company believes that it has
adequate available borrowing capacity under its Letter of Credit Facility and
its Revolving Facility to provide letters of credit or other collateral to
secure its obligations.
The Company has issued letters of credit under its Letter of Credit Facility,
described in "Debt" above, to satisfy a portion of its security requirements. At
December 31, 2005, $135.8 million of the $144.1 million issued letters of credit
were used to satisfy security requirements.
60
Contingent Matters
- --------------------------------------------------------------------------------
Income Tax
The Company and its subsidiaries are subject to tax examinations in various U.S.
and foreign jurisdictions and the Company has accrued approximately $13 million
for related contingencies at December 31, 2005. 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.
Former Operations
The Company has recorded estimated liabilities for contingent liabilities,
including those for premiums to the Combined Fund, coal-related workers'
compensation claims and reclamation obligations. These are discussed in more
detail at "Results of Operations - Retained Liabilities and Assets of Former
Operations - Legacy Liabilities and Assets."
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. The Company has
contractually indemnified the purchaser of BAX Global for this contingency.
The Company has retained all pre-closing tax assets and liabilities related to
BAX Global, except deferred income taxes. The Company has $23.3 million accrued
for these net tax liabilities at December 31, 2005.
Insurance claims
The Company expects to file insurance claims of $4.0 million to $6.5 million
related to property damage and business interruption insurance coverage for
losses sustained from Hurricane Katrina. As of December 31, 2005, the Company
had recorded a receivable of $2.2 million for claims to be filed, which equals
the amount of hurricane-related property losses recognized to date. Because the
Company's property damage insurance coverage provides for replacement value, the
Company expects to record proceeds in excess of realized losses when the claims
are ultimately settled. Claims for lost revenues under business interruption
coverage will be recognized as operating income when the claims are settled.
Value-added taxes ("VAT") and customs duties
During 2004, the Company determined that one of its non-U.S. Brink's business
units had not paid customs duties and VAT with respect to the importation of
certain goods and services. The Company was advised that civil and criminal
penalties could be asserted for the non-payment of these customs duties and VAT.
Although no penalties have been asserted to date, they could be asserted at any
time. The business unit has provided the appropriate government authorities with
an accounting of unpaid customs duties and VAT and has made payments covering
its calculated unpaid VAT. As a result of its investigation, the Company accrued
charges of $1.1 million to operating profit and recorded estimated interest
expense of $0.7 million related to this matter during 2004. The Company believes
that the range of reasonably possible losses is between $0.4 million and $3.0
million for potential penalties on unpaid VAT and between $0 and $35 million for
unpaid customs duties and associated penalties. The Company believes that the
assertion of the penalties on unpaid customs duties would be excessive and would
vigorously defend against any such assertion. The Company does not expect to be
assessed interest charges in connection with any penalties that may be asserted.
The Company continues 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.
61
BHS contingency for a component
BHS has been notified by one of its equipment suppliers that it is reviewing
data associated with the reliability of a component. The supplier is examining
currently available data and developing additional data in order to complete the
review. The conclusions from the review could range from the confirmation of the
reliability of the component to a requirement to replace the component. The
Company does not currently believe that actions, if any, stemming from this
review will have a material impact on the Company's financial position. The
Company expects to be reimbursed for costs, if any, that may be incurred in
responding to the review. However, depending upon the timing and amounts of
expenditures and reimbursements, there could be an impact on results of
operations for individual quarters in 2006.
MARKET RISK EXPOSURES
================================================================================
The Company's continuing operations have activities in approximately 50
countries. These operations expose the Company to a variety of market risks,
including the effects of changes in interest rates, commodities prices and
foreign currency exchange rates. These financial and commodity exposures are
monitored and managed by the Company as an integral part of its overall risk
management program.
The Company periodically uses various derivative and non-derivative financial
instruments, as discussed below, to hedge its interest rate, commodities prices
and foreign currency exposures when appropriate. The risk that counterparties to
these instruments may be unable to perform is minimized by limiting the
counterparties used to major financial institutions with investment grade credit
ratings. The Company does not expect to incur a loss from the failure of any
counterparty to perform under the agreements. The Company does not use
derivative financial instruments for purposes other than hedging underlying
financial or commercial exposures.
The sensitivity analyses discussed below for the market risk exposures were
based on the facts and circumstances in effect at December 31, 2005. Actual
results will be determined by a number of factors that are not under
management's control and could vary materially from those disclosed.
Interest Rate Risk
- --------------------------------------------------------------------------------
The Company uses both fixed and floating rate debt and leases to finance its
operations. Floating rate obligations, including the Company's Revolving
Facility, expose the Company to fluctuations in cash flows due to changes in the
general level of interest rates. Fixed rate obligations, including the Company's
Senior Notes and Dominion Terminal Associates debt, are subject to fluctuations
in fair values as a result of changes in interest rates.
Based on the contractual interest rates on the floating rate debt at December
31, 2005, a hypothetical 10% increase in rates would increase cash outflows by
approximately $0.7 million over a twelve-month period (in other words, the
Company's weighted average interest rate on its floating rate instruments was
4.25% per annum at December 31, 2005. If that average rate were to increase by
43 basis points to 4.68%, the cash outflows associated with these instruments
would increase by $0.7 million annually). The effect on the fair value of the
Company's Senior Notes and Dominion Terminal Associates debt for a hypothetical
10% decrease in the yield curve from year-end 2005 levels would result in a $4.3
million increase in the fair values of this debt.
62
Commodities Price Risk
- --------------------------------------------------------------------------------
The Company consumes various commodities in the normal course of its business
and, from time to time, uses derivative financial instruments to minimize the
variability in forecasted cash flows due to price movements in these
commodities. The derivative contracts are entered into in accordance with
guidelines set forth in the Company's risk management policies.
During 2004 and 2003, BAX Global utilized swap contracts to fix a portion of
forecasted jet fuel purchases at specific price levels. In addition, depending
on market conditions, the Company has been able to adjust its pricing through
the use of surcharges on shipments to partially offset large increases in the
cost of jet fuel. At December 31, 2005, the Company had no outstanding jet fuel
hedge derivatives.
During 2003, the Company utilized option strategies and forward sales contracts
to hedge the selling price on a portion of its forecasted natural gas and gold
sales. The Company exited the natural gas business in 2003 and the gold business
in early 2004. Following the sale of these businesses, the Company had no
outstanding natural gas or gold derivatives.
Foreign Currency Risk
- --------------------------------------------------------------------------------
The Company's continuing operations, primarily through its Brink's operations,
has exposure to the effects of foreign currency exchange rate fluctuations on
the results of all of its foreign operations, which are operated primarily in
local currencies but are reported in U.S. dollars.
The Company is exposed periodically to the foreign currency rate fluctuations
that affect transactions not denominated in the functional currency of domestic
and foreign operations. To mitigate these exposures, the Company may, from time
to time, enter into foreign currency forward contracts. The Company does not use
derivative financial instruments to hedge investments in foreign subsidiaries
since such investments are long-term in nature.
The effects of a hypothetical simultaneous 10% appreciation in the U.S. dollar
from year-end 2005 levels against all other currencies of countries in which the
Company has continuing operations are as follows:
Hypothetical Effects
(In millions) Increase/ (decrease)
- ---------------------------------------------------------------------------
Translation of 2005 earnings into U.S. dollars $ (1.1)
Transactional exposures 0.1
Translation of net assets of foreign subsidiaries (25.7)
===========================================================================
63
APPLICATION OF CRITICAL ACCOUNTING POLICIES
================================================================================
The application of accounting principles requires the use of assumptions,
estimates and judgments which are the responsibility of management. Management
makes estimates and judgments based on, among other things, knowledge of
operations, markets, historical trends and likely future changes, similarly
situated businesses and, when appropriate, the opinions of advisors with
relevant knowledge and experience. Many assumptions, estimates and judgments are
straightforward; others are not. Reported results could have been materially
different had the Company used a different set of assumptions, estimates and
judgments.
Deferred Tax Asset Valuation Allowance
- --------------------------------------------------------------------------------
It is common for companies to record expenses and accruals before the related
payments are actually made. In the U.S., and most other countries and tax
jurisdictions, many deductions for tax return purposes cannot be taken until the
expenses are paid. Similarly, some tax credits and tax loss carryforwards cannot
be used until future periods when sufficient taxable income is generated. In
these circumstances, under GAAP, companies accrue for the tax benefit expected
to be received in future years if, in the judgment of management, it is "more
likely than not" that the company will receive the tax benefits. These benefits
(deferred tax assets) are often offset, in whole or in part, by the effects of
deferred tax liabilities which relate primarily to deductions available for tax
return purposes under existing tax laws and regulations before such costs are
reported as expenses under GAAP.
As of December 31, 2005, the Company had approximately $349 million of net
deferred tax assets on its consolidated balance sheet. A significant amount of
the Company's deferred tax assets relates to expected future tax deductions
arising from retiree medical and other coal-related expenses the Company has
already recorded in its financial statements. For more details associated with
this net balance, see note 17 to the accompanying consolidated financial
statements.
Since there is no absolute assurance that these assets will be ultimately
realized, management annually reviews the Company's deferred tax positions to
determine if it is more likely than not that the assets will be realized.
Periodic reviews include, among other things, the nature and amount of the
taxable income and expense items, the expected timing when assets will be used
or liabilities will be required to be reported and the reliability of historical
profitability of businesses expected to provide future earnings. Furthermore,
management considers tax-planning strategies it can use to increase the
likelihood that the tax assets will be realized. If after conducting the
periodic review, management determines that the realization of the tax asset
does not meet the "more-likely-than-not" criteria, an offsetting valuation
allowance is recorded thereby reducing net earnings and the deferred tax asset
in that period. For these reasons and since changes in estimates can materially
affect net earnings, management believes the accounting estimate related to
deferred tax asset valuation allowances is a "critical accounting estimate."
Approximately 84% of the deferred tax assets before valuation allowance at
December 31, 2005 relates to the U.S. federal tax jurisdiction. Due to its
expectation that the historical profitability of the Company's U.S. portion of
the Brink's and BHS operations will continue and the lengthy period over which
coal-related liabilities will become available for deduction on tax returns,
management has concluded that it is more likely than not that these deferred tax
assets will be realized.
For U.S. state jurisdictions and non-U.S. jurisdictions, the Company has
evaluated its ability to fully utilize the net deferred tax assets on an
individual jurisdiction basis. Due to a recent history of losses in some
non-U.S. jurisdictions and doubts about whether future operating performance
will be sufficiently profitable to realize deferred tax assets, the Company has
approximately $42 million of valuation allowances at December 31, 2005.
64
Among other things, should tax statutes, the timing of deductibility of expenses
or expectations for future performance change, the Company could decide to
adjust its valuation allowances, which would increase or decrease tax expense,
possibly materially.
Goodwill and Property and Equipment Valuations
- --------------------------------------------------------------------------------
Accounting Policies
At December 31, 2005, the Company had property and equipment of $867.4 million
and goodwill of $103.8 million, net of accumulated depreciation and
amortization. The Company reviews these assets for possible impairment using the
guidance in SFAS 142, "Goodwill and Other Intangible Assets," for goodwill and
SFAS 144, "Accounting for the Impairment or Disposal of Long-lived Assets," for
property and equipment and other long-lived assets. The review for impairment
requires the use of significant judgments about the future performance of the
Company's operating subsidiaries and, as such, the Company believes they
represent critical accounting estimates.
Application of Accounting Policies
Goodwill
Goodwill is reviewed for impairment at least annually. The Company estimates the
fair value of Brink's, the only reporting unit that has goodwill, primarily
using estimates of future cash flows. The fair value of the reporting unit is
compared to its carrying value to determine if an impairment is indicated. At
December 31, 2005, net goodwill was $103.8 million at Brink's. To date, no
impairment has been identified. BAX Global's goodwill of $165.2 million at
December 31, 2005 has been included in assets held for sale.
Due to a history of profitability and cash flow, the carrying values of
long-lived assets of Brink's are believed to be appropriate.
Property and Equipment
To determine if an impairment exists related to property and equipment, the
Company compares estimates of the future undiscounted net cash flows of groups
of assets to their carrying value when events or changes in circumstances
indicate the carrying amount may not be recoverable. For purposes of assessing
impairment, assets are grouped at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows of other
groups of assets.
Brink's has not had any material impairments of property and equipment in the
last three years.
Each quarter, when BHS customers disconnect their monitoring service, BHS
records an impairment charge related to the carrying value of the related
security systems estimated to be permanently disconnected based on historical
reconnection experience. BHS makes estimates about future reconnection
experience in its estimate of impairment charges. Future reconnection experience
is estimated using historical data. Should the estimate of future reconnection
experience change, BHS's impairment charges would be affected.
65
Employee and Retiree Benefit Obligations
- --------------------------------------------------------------------------------
The Company provides its employees and retirees benefits arising from both
Company-sponsored plans (e.g. defined benefit pension plans) and statutory
requirements (e.g. medical benefits for otherwise ineligible former employees
and nonemployees under the Health Benefit Act).
The primary benefits which require the Company to make cash payments over an
extended period of years are:
o Pension obligation
o Retiree medical obligation
o Health Benefit Act premiums to the Combined Fund
o Black Lung obligation
Accounting Policy
The Company accounts for its pension plans under SFAS 87, "Employers' Accounting
for Pensions." The Company accounts for its retiree medical obligations and
Black Lung obligations under SFAS 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." As a result of annual remeasurements, the Company
records changes in liabilities and associated expenses over time as required
under these accounting standards.
Health Benefit Act obligations are recorded under EITF 92-13, "Accounting for
Estimated Payments in Connection with the Coal Industry Retiree Health Benefit
Act of 1992," which requires the Company to accrue estimated undiscounted future
premiums to be paid to the Combined Fund.
As is normal for these benefits, cash payments will be made for periods ranging
from the current year to over seventy years from now for these benefits. The
amount of the cash payments and related expenses will be affected over time by
inflation, salary increases, investment returns and market interest rates,
changes in the numbers of plan participants and changes in the benefit
obligations and/or laws and regulations covering the benefit obligations.
Because of the inherent volatility of these items and because the obligations
are significant, the Company believes these represent critical accounting
estimates.
The critical accounting estimates that determine the carrying values of
liabilities and the resulting annual expense are discussed below. The plans that
are affected by the assumptions discussed are identified parenthetically in the
relevant title.
Application of Accounting Policy
Discount Rate (Pension, Retiree Medical and Black Lung)
A discount rate is used to determine the present value of future payments. The
rate should reflect returns expected from high-quality bonds and will fluctuate
over time with market interest rates. In general, the Company's liability
changes in an inverse relationship to interest rates, i.e. the lower the
discount rate, the higher the associated plan obligation.
The Company selects a discount rate for its plan obligations after reviewing
published long-term yield information for a small number of high-quality
fixed-income securities (e.g. Moody's AA bond yields). The Company's advisors
also calculate yields for the broader range of long-term high-quality securities
with maturities in line with expected payments. After considering these factors,
the Company selected a discount rate of 5.50% as of December 2005 and 5.75% as
of December 31, 2004. The average Moody's AA bond yields for the ten year period
ended December 31, 2005 was approximately 6.9%.
Sensitivity Analysis
The discount rate selected at year end materially affects the valuations of plan
obligations at year end and calculations of net periodic expenses for the
following year.
66
The tables below compare hypothetical plan obligation valuations as of December
31, 2005 and estimated expenses for 2006 if the Company had used discount rates
that were 100 basis points lower or higher.
Plan Obligations at December 31, 2005
Hypothetical Actual Hypothetical
(In millions) 4.50% 5.50% 6.50%
- ---------------------------------------------------------------------------------------------------
Primary U.S. pension plan ABO and PBO $ 873.7 745.6 644.4
Coal-related retiree medical accumulated postretirement
benefit obligation ("APBO") 707.3 633.0 571.6
Black Lung APBO 55.6 51.7 47.7
===================================================================================================
Projected 2006 Expense
Hypothetical Actual Hypothetical
(In millions) 4.50% 5.50% 6.50%
- ---------------------------------------------------------------------------------------------------
Primary U.S. pension plan $ 16.8 5.2 (4.4)
Coal-related retiree medical 18.8 17.0 15.3
Black Lung 4.0 3.9 3.7
===================================================================================================
Return on Assets (Pension and Retiree Medical)
The Company's primary U.S. defined benefit pension plan had assets at December
31, 2005 valued at approximately $620 million. This pension plan's assets are
invested primarily using actively managed accounts with asset allocation targets
of 47.5% domestic equities and 22.5% international equities, which include a
broad array of market capitalization sizes and investment styles, and 30% fixed
income securities. The Company's policy does not permit certain investments,
including investments in The Brink's Company common stock, unless part of a
commingled fund. Fixed-income investments must have an investment grade rating
at the time of purchase. The plan rebalances its assets on a quarterly basis if
actual allocations of assets are outside predetermined ranges. Among other
factors, the performance of asset groups and investment managers will affect the
long-term rate of return.
The Company-sponsored retiree medical plan had assets in a VEBA at December 31,
2005 valued at approximately $185 million. The assets in the VEBA are invested
and managed on a similar basis to the pension plan. Accordingly, the same
long-term rate of return assumption is used for the VEBA.
Pension accounting principles require companies to use estimates of expected
asset returns over long periods of time. The Company selects the expected
long-term rate of return assumption using advice from its investment advisor and
its actuary considering the plan's asset allocation targets and expected overall
investment manager performance and a review of its most recent ten-year
historical average compounded rate of return. After following the above process,
the Company selected 8.75% as its expected long-term rate of return as of
December 31, 2005 and 2004.
It is unlikely that in any given year the actual rate of return will be the same
as the assumed long-term rate of return. In general, if actual returns exceed
the expected long-term rate of return, future levels of expense will go down and
vice-versa. Over the last ten years, the annual returns of the Company's primary
pension plan have fluctuated from a high of a 27.5% gain (2003) to a low of a
9.3% loss (2002) and averaged over 9.6%, net of fees, per annum over the period.
During that time period, there were seven years in which returns exceeded the
assumed long-term rate of return and three years, the three years ended December
31, 2002, with returns below the assumed long-term rate of return.
67
If the Company were to use a different long-term rate of return assumption, it
would affect annual pension expense but would have no immediate effect on
funding requirements. For every hypothetical change of 100 basis points in the
assumed long-term rate of return on plan assets, the Company's U.S. annual
pension plan expense in 2005 would have increased or decreased by approximately
$6 million before tax. Similarly, the 2005 benefit of investment income in the
VEBA would have increased or decreased by approximately $2 million.
The reduction (or "credit") to pension expense associated with the assumed
investment return fluctuates based on the level of plan assets (over time, the
higher the level of assets, the higher the credit and vice versa) and the
assumed rate of return (the higher the rate, the higher the credit and vice
versa).
For the pension plan, the Company calculates expected investment returns by
applying the expected long-term rate of return to the market-related value of
plan assets. The market-related value of the plan assets is different from the
actual or fair-market value of the assets. The actual or fair-market value is
the value of the assets at a point in time that are available to make payments
to pensioners and to cover any transaction costs. The market-related value
recognizes changes in fair-value on a straight-line basis over five years. This
recognition method spreads the effects of year-over-year volatility in the
financial markets over several years.
The Company has elected to calculate expected investment returns on assets in
the VEBA by applying the expected long-term rate of return to the fair market
value of the assets at year end. This method is likely to cause the credit from
the VEBA's expected return to fluctuate more than the similar credit in the
pension plan.
Salary Inflation (Pension)
Historically, pension expense and liabilities varied with the expected rate of
salary increases - the higher or lower the annual increase, the higher or lower
the liability and expense. Since the Company has frozen benefits under the U.S.
defined benefit pension plan, this assumption will no longer affect future
pension expense and liability for that plan.
Medical Inflation (Retiree Medical, Health Benefit Act)
Changes in medical inflation will affect liability and expense amounts
differently for the Company's plans. There is a direct link between medical
inflation and expected spending for postretirement medical benefits under the
Company-sponsored plan for 2005 and for later years. Future cash payments
associated with the Health Benefit Act will reflect only a portion of the effect
of medical inflation as a result of statutory limitations on premium growth.
For the retiree medical plan, the Company assumed an inflation rate of 10% for
2006, and projects this rate to decline to 5% by 2011 for the Company-sponsored
plans. The average annual increase for medical inflation in the plan for the
last three years has been above 9%. Health Benefit Act liabilities were assumed
to have a 4.5% inflation rate for premium payments. The average annual premium
increase over the last three years has been below 4.5% since premium increases
are related only to increases in prices of medical benefits and do not include
cost changes stemming from the use of more expensive treatments, changes in
technology or the amount of care required. Because of the volatility of medical
inflation it is likely that there will be future adjustments to these estimates,
although the direction and extent of these adjustments cannot be predicted at
the present time.
If the Company had assumed that the health care cost trend rates would be 100
basis points higher in each future year, the APBO for the coal-related retiree
medical benefit plan would have been approximately $76 million higher at
December 31, 2005 and the expense for 2005 would have been $3.8 million higher.
If the Company had assumed that the future health care cost trend rate would be
100 basis points lower, the APBO would have been approximately $64 million lower
at December 31, 2005 and the related 2005 expenses would have been $3.2 million
lower.
68
Numbers of Participants (All Plans)
The valuations of all of these benefit plans are affected by the life expectancy
of the participants. Accordingly, the Company relies on actuarial information to
predict the number and life expectancy of participants. The Company uses the
following mortality table for its major plans.
Plan Mortality table
- -----------------------------------------------------------------------
Retiree medical RP-2000 Combined Healthy Blue Collar
Black Lung 1983 Group Annuity
Health Benefit Act U.S. Life 79-81
U.S. pension RP-2000 Combined Healthy Blue Collar
=======================================================================
The 2005 number of participants by major plan are as follows:
Plan Number of participants
- -----------------------------------------------------------------------
Coal-related 5,413
All other 5,400
- -----------------------------------------------------------------------
Total retiree medical 10,813
Black Lung 805
Health Benefit Act - assigned beneficiaries (a) 2,140
U.S. pension 23,809
=======================================================================
(a) In addition to assigned beneficiaries, there are 15,349 unassigned
beneficiaries, of which approximately 10% are allocated to subsidiaries of
the Company.
Due to the complexity of the contractual relationship with the UMWA for
postretirement medical benefits and the application of regulations associated
with the Health Benefit Act, the number of participants has and will continue to
fluctuate as new participants are made known to the Company and as the Company
and others investigate the application of the regulations. Since the Company is
no longer operating in the coal industry, it anticipates that the number of
participants in the postretirement medical plan and the number of beneficiaries
under the Health Benefit Act will decline over time due to mortality.
Changes in Laws (All Plans)
The Company's valuations of its liabilities are determined under existing laws
and regulations. Changes in laws and regulations which affect the ultimate level
of liabilities and expense are reflected once the changes are final and their
impact can be reasonably estimated. Recent changes in laws that provide
government subsidies for amounts paid for pharmaceuticals for medicare-eligible
medical plan participants have reduced the Company's liability. Changes in laws
directed at changing the funding available for medical benefits related to
unassigned beneficiaries under the Health Benefit Act could significantly reduce
the Company's ultimate liability to the Combined Fund.
69
RECENT ACCOUNTING PRONOUNCEMENTS
================================================================================
Adopted Standards
In March 2005, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation 47, "Accounting for Conditional Asset Retirement Obligations"
("FIN 47"), an interpretation of SFAS 143, "Asset Retirement Obligations." FIN
47 clarifies that the term "conditional asset retirement obligation" as used in
SFAS 143 includes a legal obligation associated with the retirement of a
tangible long-lived asset in which the timing and/or method of settlement is
conditional on a future event that may or may not be within the control of the
entity. An entity is required to recognize a liability for the fair value of a
conditional asset retirement obligation if the fair value of the liability can
be reasonably estimated, even if conditional on a future event. The Company has
conditional asset retirement obligations primarily associated with leased
facilities. The Company adopted FIN 47 on December 31, 2005 and recognized the
following:
(In millions)
- --------------------------------------------------------------------------------
Adjustment at December 31, 2005
Increase in assets (a):
Leasehold improvements $ 3.8
Noncurrent deferred income tax asset 0.9
- -------------------------------------------------------------------------------
4.7
Increase in liabilities - asset retirement obligations (b) (10.1)
- -------------------------------------------------------------------------------
Cumulative effect of change in accounting principle, net of tax (c) $ (5.4)
===============================================================================
(a) Includes $1.1 million of assets held for sale.
(b) Includes $2.1 million of liabilities held for sale.
(c) Includes $1.0 million of cumulative effect of change in accounting
principle, net of tax, related to BAX Global.
In July 2005 the FASB issued FASB Staff Position ("FSP") APB 18-1, "Accounting
by an Investor for Its Proportionate Share of Accumulated Other Comprehensive
Income of an Investee Accounted for under the Equity Method in Accordance with
APB Opinion 18 upon a Loss of Significant Influence." FSP APB 18-1 requires an
investor's proportionate share of an investee's equity adjustments for other
comprehensive income to be offset against the carrying value of the investment
at the time significant influence is lost. FSP APB 18-1 requires comparative
financial statements be retrospectively adjusted to reflect the provisions of
the FSP APB 18-1. The Company adopted FSP APB 18-1 on October 1, 2005. The
carrying value (before the effect of FSP APB 18-1) of Brink's cost method
investment that was previously accounted for under the equity method was $8.9
million at December 31, 2005 and 2004. Cumulative currency losses of $14.5
million at December 31, 2005 and 2004 were reclassified from accumulated other
comprehensive loss and increased the carrying value of the Company's related
investment to $23.4 million. This reclassification had no effect on net income.
Effective January 1, 2004, the Company adopted FASB Interpretation 46 (revised
December 2003), "Consolidation of Variable Interest Entities," which addresses
how a business enterprise should evaluate whether it has a controlling financial
interest in an entity through a means other than voting rights. The
implementation of this new standard did not have a material effect on the
Company's results of operations or financial position.
Effective December 31, 2003, the Company adopted SFAS 132R, "Employers'
Disclosure about Pensions and Other Postretirement Benefits." SFAS 132R does not
change the way liabilities are valued and expenses are calculated for those
plans. The standard requires, among other things, additional disclosures about
the assets held in employer sponsored plans, disclosures relating to plan asset
investment policy and practices and disclosure of expected contributions to be
made to the plans and expected benefit payments to be made by the plans.
70
In December 2004, the FASB issued FSP FAS 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004." The American Jobs Creation Act introduced a
limited-time 85% dividends-received deduction on the repatriation of foreign
earnings to U.S. taxpayers, provided certain criteria are met. FSP FAS 109-2
provides accounting and disclosure guidance for the repatriation provision. FSP
FAS 109-2 was effective immediately and the required disclosures have been
included in note 17 to the Company's consolidated financial statements.
Standards not yet adopted
In December 2004, the FASB issued SFAS 123R, "Share-Based Payment." SFAS 123R is
a revision of SFAS 123 and supersedes APB 25. SFAS 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. Compensation expense
related to stock options that are subject to continued vesting upon retirement
will be recognized over the period of employment up to the retirement-eligible
date. The Company is required to adopt SFAS 123R effective January 1, 2006. SFAS
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 123R for
all share-based payments granted after that date, and based on the requirements
of SFAS 123 for all unvested awards granted prior to the effective date of SFAS
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 123. The Company will apply the
modified prospective method upon adoption of SFAS 123R.
Based on current estimates, the Company believes that it will record in
continuing operations pretax expense of between $8 million and $10 million
during 2006 for stock option grants issued under these plans. The actual 2006
expense will be different from the estimate because the number of options to be
granted in 2006 and other variables assumed in estimating the fair value of the
2006 grants are not currently known. The Company believes that a significant
portion of the estimated 2006 expense will be recorded in the third quarter.
Proposed Standards
In 2005, the FASB announced a project to consider changing the accounting model
for pension plans that are currently accounted for under SFAS 87 and other
postretirement benefit plans currently accounted for under SFAS 106. Phase I of
the proposed rule modification is designed to address only balance sheet
presentation of asset and liabilities, and Phase II of the proposed rule
modification is designed to address how changes in the assets and liabilities
are reflected in earnings. The principal effect of Phase I, as presently
conceived, would be to require companies to record assets and liabilities on the
balance sheet including the effect of actuarial and other gains and losses that
are presently unrecognized under existing accounting guidance. Phase I is
targeted to be in place by the end of 2006. Because the Company has significant
pretax losses not recognized in equity ($331 million at December 31, 2005), the
effect of the proposed new rule, as presently conceived, could materially reduce
the reported equity of the Company upon adoption.
71
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 use of proceeds from the sale of BAX Global,
costs associated with indemnities and tax liabilities from the BAX Global sale,
the expectation of significant ongoing expenses and cash outflows related to
former coal operations, the creation of further valuation allowances and the
reversal of valuation allowances, the realization of deferred tax assets, the
anticipated effective tax rate for 2006, the expected reduction in U.S.
retirement benefit plan expenses in 2006, Brink's ability to generate operating
profit margins above 7% annually, variances in Brink's performance from period
to period, possible insurance recoveries, expected annual cost savings from
Brink's restructuring in Europe, the outcome of the issue relating to the
non-payment of customs duties and value-added tax by a non-U.S. subsidiary of
Brink's, Incorporated, the effect of the U.S. economy on BHS' performance,
changes in the disconnect rate and related expenses at BHS, selective increases
in BHS' monitoring prices, expectations regarding 2006 growth rates in
subscribers, revenues and operating profit at BHS and expected lower operating
profit margins at BHS for the first half of 2006. the impact of BHS' second
monitoring center on expenses and future growth and productivity, the impact of
freezing the U.S. defined benefit pension plan, 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 duration and size of
Legacy liabilities, anticipated changes in the estimated payments and expenses
related to Legacy liabilities, expected coal-related tax benefits, the
expectation that the Company will realize the benefit of net deferred tax
assets, the estimated payout period for annual Combined Fund premiums, changes
in payment requirements for unassigned beneficiaries under the Health Benefit
Act and increases of the Company's obligations under the Health Benefit Act for
this and other reasons, the decline over time of cash payments for black lung
obligations, the satisfaction of the liability for the coal-related
multi-employer plans, expected tax payments arising from the 2005 repatriation,
the utilization of U.S. tax carryforwards, cash out flows arising from the
changes to the 401(k) plan, the timing and amount of stock option expense
related to the new accounting requirements, possible share repurchases, the
possibility that Venezuela may be considered highly inflationary again, the
possibility that Brink's Venezuela may be subject to less favorable exchange
rates on dividend remittances, capital expenditures in 2006, expected
utilization of additional debt, estimated contractual obligations for the next
five years, the adequacy of sources of liquidity to meet the Company's near term
requirements, the use of earnings from foreign subsidiaries and equity
affiliates, the impact of exchange rates, the ability of the Company to provide
letters of credit or other collateral to replace any surety bonds that are not
renewed in the future, the use of the Letter of Credit Facility to replace
surety bonds and other letters of credit, future contributions to and use of the
VEBA, and expected investment returns on funds contributed to the VEBA, if any,
the outcome of pending litigation, estimates for coal-related contingent
liabilities, the possible need to replace a component used by BHS and the impact
that replacing the component would have on BHS' financial condition and results
of operations, the likelihood of losses due to non-performance by parties to
hedging instruments, projected payments and expense for the primary U.S. pension
plan and its expected long-term rate of return, possible pension plan
contributions, the effectiveness of the Company's hedges, estimates of future
reconnection experience at BHS and the impact of any change in estimates on BHS'
impairment charges, estimated discount rates and expected returns on assets
related to legacy liabilities, the Company's salary increase assumption, changes
in the assumed level of inflation for a number of the Company's benefit plans,
and the impact of recent proposals regarding changes to the accounting model for
pension plans, involve forward-looking information which is subject to known and
unknown risks, uncertainties, and contingencies which could cause actual
results, performance or achievements, to differ materially from those that are
anticipated.
72
These risks, uncertainties and contingencies, many of which are beyond the
control of the Company, include, but are not limited to, strategic initiatives
and acquisition opportunities, the Company's tax position and the tax impact of
various possible uses of the proceeds from the BAX Global sale, decisions by the
Company's Board of Directors, the satisfaction or waiver of limitations on the
use of proceeds contained in various of the Company's financing arrangements,
the demand for capital, the timing of the pass-through of costs by third parties
and governmental authorities relating to the disposal of the coal assets,
retirement decisions by mine workers, performance of the investments made by the
multi-employer plans, estimates made by the multi-employer plans, the number of
participants in the multi-employer plans and the cost to administer the plans,
comparisons of hours worked by covered coal employees over the last five years
versus industry averages, black lung claims incidence, the number of dependents
of mine workers for whom benefits are provided, actual medical and legal
expenses related to benefits, increases in the Company's shares of the
unassigned obligations under the Health Benefit Act, the funding and benefit
levels of multi-employer plans and pension plans, changes in inflation rates
(including medical inflation) and interest rates, acquisitions and dispositions
made by the Company in the future, the ability of the operations to identify
losses as relating to Hurricane Katrina and positions taken by insurers, the
financial condition of the insurers, the willingness of BHS' customers to absorb
price increases and the actions of BHS' competitors, BHS' ability to maintain
subscriber growth and return to a lower disconnect rate, costs associated with
BHS' new facility, the ability of BHS to hire and retain high quality employees
at reasonable costs in Knoxville, the return to profitability of operations in
jurisdictions where the Company has recorded valuation adjustments, the ability
of Brink's competitors to provide safe and reliable service at a lesser cost,
Brink's ability to cost effectively match customer demand with appropriate
resources, Brink's loss experience, changes in insurance costs, Brink's ability
to integrate recent acquisitions, the performance of Brink's European operations
and the effect of recent restructuring efforts, the input of governmental
authorities regarding the non-payment of customs duties and value-added tax, the
ability of the home security industry to dissuade law enforcement and
municipalities from refusing to respond to alarms, the willingness of BHS'
customers to pay for private response personnel or other alternatives to police
responses to alarms, the amount of work performed by third parties in connection
with the Company's compliance with Section 404 of the Sarbanes-Oxley Act of
2002, the demand for capital by the Company and the availability of such
capital, the cash, debt and tax position and growth needs of the Company, the
funding of and accounting for the VEBA, the determination of taxes owed from the
BAX Global sale and offsets to these taxes in addition to the Company's tax
credit carryforwards, the stability of the Venezuelan economy and changes in
Venezuelan policy regarding exchange rates for dividend remittances, discovery
of new facts relating to civil suits, the addition of claims or changes in
relief sought by adverse parties, changes in the scope or method of remediation
or monitoring, the decision to require the replacement of the component used by
BHS, the timing of any such replacement and the costs associated therewith,
payments received by BHS from the third party that sold the component to BHS,
the financial condition of that third party, the ability of BHS to complete new
installations and respond to other service calls during the time allotted to
replace the component, the nature of the Company's hedging relationships, the
financial performance of the Company, overall economic and business conditions,
foreign currency exchange rates, changes in assumptions underlying the Company's
critical accounting policies, as more fully described in the section
"Application of Critical Accounting Policies" but including, the likelihood that
net deferred tax assets will be realized, discount rates, expectations of future
performance, the timing of deductibility of expenses, estimated reconnection
experience at BHS, anticipated return on assets, projections regarding the
number of participants in and beneficiaries of the Company's employee and
retiree benefit plans, inflation, and the promulgation and adoption of new
accounting standards and interpretations, including FIN 47, FSP APB 18-1, FASB
Interpretation 46, and SFAS 123R, mandatory or voluntary pension plan
contributions, the impact of continuing initiatives to control costs and
increase profitability, pricing and other competitive industry factors, fuel
prices, new government regulations, legislative initiatives, judicial decisions,
variations in costs or expenses and the ability of counterparties to perform.
73
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
================================================================================
Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934. The Company's internal control over
financial reporting is designed to provide reasonable assurance to the Company's
management and board of directors regarding the preparation and fair
presentation of published financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Management assessed the effectiveness of the Company's internal control over
financial reporting as of December 31, 2005. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in "Internal Control -
Integrated Framework". Based on our assessment, we believe that, as of December
31, 2005, the Company's internal control over financial reporting is effective
based on those criteria.
Management's assessment of the effectiveness of internal control over financial
reporting as of December 31, 2005, has been audited by KPMG LLP, the independent
registered public accounting firm which also audited the Company's consolidated
financial statements. KPMG's attestation report on management's assessment of
the Company's internal control over financial reporting appears on page 75
hereof.
74
REPORT of INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
================================================================================
The Board of Directors and Shareholders
The Brink's Company
We have audited management's assessment, included in the accompanying
Management's Report on Internal Controls over Financial Reporting, that The
Brink's Company maintained effective internal control over financial reporting
as of December 31, 2005, based on criteria established in "Internal Control -
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO"). The Brink's Company's management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that The Brink's Company maintained
effective internal control over financial reporting as of December 31, 2005, is
fairly stated, in all material respects, based on criteria established in
"Internal Control - Integrated Framework" issued by COSO. Also, in our opinion,
The Brink's Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2005, based on criteria
established in "Internal Control - Integrated Framework" issued by COSO.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
The Brink's Company and subsidiaries as of December 31, 2005 and 2004, and the
related consolidated statements of operations, comprehensive income,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2005, and our report dated March 7, 2006, expressed an
unqualified opinion on those consolidated financial statements.
KPMG LLP
Richmond, Virginia
March 7, 2006
75
REPORT of INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
================================================================================
The Board of Directors and Shareholders
The Brink's Company
We have audited the accompanying consolidated balance sheets of The Brink's
Company and subsidiaries (the "Company") as of December 31, 2005 and 2004, and
the related consolidated statements of operations, comprehensive income,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2005. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Brink's Company
and subsidiaries as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2005, in conformity with U.S. generally accepted accounting
principles.
As discussed in note 1 to the consolidated financial statements, the Company
changed its method of accounting for conditional asset retirement obligations in
2005.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2005, based on
criteria established in "Internal Control-Integrated Framework" issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated March 7, 2006, expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
KPMG LLP
Richmond, Virginia
March 7, 2006
76
THE BRINK'S COMPANY
and subsidiaries
Consolidated Balance Sheets
================================================================================
December 31,
(In millions, except per share amounts) 2005 2004
- ----------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 96.2 169.0
Accounts receivable, (net of estimated uncollectible
amounts: 2005 - $11.3; 2004 - $26.7) 419.1 749.5
Prepaid expenses and other current assets 36.0 58.1
Deferred income taxes 174.0 116.0
Assets held for sale 976.5 -
- ----------------------------------------------------------------------------------------------------
Total current assets 1,701.8 1,092.6
Property and equipment, net 867.4 914.0
Goodwill 103.8 259.6
Deferred income taxes 196.9 234.7
Other 167.0 191.8
- ----------------------------------------------------------------------------------------------------
Total assets $ 3,036.9 2,692.7
====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 25.5 27.5
Current maturities of long-term debt 35.5 35.1
Accounts payable 118.8 357.0
Accrued liabilities 454.6 612.5
Liabilities held for sale 491.4 -
- ----------------------------------------------------------------------------------------------------
Total current liabilities 1,125.8 1,032.1
Long-term debt 251.9 181.6
Accrued pension costs 170.0 117.0
Postretirement benefits other than pensions 304.8 331.2
Deferred revenue 150.7 139.5
Deferred income taxes 18.8 26.0
Other 177.4 176.8
- ----------------------------------------------------------------------------------------------------
Total liabilities 2,199.4 2,004.2
Commitments and contingent liabilities (notes 4, 5, 12, 14, 17 and 22)
Shareholders' equity:
Common stock, par value $1 per share:
Shares authorized: 100.0
Shares issued and outstanding: 2005 - 58.7; 2004 - 56.7 58.7 56.7
Capital in excess of par value 530.6 457.4
Retained earnings 488.0 352.9
Employee benefits trust, at market value:
Shares not allocated to employees: 2005 - 1.2; 2004 - 1.1 (55.2) (44.9)
Accumulated other comprehensive income (loss):
Minimum pension liabilities (151.6) (129.9)
Foreign currency translation (33.7) (3.7)
Unrealized gains on marketable securities 0.7 -
- ----------------------------------------------------------------------------------------------------
Accumulated other comprehensive loss (184.6) (133.6)
- ----------------------------------------------------------------------------------------------------
Total shareholders' equity 837.5 688.5
- ----------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 3,036.9 2,692.7
====================================================================================================
See accompanying notes to consolidated financial statements.
77
THE BRINK'S COMPANY
and subsidiaries
Consolidated Statements of Operations
================================================================================
Years Ended December 31,
(In millions, except per share amounts) 2005 2004 2003
- -------------------------------------------------------------------------------------------------------------
Revenues $ 2,549.0 2,277.5 1,999.4
Expenses:
Operating expenses 2,041.8 1,790.7 1,591.7
Selling, general and administrative expenses 406.8 360.5 332.4
- -------------------------------------------------------------------------------------------------------------
Total expenses 2,448.6 2,151.2 1,924.1
Other operating income, net 15.0 11.1 22.0
- -------------------------------------------------------------------------------------------------------------
Operating profit 115.4 137.4 97.3
Interest expense (18.6) (20.8) (23.6)
Interest and other income, net 9.3 7.9 9.0
Minority interest (14.3) (12.4) (8.4)
- -------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 91.8 112.1 74.3
Provision for income taxes 49.5 40.6 36.4
- -------------------------------------------------------------------------------------------------------------
Income from continuing operations 42.3 71.5 37.9
Income (loss) from discontinued operations, net of income taxes 105.5 50.0 (8.5)
- -------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in accounting principle 147.8 121.5 29.4
Cumulative effect of change in accounting principle, net of income taxes (5.4) - -
- -------------------------------------------------------------------------------------------------------------
Net income $ 142.4 121.5 29.4
=============================================================================================================
Earnings per common share
Basic:
Continuing operations $ 0.75 1.31 0.71
Discontinued operations 1.88 0.92 (0.16)
Cumulative effect of change in accounting principle (0.10) - -
- -------------------------------------------------------------------------------------------------------------
Net income $ 2.53 2.23 0.55
=============================================================================================================
Diluted:
Continuing operations $ 0.74 1.29 0.71
Discontinued operations 1.85 0.91 (0.16)
Cumulative effect of change in accounting principle (0.09) - -
- -------------------------------------------------------------------------------------------------------------
Net income $ 2.50 2.20 0.55
=============================================================================================================
Weighted-average common shares outstanding
Basic 56.3 54.6 53.1
Diluted 57.0 55.3 53.2
=============================================================================================================
See accompanying notes to consolidated financial statements.
As discussed in note 1, the Company adopted FIN 47 during 2005 on a cumulative
basis as of December 31, 2005 resulting in a change in the Company's method of
accounting for conditional asset retirement obligations. Pro forma amounts,
assuming the new method of accounting for conditional retirement obligations was
applied retroactively, are presented in note 1.
78
THE BRINK'S COMPANY
and subsidiaries
Consolidated Statements of Comprehensive Income
================================================================================
Years Ended December 31,
(In millions) 2005 2004 2003
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 142.4 121.5 29.4
Other comprehensive income (loss):
Minimum pension liability adjustments:
Adjustments to minimum pension liability (33.3) (9.2) 27.1
Tax benefit (expense) related to minimum pension liability adjustment 11.6 1.4 (12.0)
- ----------------------------------------------------------------------------------------------------------------------
Minimum pension liability adjustments, net of tax (21.7) (7.8) 15.1
- ----------------------------------------------------------------------------------------------------------------------
Foreign currency:
Translation adjustments arising during the year (32.3) 25.7 47.0
Reclassification of translation losses upon changing to cost
method accounting for investment - 14.5 -
Tax benefit related to translation adjustments 2.3 0.9 -
Reclassification adjustment for losses included in net income - 0.8 0.9
- ----------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustments, net of tax (30.0) 41.9 47.9
- ----------------------------------------------------------------------------------------------------------------------
Cash flow hedges:
Unrealized net gains on cash flow hedges arising during the year - 2.6 2.4
Tax expense related to unrealized net gains on cash flow hedges - (0.9) (0.7)
Reclassification adjustment for net losses (gains) realized in net income - (2.8) 5.2
Tax expense (benefit) related to net losses (gains) realized in net income - 1.0 (1.6)
- ----------------------------------------------------------------------------------------------------------------------
Unrealized net gains (losses) on cash flow hedges, net of tax - (0.1) 5.3
- ----------------------------------------------------------------------------------------------------------------------
Marketable securities:
Unrealized net gains on marketable securities arising during the year 1.2 0.1 4.4
Tax expense related to unrealized net gains on marketable securities (0.4) - (1.5)
Reclassification adjustment for net losses (gains) realized in net income (0.2) (4.3) 0.2
Tax expense (benefit) related to net losses (gains) realized in net income 0.1 1.5 (0.1)
- ----------------------------------------------------------------------------------------------------------------------
Unrealized net gains (losses) on marketable securities, net of tax 0.7 (2.7) 3.0
- ----------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (51.0) 31.3 71.3
- ----------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 91.4 152.8 100.7
======================================================================================================================
See accompanying notes to consolidated financial statements
79
THE BRINK'S COMPANY
and subsidiaries
Consolidated Statements of Shareholders' Equity
================================================================================
Years Ended December 31, 2005, 2004 and 2003
Capital Accumulated
in Excess Employee Other
Common of Par Retained Benefits Comprehensive
(In millions) Stock Value Earnings Trust Loss Total
- --------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2002 54.3 383.0 213.1 (33.0) (236.2) 381.2
Net income - - 29.4 - - 29.4
Other comprehensive income - - - - 71.3 71.3
Common stock dividends ($0.10 per share) - - (5.3) - - (5.3)
Employee benefits trust:
Remeasurement - (0.1) - 0.1 - -
Distributions for benefit programs - (0.1) - 18.9 - 18.8
Tax benefit of stock options exercised - 0.2 - - - 0.2
- --------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2003 54.3 383.0 237.2 (14.0) (164.9) 495.6
Net income - - 121.5 - - 121.5
Other comprehensive income - - - - 31.3 31.3
Common stock dividends ($0.10 per share) - - (5.4) - - (5.4)
Retire shares of common stock (0.1) (0.2) (0.4) - - (0.7)
Employee benefits trust:
Shares issued to trust 2.5 58.9 - (61.4) - -
Remeasurement - 28.7 - (28.7) - -
Distributions for benefit programs - (17.7) - 59.2 - 41.5
Tax benefit of stock options exercised - 4.7 - - - 4.7
- --------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2004 56.7 457.4 352.9 (44.9) (133.6) 688.5
Net income - - 142.4 - - 142.4
Other comprehensive loss - - - - (51.0) (51.0)
Common stock dividends ($0.10 per share) - - (5.5) - - (5.5)
Retire shares of common stock (0.1) (2.1) (1.8) - - (4.0)
Employee benefits trust:
Shares issued to trust 2.1 65.0 - (67.1) - -
Remeasurement - 22.5 - (22.5) - -
Distributions for benefit programs - (27.3) - 79.3 - 52.0
Tax benefit of stock options exercised - 15.1 - - - 15.1
- --------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2005 $ 58.7 530.6 488.0 (55.2) (184.6) 837.5
==============================================================================================================
See accompanying notes to consolidated financial statements
80
THE BRINK'S COMPANY
and subsidiaries
Consolidated Statements of Cash Flows
================================================================================
Years Ended December 31,
(In millions) 2005 2004 2003
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 142.4 121.5 29.4
Adjustments to reconcile net income to net cash provided by operating activities:
(Income) loss from discontinued operations (105.5) (50.0) 8.5
Cumulative effect of change in accounting principle 5.4 - -
Depreciation and amortization 149.3 133.2 121.0
Impairment charges from subscriber disconnects 45.2 38.4 34.3
Amortization of deferred revenue (29.5) (26.1) (25.0)
Impairment of other long-lived assets 1.3 0.3 -
Deferred income taxes 11.8 8.6 2.9
Provision for uncollectible accounts receivable 3.6 4.2 3.5
Other operating, net 15.8 16.9 3.4
Postretirement benefit funding (more) less than expense:
Pension 38.0 14.3 (1.9)
Other than pension (11.5) (61.8) 8.3
Change in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (42.2) (16.0) 17.7
Accounts payable and accrued liabilities 16.8 26.0 2.2
Deferred subscriber acquisition cost (22.9) (19.5) (18.4)
Deferred revenue from new subscribers 40.7 34.6 28.2
Other, net 1.1 7.3 10.1
Discontinued operations, net 54.2 53.0 79.5
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 314.0 284.9 303.7
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (271.7) (194.9) (179.1)
Cash proceeds from:
Disposal of former natural resource interests 5.0 28.6 119.4
Disposal of other property and equipment 3.8 8.8 17.4
Monetization of notes receivable and royalty agreement related to sale of
former coal operations - - 26.0
Acquisitions (53.2) (14.8) (7.2)
Contributions to Voluntary Employees' Beneficiary Association trust - - (82.0)
Other, net (6.3) (1.1) (0.8)
Discontinued operations, net (72.8) (49.1) (55.9)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (395.2) (222.5) (162.2)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Long-term debt:
Additions 211.9 89.5 80.1
Repayments (139.3) (118.4) (180.0)
Short-term borrowings (repayments), net 14.0 (7.9) (14.3)
Proceeds from exercise of stock options 28.3 24.2 1.7
Dividends (5.5) (5.4) (5.3)
Dividends to minority interest holders in subsidiaries (6.7) (4.8) (2.9)
Other, net (1.4) (1.8) (0.6)
Discontinued operations, net (7.7) (2.3) (4.6)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 93.6 (26.9) (125.9)
- ----------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (6.6) 4.8 10.8
- ----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 5.8 40.3 26.4
Cash and cash equivalents included in assets held for sale (78.6) - -
Cash and cash equivalents at beginning of year 169.0 128.7 102.3
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 96.2 169.0 128.7
- ----------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
81
THE BRINK'S COMPANY
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Note 1 - Summary of Significant Accounting Policies
================================================================================
Basis of Presentation
The Brink's Company (along with its subsidiaries, the "Company") conducts
business in the security industry, through two wholly owned subsidiaries:
o Brink's, Incorporated ("Brink's")
o Brink's Home Security, Inc. ("BHS")
In November 2005, the Company's Board of Directors approved the sale of BAX
Global Inc. ("BAX Global"), a wholly owned freight and transportation subsidiary
of the Company. Accordingly, BAX Global's results of operations have been
reported as discontinued operations for all periods presented. BAX Global's
assets and liabilities in 2005 have been classified as held for sale. In January
2006, the Company sold BAX Global for $1.1 billion in cash, subject to final
sales price adjustments. In prior years, the Company sold its natural resource
businesses and interests, and the results of these operations have also been
reported as discontinued operations. The Company has significant liabilities
associated with its former coal operations and expects to have significant
ongoing expenses and cash outflows related to these obligations. See note 5.
Principles of Consolidation
The consolidated financial statements include the accounts of The Brink's
Company and the subsidiaries it controls. Control is determined based on
ownership rights or, when applicable, based on whether the Company is considered
the primary beneficiary of a variable interest entity. The Company's interest in
20%- to 50%-owned companies that are not controlled are accounted for using the
equity method ("equity affiliates"), unless the Company does not sufficiently
influence the management of the investee. Other investments are accounted for as
cost-method investments or as available-for-sale marketable securities. All
material intercompany accounts and transactions have been eliminated in
consolidation.
Revenue Recognition
Brink's. Revenue is recognized when services are performed. Services related to
armored car transportation, ATM servicing, cash logistics and coin sorting and
wrapping are performed in accordance with the terms of customer contracts, which
have contract prices that are fixed and determinable. Brink's assesses the
customer's ability to meet the contractual terms, including payment terms,
before entering into contracts. Customer contracts are automatically extended
after the initial contract period until either party terminates the agreement.
BHS. Monitoring revenues are recognized monthly as services are provided
pursuant to the terms of subscriber contracts, which have contract prices that
are fixed and determinable. BHS assesses the subscriber's ability to meet the
contract terms, including payment terms, before entering into the contract.
Nonrefundable installation revenues and a portion of the related direct costs of
acquiring new subscribers (primarily sales commissions) are deferred and
recognized over an estimated 15 year subscriber relationship period. When an
installation is identified for disconnection, any unamortized deferred revenues
and deferred costs related to that installation are recognized at that time.
82
BAX Global. Revenues related to transportation services are recognized, together
with related variable transportation costs, on the date shipments depart from
facilities en route to destination locations. BAX Global and its customer agree
to the terms of the shipment, including pricing, prior to shipment. Pricing
terms are fixed and determinable, and BAX Global only agrees to shipments when
it believes that the collectibility of related billings is reasonably assured.
Export freight service revenues are shared among the origin and destination
countries.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits and investments
with original maturities of three months or less.
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts is the Company's best estimate of
the amount of probable credit losses on the Company's existing accounts
receivable. The Company determines the allowance based on historical write-off
experience using industry and customer specific data. The Company reviews its
allowance for doubtful accounts quarterly. Account balances are charged off
against the allowance after all means of collection have been exhausted and the
potential for recovery is considered remote. Through December 15 2005, the
Company had an accounts receivable securitization program (described in note
13). Transfers of receivables under this program were accounted for as a sale.
Property and Equipment
Purchased property and equipment are recorded at cost. Depreciation is
calculated principally on the straight-line method based on the estimated useful
lives of individual assets or classes of assets.
Leased property and equipment meeting capital lease criteria are capitalized at
the present value of the related lease payments. Amortization is calculated on
the straight-line method based on the lease term.
Leasehold improvements are recorded at cost. Amortization is calculated
principally on the straight-line method over the lesser of the estimated useful
life of the leasehold improvement or lease term. Renewal periods are included in
the lease term when the renewal is determined to be reasonably assured.
Estimated Useful Lives (a) Years
- --------------------------------------------------------------------------------
Buildings 10 to 25
Building leasehold improvements 3 to 10
Security systems 15
Vehicles 3 to 12
Capitalized software 3 to 6
Other machinery and equipment 3 to 20
Machinery and equipment leasehold improvements 3 to 10
================================================================================
(a) Excludes BAX Global.
83
Expenditures for routine maintenance and repairs on property and equipment,
including aircraft, are charged to expense. Major renewals, betterments and
modifications are capitalized and amortized over the lesser of the remaining
life of the asset or, if applicable, lease term. Scheduled air time and periodic
engine overhaul cost are capitalized when incurred and amortized over flying
time to the next scheduled maintenance date.
BHS retains ownership of most security systems installed at subscriber
locations. Costs for those systems are capitalized and depreciated over the
estimated lives of the assets. Costs capitalized as part of security systems
include equipment and materials used in the installation process, direct labor
required to install the equipment at subscriber sites, and other costs
associated with the installation process. These other costs include the cost of
vehicles used for installation purposes and the portion of telecommunication,
facilities and administrative costs incurred primarily at BHS' branches that are
associated with the installation process. In 2005, direct labor and other costs
represented approximately 68% of the amounts capitalized, while equipment and
materials represented approximately 32% of amounts capitalized. In addition to
regular straight-line depreciation expense each period, the Company charges to
expense the carrying value of security systems estimated to be permanently
disconnected based on each period's actual disconnects and historical
reconnection experience.
Part of the costs related to the development or purchase of internal-use
software is capitalized and amortized over the estimated useful life of the
software. Costs that are capitalized include external direct costs of materials
and services to develop or obtain the software, and internal costs, including
compensation and employee benefits for employees directly associated with a
software development project.
Goodwill and Other Intangible Assets
Goodwill is recognized for the excess of the purchase price over the fair value
of tangible and identifiable intangible net assets of businesses acquired.
Intangibles assets arising from business acquisitions include covenants not to
compete, customer lists and other identifiable intangibles. Intangible assets
that are subject to amortization have average remaining useful lives ranging
from 1 to 8 years and are amortized primarily on a straight-line basis.
Impairment of Long-Lived Assets
Goodwill is tested for impairment at least annually by comparing the carrying
value of the reporting unit to its estimated fair value. The Company bases its
estimates of fair value on projected future cash flows. The Company completed
goodwill impairment tests during each of the last three years with no impairment
charges required.
Long-lived assets besides goodwill are reviewed for impairment when events or
changes in circumstances indicate the carrying value of an asset may not be
recoverable.
For long-lived assets other than goodwill that are to be held and used in
operations, an impairment is indicated when the estimated total undiscounted
cash flow associated with the asset or group of assets is less than carrying
value. If impairment exists, an adjustment is made to write the asset down to
its fair value, and a loss is recorded as the difference between the carrying
value and fair value.
Long-lived assets held for sale are carried at the lower of carrying value or
fair value less cost to sell. Fair values are determined based on quoted market
values, discounted cash flows or internal and external appraisals, as
applicable.
84
Investments Held by VEBA Trust
Prior to January 1, 2004, the Company accounted for investments held by its
Voluntary Employees' Beneficiary Association trust ("VEBA") as
available-for-sale marketable securities and unrealized gains and losses were
recognized in other comprehensive income (loss) and realized gains and losses
were recognized in earnings. Realized gains and losses were computed based on
the average cost method.
Effective January 1, 2004, the Company restricted the use of the assets held by
its VEBA to pay only obligations of its coal-related retiree medical plan and,
accordingly, began accounting for the VEBA as a plan asset. Since January 1,
2004, the VEBA is reflected as a direct offset to the liability within
postretirement benefits other than pensions on the Company's balance sheet. With
the restriction in the use of the VEBA, an unrealized net gain of $4.4 million
was recognized in 2004 within interest and other income, net.
Share-Based Compensation
The Company accounts for share-based compensation plans using the intrinsic
value method prescribed in Accounting Principles Board Opinion ("APB") 25,
"Accounting for Stock Issued to Employees" and related interpretations. The
Company grants stock options with an exercise price equal to the market price of
the stock on the date of grant and, as a result, the Company has not recognized
any compensation expense related to its stock option plans.
Had compensation costs for the Company's stock option plans been determined
based on the fair value of awards at the grant dates consistent with the
optional recognition provision of SFAS 123, "Accounting for Stock Based
Compensation," net income and net income per share would have been the pro forma
amounts indicated below:
Years Ended December 31,
(In millions, except per share amounts) 2005 2004 2003
- --------------------------------------------------------------------------------------------
Net income
As reported $ 142.4 121.5 29.4
Less share-based compensation expense determined under
the fair value method, net of related tax effects (4.1) (3.6) (4.7)
- --------------------------------------------------------------------------------------------
Pro forma $ 138.3 117.9 24.7
============================================================================================
Net income per share
Basic, as reported $ 2.53 2.23 0.55
Basic, pro forma 2.46 2.16 0.47
Diluted, as reported $ 2.50 2.20 0.55
Diluted, pro forma 2.43 2.13 0.46
============================================================================================
In these tables, the fair value of each stock option grant is estimated at the
time of grant using the Black-Scholes option-pricing model. If a different
option-pricing model had been used, results may have been different. The fair
value of options that vest entirely at the end of a fixed period, generally
three years, is estimated using a single option approach and amortized on a
straight line basis over the total vesting period. The fair value of options
that vest ratably over three years is estimated using a multiple-option approach
and amortized on a straight-line basis over each separate vesting period.
Forfeitures are recognized when they occur.
85
The assumptions used and the resulting weighted-average grant-date estimates of
fair value for options granted are as follows:
Years Ended December 31,
2005 2004 2003
- --------------------------------------------------------------------------------
Options granted
In millions 0.7 0.9 0.6
Weighted-average exercise price per share $ 35.95 31.88 15.24
Weighted-average assumptions
Expected dividend yield 0.4% 0.5% 0.5%
Expected volatility 34% 32% 37%
Risk-free interest rate 3.8% 3.3% 2.3%
Expected term (in years) 4.1 3.8 4.0
Fair value estimates
In millions $ 7.8 8.3 3.0
Weighted-average per share $ 11.21 8.84 4.69
================================================================================
Postretirement Benefits Other Than Pensions
The Company has postretirement benefit obligations other than pensions provided
under Company-sponsored plans. In addition, the Company is obligated to pay
premiums to the United Mine Workers Association Combined Benefit Fund (the
"Combined Fund") pursuant to rules established by the Coal Industry Retiree
Health Benefit Act of 1992 (the "Health Benefit Act") as further discussed in
note 4.
Postretirement benefits for Company-sponsored plans are accounted for in
accordance with SFAS 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," which requires employers to accrue the cost of retirement
benefits during the period of employees' service with the Company. Actuarial
gains and losses are deferred. The portion of the deferred gains or losses that
exceeds 10% of the greater of the accumulated postretirement benefit obligation
or plan assets at the beginning of the year is amortized into earnings over the
average remaining life expectancy for inactive participants.
Postretirement benefit obligations to the Combined Fund are recorded as a
liability when they are probable and estimable in accordance with Emerging
Issues Task Force ("EITF") 92-13, "Accounting for Estimated Payments in
Connection with the Coal Industry Retiree Health Benefit Act of 1992."
Income Taxes
Deferred tax assets and liabilities are recorded to recognize the expected
future tax benefits or costs of events that have been reported in different
years for financial statement purposes than tax purposes. Deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which these items are expected to reverse. Management
periodically reviews recorded deferred tax assets to determine if it is
more-likely-than-not they will be realized. If management determines it is not
more-likely-than-not a deferred tax asset will be realized, an offsetting
valuation allowance is recorded, reducing earnings and the deferred tax asset in
that period.
86
Foreign Currency Translation
The Company's consolidated financial statements are reported in U.S. dollars. A
substantial amount of the Company's business is transacted in other currencies
due to the large number of countries in which the Company operates. In addition,
the Company's foreign subsidiaries maintain their records primarily in the
currency of the country within which they operate. Accordingly, income, expense
and balance sheet values must be translated into U.S. dollars. The value of
assets and liabilities of foreign subsidiaries are translated into U.S. dollars
using rates of exchange at the balance sheet date and resulting cumulative
translation adjustments are recorded in other comprehensive income (loss).
Revenues and expenses are translated at rates of exchange in effect during the
year. Transaction gains and losses and translation adjustments relating to
subsidiaries in countries with highly inflationary economies are included in net
income. No subsidiaries operated in highly inflationary economies for the three
years ended December 31, 2005.
Derivative Instruments and Hedging Activities
All derivative instruments are recorded in the consolidated balance sheets at
fair value. If the derivative has been designated as a cash flow hedge, changes
in the fair value are recognized in other comprehensive income (loss) until the
hedged transaction is recognized in earnings.
Concentration of Credit Risks
Financial instruments which potentially subject the Company to concentrations of
credit risks are principally cash and cash equivalents and accounts receivables.
Cash and cash equivalents are held by major financial institutions. The Company
routinely assesses the financial strength of significant customers and this
assessment, combined with the large number and geographic diversity of its
customers, limits the Company's concentration of risk with respect to accounts
receivable.
Use of Estimates
In accordance with U.S. generally accepted accounting principles ("GAAP"),
management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements. Actual results could differ materially from those estimates. The
most significant estimates used by management are related to goodwill and other
long-lived assets, pension and other postretirement benefit obligations, and
deferred tax assets.
Reclassifications
Certain prior-year amounts have been reclassified to conform to the current
year's financial statement presentation and to reflect the retrospective
adoption of certain accounting standards, discussed below.
87
New Accounting Standards
Adopted Standards
In March 2005, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation 47, "Accounting for Conditional Asset Retirement Obligations"
("FIN 47"), an interpretation of SFAS 143, "Asset Retirement Obligations." FIN
47 clarifies that the term "conditional asset retirement obligation" as used in
SFAS 143 includes a legal obligation associated with the retirement of a
tangible long-lived asset in which the timing and/or method of settlement is
conditional on a future event that may or may not be within the control of the
entity. An entity is required to recognize a liability for the fair value of a
conditional asset retirement obligation if the fair value of the liability can
be reasonably estimated, even if conditional on a future event. The Company has
conditional asset retirement obligations primarily associated with leased
facilities. The Company adopted FIN 47 on December 31, 2005 and recognized the
following:
(In millions)
- -------------------------------------------------------------------------------
Adjustment at December 31, 2005
Increase in assets (a):
Leasehold improvements $ 3.8
Noncurrent deferred income tax asset 0.9
- -------------------------------------------------------------------------------
4.7
Increase in liabilities - asset retirement obligations (b) (10.1)
- -------------------------------------------------------------------------------
Cumulative effect of change in accounting principle, net of tax (c) $ (5.4)
===============================================================================
(a) Includes $1.1 million of assets held for sale.
(b) Includes $2.1 million of liabilities held for sale.
(c) Includes $1.0 million of cumulative effect of change in accounting
principle, net of tax, related to BAX Global.
If the Company had adopted FIN 47 on January 1, 2003 income from continuing
operations and net income, and the respective per share amounts, would have been
the following on a pro forma basis in the three years ended 2005.
Years Ended December 31,
(In millions) 2005 2004 2003
- -----------------------------------------------------------------------------------------------------------------
Net income, as reported $ 142.4 121.5 29.4
Add back cumulative effect 5.4 - -
Less total depreciation and interest accretion expense, net of tax (1.6) (1.0) (1.0)
- -----------------------------------------------------------------------------------------------------------------
Pro forma net income $ 146.2 120.5 28.4
=================================================================================================================
Net income per common share:
Basic:
As reported $ 2.53 2.23 0.55
Pro forma 2.60 2.21 0.54
Diluted:
As reported $ 2.50 2.20 0.55
Pro forma 2.57 2.18 0.53
- -----------------------------------------------------------------------------------------------------------------
The pro forma amounts were measured using the same information, assumptions and
interest rates used to measure the liability for conditional asset retirement
obligations recognized upon adoption of FIN 47.
88
In July 2005 the FASB issued FASB Staff Position ("FSP") APB 18-1, "Accounting
by an Investor for Its Proportionate Share of Accumulated Other Comprehensive
Income of an Investee Accounted for under the Equity Method in Accordance with
APB Opinion 18 upon a Loss of Significant Influence." FSP APB 18-1 requires an
investor's proportionate share of an investee's equity adjustments for other
comprehensive income to be offset against the carrying value of the investment
at the time significant influence is lost. FSP APB 18-1 requires comparative
financial statements be retrospectively adjusted to reflect the provisions of
the FSP APB 18-1. The Company adopted FSP APB 18-1 on October 1, 2005. The
carrying value (before the effect of FSP APB 18-1) of Brink's cost method
investment that was previously accounted for under the equity method was $8.9
million at December 31, 2005 and 2004. Cumulative currency losses of $14.5
million at December 31, 2005 and 2004 were reclassified from accumulated other
comprehensive loss and increased the carrying value of the Company's related
investment to $23.4 million. This reclassification had no effect on net income.
Effective January 1, 2004, the Company adopted FASB Interpretation 46 (revised
December 2003), "Consolidation of Variable Interest Entities," which addresses
how a business enterprise should evaluate whether it has a controlling financial
interest in an entity through a means other than voting rights. The
implementation of this new standard did not have a material effect on the
Company's results of operations or financial position.
Effective December 31, 2003, the Company adopted SFAS 132R, "Employers'
Disclosure about Pensions and Other Postretirement Benefits." SFAS 132R does not
change the way liabilities are valued and expenses are calculated for those
plans. The standard requires, among other things, additional disclosures about
the assets held in employer sponsored plans, disclosures relating to plan asset
investment policy and practices and disclosure of expected contributions to be
made to the plans and expected benefit payments to be made by the plans.
In December 2004, the FASB issued FSP FAS 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004." The American Jobs Creation Act introduced a
limited-time 85% dividends-received deduction on the repatriation of foreign
earnings to U.S. taxpayers, provided certain criteria are met. FSP FAS 109-2
provides accounting and disclosure guidance for the repatriation provision. FSP
FAS 109-2 was effective immediately and the required disclosures have been
included in note 17 to the Company's consolidated financial statements.
Standards not yet adopted
In December 2004, the FASB issued SFAS 123R, "Share-Based Payment." SFAS 123R is
a revision of SFAS 123 and supersedes APB 25. SFAS 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. Compensation expense
related to stock options that are subject to continued vesting upon retirement
will be recognized over the period of employment up to the retirement-eligible
date. The Company is required to adopt SFAS 123R effective January 1, 2006. SFAS
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 123R for
all share-based payments granted after that date, and based on the requirements
of SFAS 123 for all unvested awards granted prior to the effective date of SFAS
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 123. The Company will apply the
modified prospective method upon adoption of SFAS 123R.
Based on current estimates, the Company believes that it will record in
continuing operations pretax expense of between $8 million and $10 million
during 2006 for stock option grants issued under these plans. The actual 2006
expense will be different from the estimate because the number of options to be
granted in 2006 and other variables assumed in estimating the fair value of the
2006 grants are not currently known. The Company believes that a significant
portion of the estimated 2006 expense will be recorded in the third quarter.
89
Note 2 - Segment Information
================================================================================
The Company conducts business in two operating segments: Brink's and BHS. These
reportable segments are identified by the Company based on how resources are
allocated and operating decisions are made. Management evaluates performance and
allocates resources based on operating profit or loss, excluding corporate
allocations. In November 2005, the Company's board of directors approved the
sale of BAX Global, a wholly owned freight transportation subsidiary of the
Company. Accordingly, BAX Global's results of operations have been reported as
discontinued operations for all periods presented and are not included in 2005
revenues and operating profit segment information. Discontinued operations are
discussed in note 5. BAX Global's assets and liabilities have been classified as
held for sale on the Company's consolidated balance sheet for 2005. In January
2006, the Company sold BAX Global.
Brink's offers services globally including armored car transportation, automated
teller machine ("ATM") replenishment and servicing, currency and deposit
processing including its "Cash Logistics" operations, coin sorting and wrapping,
arranging the secure air transportation of valuables ("Global Services") and the
deploying and servicing of safes and safe control devices, including its
patented CompuSafe(R) service. Brink's operates in approximately 50 countries.
BHS offers monitored security services in North America primarily for
owner-occupied, single-family residences. To a lesser extent, BHS offers
security services for commercial and multi-family properties. BHS typically
installs and owns the on-site security systems, and charges fees to monitor and
service the systems.
Revenues Operating Profit
- -------------------------------------------------------------------------------------------------------------
Years Ended December 31, Years Ended December 31,
(In millions) 2005 2004 2003 2005 2004 2003
- -------------------------------------------------------------------------------------------------------------
Business Segments
Brink's $ 2,156.9 1,931.9 1,689.0 $ 111.9 144.7 112.5
BHS 392.1 345.6 310.4 87.4 80.8 71.2
- -------------------------------------------------------------------------------------------------------------
Business Segments 2,549.0 2,277.5 1,999.4 199.3 225.5 183.7
Corporate - - - (44.7) (42.2) (27.3)
Gain on sale of equity interest - - - - - 10.4
Former coal operations - - - (39.2) (45.9) (69.5)
- -------------------------------------------------------------------------------------------------------------
$ 2,549.0 2,277.5 1,999.4 $ 115.4 137.4 97.3
=============================================================================================================
Capital Expenditures Depreciation and Amortization
- -----------------------------------------------------------------------------------------------------------
Years Ended December 31, Years Ended December 31,
(In millions) 2005 2004 2003 2005 2004 2003
- -----------------------------------------------------------------------------------------------------------
Business Segments
Brink's $ 109.0 76.2 80.9 $ 87.3 79.1 69.4
BHS 162.2 117.6 98.0 49.1 42.9 40.1
Corporate 0.5 1.1 0.2 0.7 0.7 2.5
- -----------------------------------------------------------------------------------------------------------
Property and equipment 271.7 194.9 179.1 137.1 122.7 112.0
Amortization of BHS deferred subscriber
acquisition costs - - - 9.0 8.6 7.8
Amortization of Brink's intangible assets - - - 3.2 1.9 1.2
- -----------------------------------------------------------------------------------------------------------
$ 271.7 194.9 179.1 $ 149.3 133.2 121.0
===========================================================================================================
90
Assets
- -----------------------------------------------------------------------------------------------------------
December 31,
(In millions) 2005 2004 2003
- -----------------------------------------------------------------------------------------------------------
Business Segments
Brink's $1,096.7 1,055.7 945.2
BHS 585.1 440.6 410.9
- -----------------------------------------------------------------------------------------------------------
Business Segments 1,681.8 1,496.3 1,356.1
BAX Global 976.5 839.7 763.1
Former natural resource operations and interests:
Net deferred tax assets 255.1 230.1 228.0
Other residual coal assets 34.2 25.3 50.4
Corporate:
VEBA (see note 1) - - 105.2
Other and eliminations 89.3 101.3 45.8
- -----------------------------------------------------------------------------------------------------------
$3,036.9 2,692.7 2,548.6
===========================================================================================================
Years Ended December 31,
(In millions) 2005 2004 2003
- -----------------------------------------------------------------------------------------------------------
Other BHS Information
Impairment charges from subscriber disconnects $ 45.2 38.4 34.3
Amortization of deferred revenue (29.5) (26.1) (25.0)
Deferred subscriber acquisition costs (current year payments) (22.9) (19.5) (18.4)
Deferred revenue from new subscribers (current year receipts) 40.7 34.6 28.2
===========================================================================================================
Long-Lived Assets (a) Revenues
- -----------------------------------------------------------------------------------------------------------
December 31, Years Ended December 31,
(In millions) 2005 2004(b) 2003 (b) 2005 2004 2003
- -----------------------------------------------------------------------------------------------------------
Geographic
International:
France $ 145.9 168.1 156.4 $ 508.1 466.6 374.2
Other 269.4 315.9 278.8 975.6 822.8 681.8
- -----------------------------------------------------------------------------------------------------------
Subtotal 415.3 484.0 435.2 1,483.7 1,289.4 1,056.0
- -----------------------------------------------------------------------------------------------------------
United States:
Business segments 641.4 776.6 767.9 1,065.3 988.1 943.4
Corporate and former operations 3.2 3.8 7.1 - - -
- -----------------------------------------------------------------------------------------------------------
Subtotal 644.6 780.4 775.0 1,065.3 988.1 943.4
- -----------------------------------------------------------------------------------------------------------
$ 1,059.9 1,264.4 1,210.2 $2,549.0 2,277.5 1,999.4
===========================================================================================================
(a) Long-lived assets include property, plant and equipment, net, goodwill,
other intangible assets, net and deferred charges.
(b) Includes $321.1 million in 2004 and $347.3 million in 2003 of long-lived
assets related to BAX Global.
91
Revenues are recorded in the country where service is initiated or performed.
The Company has no single customer that represents more than 10% of its total
revenue.
December 31,
(In millions) 2005 2004 2003
- ------------------------------------------------------------------------------------------------------------
Net assets outside the U.S. (a)
Europe, Middle East and Africa $ 190.5 252.5 241.8
Latin America 123.9 92.0 73.7
Asia Pacific 166.1 155.2 116.9
Other 38.4 53.6 40.0
- ------------------------------------------------------------------------------------------------------------
$ 518.9 553.3 472.4
============================================================================================================
(a) Includes $222.2 million in 2005, and $213.1 million in 2004 and $210.7
million in 2003 related to BAX Global.
December 31,
(In millions) 2005 2004 2003
- ------------------------------------------------------------------------------------------------------------
Investments in unconsolidated equity affiliates
Brink's $ 10.2 11.9 23.1
Other 5.5 5.2 6.9
- ------------------------------------------------------------------------------------------------------------
$ 15.7 17.1 30.0
============================================================================================================
Share of earnings (losses) of unconsolidated equity affiliates
Brink's $ 3.0 1.0 1.6
Other 0.4 - (1.3)
- ------------------------------------------------------------------------------------------------------------
$ 3.4 1.0 0.3
============================================================================================================
The Company's accounting method for a 20%-owned investment of Brink's changed in
the third quarter of 2004 from the equity method of accounting to the cost
method of accounting reflecting management's conclusion that the Company no
longer sufficiently influenced the management of the investee. The Company's
equity method investment at December 31, 2003 was $10.1 million.
Undistributed earnings of equity affiliates included in consolidated retained
earnings approximated $8.7 million at December 31, 2005 and $8.6 million at
December 31, 2004.
92
Note 3 - Earnings Per Share
================================================================================
Years Ended December 31,
(In millions) 2005 2004 2003
- --------------------------------------------------------------------------------
Numerator - income from continuing operations $ 42.3 71.5 37.9
Denominator - weighted-average common shares outstanding
Basic 56.3 54.6 53.1
Effect of dilutive stock options 0.7 0.7 0.1
- --------------------------------------------------------------------------------
Diluted 57.0 55.3 53.2
================================================================================
Antidilutive stock options excluded from denominator - 0.6 3.1
================================================================================
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 2005, the board of directors approved and issued 2.1
million shares of common stock to the Trust. The Trust held 1.2 million
unallocated shares at December 31, 2005, 1.1 million unallocated shares at
December 31, 2004 and 0.6 million unallocated shares at December 31, 2003.
Note 4 - Employee and Retiree Benefits
================================================================================
The employee benefit plans and other liabilities described below cover eligible
employees and retirees. The measurement date for all plans is December 31.
Pension Plans
The Company has noncontributory defined benefit pension plans covering
substantially all U.S. non-union employees who meet vesting and other minimum
requirements. The Company also has other contributory and noncontributory
defined benefit plans for eligible non-U.S. employees. Benefits under most of
the plans are based on salary (including commissions, bonuses, overtime and
premium pay) and years of service. The Company's policy is to fund at least the
minimum actuarially determined amounts required by applicable regulations.
In October 2005, the Company announced that benefit levels for its U.S. defined
benefit pension plans would be frozen, effective December 31, 2005. As a result,
participants in the U.S. defined benefit pension plans will cease to earn
additional benefits after 2005, although participants who have not met
requirements for vesting will continue to accrue vesting service in accordance
with the terms of the plans.
The Company has retained the obligations and assets related to the participation
of BAX Global's employees in the Company's U.S. pension plans. Pension
obligations and assets of BAX Global's non-U.S. subsidiaries have been assumed
by the purchaser and these accrued and prepaid amounts have been reclassified as
assets and liabilities held for sale. Pension expenses for BAX Global employees
for the years presented have been included in discontinued operations. After
January 31, 2006, the date of sale, pension expense related to participation by
BAX Global employees in U.S. pension plans will be included in continuing
operations.
In June 2003, the Company amended the benefit formula for its U.S. pension plan
which resulted in a $4.1 million reduction in service cost in 2003 from what it
would have otherwise been. This change had no effect on benefits earned for
service prior to June 2003.
93
The weighted-average assumptions used in determining the net pension cost and
benefit obligations for the Company's pension plans were as follows:
U.S. Plans Non-U.S. Plans
- -----------------------------------------------------------------------------------------------------------
2005 2004 2003 2005 2004 2003
- -----------------------------------------------------------------------------------------------------------
Discount rate:
Pension cost 5.75% 6.25% 6.75% 5.32% 5.55% 5.86%
Benefit obligation at year end 5.50% 5.75% 6.25% 4.75% 5.32% 5.55%
Expected long-term rate of return on assets -
Pension cost 8.75% 8.75% 8.75% 6.04% 6.37% 6.74%
Average rate of increase in salaries (a):
Pension cost 5.03% 5.03% 5.04% 3.21% 3.09% 3.40%
Benefit obligation at year end N/A (b) 5.03% 5.03% 3.06% 3.21% 3.09%
===========================================================================================================
(a) Salary scale assumptions are determined through historical experience and
vary by age and industry.
(b) Not applicable at December 31, 2005 because the U.S. plan benefits were
frozen and pension benefit payments will be based on salaries earned
through December 31, 2005.
The RP-2000 Combined Healthy Blue Collar mortality table was used to estimate
the expected lives of participants in the U.S. pension plans at December 31,
2005. The 1983 Group Annuity Mortality table was used to estimate the expected
lives of participants in the U.S. pension plans at December 31, 2004 and 2003.
Expected lives of participants in non-U.S. pension plans were estimated using
mortality tables in the country of operation.
The net pension cost for the Company's pension plans is as follows:
(In millions) U.S. Plans Non-U.S. Plans Total
- -------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2005 2004 2003 2005 2004 2003 2005 2004 2003
- -------------------------------------------------------------------------------------------------------------
Service cost $ 28.2 23.5 23.0 $ 10.1 8.7 7.6 $ 38.3 32.2 30.6
Interest cost on PBO 43.8 40.8 38.6 10.6 9.4 7.8 54.4 50.2 46.4
Return on assets - expected (49.9) (49.5) (49.1) (10.0) (8.8) (7.4) (59.9) (58.3) (56.5)
Amortization of losses 22.9 14.4 7.4 3.3 3.1 3.1 26.2 17.5 10.5
Curtailment loss 0.2 - - - - - 0.2 - -
- -------------------------------------------------------------------------------------------------------------
Net pension cost $ 45.2 29.2 19.9 $ 14.0 12.4 11.1 $ 59.2 41.6 31.0
=============================================================================================================
Included in:
Continuing operations $ 33.3 21.4 14.5 $ 9.8 8.1 6.8 $ 43.1 29.5 21.3
Discontinued operations 11.9 7.8 5.4 4.2 4.3 4.3 16.1 12.1 9.7
- -------------------------------------------------------------------------------------------------------------
Net pension cost $ 45.2 29.2 19.9 $ 14.0 12.4 11.1 $ 59.2 41.6 31.0
=============================================================================================================
94
Reconciliations of the projected benefit obligation ("PBO"), plan assets, funded
status and net pension assets at December 31, 2005 and 2004 for all of the
Company's pension plans are as follows:
(In millions) U.S. Plans Non-U.S. Plans Total
- --------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2005 2004 2005 2004 2005 2004
- --------------------------------------------------------------------------------------------------------------------
PBO at beginning of year $ 762.4 672.9 210.7 172.4 973.1 845.3
Service cost 28.2 23.5 10.1 8.7 38.3 32.2
Interest cost 43.8 40.8 10.6 9.4 54.4 50.2
Plan participant contributions - - 3.1 2.7 3.1 2.7
Acquisitions 4.1 4.1
Benefits paid (26.8) (25.3) (5.7) (5.9) (32.5) (31.2)
Actuarial loss 66.7 50.5 17.3 7.8 84.0 58.3
Curtailment gain (110.0) - (0.6) - (110.6) -
Foreign currency exchange - - (17.2) 15.6 (17.2) 15.6
- --------------------------------------------------------------------------------------------------------------------
PBO at end of year $ 764.3 762.4 232.4 210.7 996.7 973.1
====================================================================================================================
Fair value of plan assets at beginning of year $ 595.1 541.9 158.1 135.5 753.2 677.4
Return on assets - actual 51.2 67.1 16.9 7.4 68.1 74.5
Acquisitions - - 2.6 - 2.6 -
Plan participant contributions - - 3.1 2.7 3.1 2.7
Employer contributions 0.5 11.4 8.2 6.7 8.7 18.1
Benefits paid (26.8) (25.3) (5.7) (5.9) (32.5) (31.2)
Foreign currency exchange - - (12.0) 11.7 (12.0) 11.7
- --------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 620.0 595.1 171.2 158.1 791.2 753.2
====================================================================================================================
Funded status $ (144.3) (167.3) (61.2) (52.6) (205.5) (219.9)
Unrecognized experience loss 185.8 253.3 64.3 57.3 250.1 310.6
Unrecognized prior service cost - 0.2 0.8 1.0 0.8 1.2
- --------------------------------------------------------------------------------------------------------------------
Net prepaid pension assets $ 41.5 86.2 3.9 5.7 45.4 91.9
====================================================================================================================
Included in:
Prepaid pension assets $ - - - 14.1 - 14.1
Accrued pension cost:
Current, included in accrued liabilities (0.6) (0.4) (5.2) (7.6) (5.8) (8.0)
Noncurrent (143.7) (80.8) (26.3) (36.2) (170.0) (117.0)
Liabilities held for sale - - (14.9) - (14.9) -
Accumulated other comprehensive loss 185.8 167.4 50.3 35.4 236.1 202.8
- --------------------------------------------------------------------------------------------------------------------
Net prepaid pension assets $ 41.5 86.2 3.9 5.7 45.4 91.9
====================================================================================================================
The unrecognized experience loss decreased in 2005 as a result of a curtailment
gain, primarily as a result of freezing the U.S. plan, partially offset by lower
discount rate assumptions and longer projected lives. The Company's unrecognized
experience loss increased in 2004 primarily due to lower discount rate
assumptions (which increased the accumulated benefit obligation ("ABO") and PBO)
partially offset by higher-than-expected returns on plan assets. Actuarial
losses are largely deferred with a portion of these losses being amortized on a
straight-line basis over the average remaining service period of employees
expected to receive benefits under the plans.
95
Information comparing plan assets to plan obligations as of December 31, 2005
and 2004 are aggregated below. The ABO differs from the PBO in that the ABO is
the obligation earned through the date noted. The PBO includes assumptions about
future compensation levels for non-U.S. plans.
ABO Greater Plan Assets
(In millions) Than Plan Assets Greater Than ABO Total
- -------------------------------------------------------------------------------
December 31, 2005 2004 2005 2004 2005 (a) 2004
- -------------------------------------------------------------------------------
PBO $ 994.5 919.7 2.2 53.4 996.7 973.1
ABO 978.1 824.5 1.1 47.5 979.2 872.0
Fair value of plan assets 789.2 703.5 2.0 49.7 791.2 753.2
===============================================================================
(a) Includes BAX Global's non-U.S. pension plans with PBO of $60.8 million, ABO
of $56.5 million and fair value of plan assets of $41.8 million at December
31, 2005.
The Company's weighted-average asset allocations at December 31, 2005 and 2004
by asset category is as follows:
(In millions, except percentages) U.S. Plans Non-U.S. Plans
- --------------------------------------------------------------------------------
December 31, 2005 2004 2005 2004
- --------------------------------------------------------------------------------
Equity securities 72% 72% 57% 54%
Debt securities 28% 27% 41% 43%
Other - 1% 2% 3%
- --------------------------------------------------------------------------------
Total 100% 100% 100% 100%
================================================================================
Plan assets at fair value $ 620.0 595.1 171.2 158.1
Actual return on assets during year $ 51.2 67.1 16.9 7.4
================================================================================
Assets of U.S. pension plans are invested primarily using actively managed
accounts with asset allocation targets of 70% equities, which include a broad
array of market capitalization sizes and investment styles, and 30% fixed income
securities. The Company's policy does not permit certain investments, including
investments in The Brink's Company common stock, unless part of a commingled
fund. Fixed-income investments must have an investment grade rating at the time
of purchase. The plan rebalances its assets on a quarterly basis if actual
allocations of assets are outside predetermined ranges. Among other factors, the
performance of asset groups and investment managers will affect the long-term
rate of return.
The Company selects the expected long-term rate of return assumption for its
U.S. pension plan using advice from its investment advisor and its actuary
considering the plan's asset allocation targets and expected overall investment
manager performance and a review of its most recent ten-year historical average
compounded rate of return.
Based on December 31, 2005 data, assumptions and funding regulations, the
Company does not currently plan to make a contribution to the primary U.S. plan
in 2006. There are limits to the amount of benefits which can be paid to
participants from a U.S. qualified pension plan. The Company maintains a
nonqualified U.S. plan to pay benefits for those eligible current and former
employees in the U.S. whose benefits exceed the regulatory limits.
Assets of non-U.S. plans are invested primarily using actively managed accounts
with weighted-average asset allocation targets of 54% equities, 44% fixed income
securities and 2% other, primarily cash. The Company selects the expected
long-term rates of return for its non-U.S. pension plans using advice from its
investment advisors and its actuary considering plan asset allocation targets
and expected overall investment manager performance.
96
The Company expects to contribute approximately $0.6 million to its U.S. pension
plans and $5.2 million to its non-U.S. pension plans in 2006.
The Company's projected benefit payments at December 31, 2005 for each of the
next five years and the aggregate five years thereafter are as follows:
(In millions) U.S. Plans Non-U.S. Plans (a) Total
- -------------------------------------------------------------------
2006 $ 28.8 3.8 32.6
2007 30.2 4.3 34.5
2008 31.5 5.1 36.6
2009 32.9 5.4 38.3
2010 34.3 6.3 40.6
2011 through 2015 198.0 36.8 234.8
- -------------------------------------------------------------------
Total $ 355.7 61.7 417.4
===================================================================
(a) Excludes payments for BAX Global's non-U.S. plans.
Termination Benefits
During 2005, one of the Company's Brink's European subsidiaries resized its
operations and accrued $6.1 million in termination benefits. This event was
accounted for under SFAS 88, "Employer's Accounting for Settlement and
Curtailment of Defined Benefit Pension Plans and for Termination Benefits."
Multi-employer Pension Plans
The Company contributes to multi-employer pension plans in a few of its non-U.S.
subsidiaries. Multi-employer pension expense (excluding changes to the
withdrawal liability discussed below) have been classified in continuing and
discontinued operations as follows:
Years Ended December 31,
(In millions) 2005 2004 2003
- -----------------------------------------------------------------------
Multi-employer Expense
Continuing operations $ 2.9 3.4 2.5
Discontinued operations 0.3 0.3 0.3
- -----------------------------------------------------------------------
$ 3.2 3.7 2.8
=======================================================================
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 2005 the UMWA reduced the estimate of the unfunded 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 is obligated to pay the
plans $30.5 million, which represents the Company's portion of the unfunded
status of the plans as of June 30, 2004, as determined by the plan agreements
and by law.
97
Savings Plans
The Company sponsors various defined contribution plans to assist eligible
employees provide for retirement. Employee contributions to the primary U.S.
401(k) plan in the first half of 2003 were matched at rates of between 50% to
100% on up to 5% of compensation (subject to limitations). In June 2003, the
Company modified the match provision of the primary U.S. 401(k) plan and
employee contributions were matched at 75% over the last half of 2003 and all of
2004 and 2005. In October 2005, the Company announced that beginning January 1,
2006, the matching contribution will increase from 75% to 125%. The Company's
contribution expense is as follows:
(In millions) U.S. 401(k) Other Plans Total
- ----------------------------------------------------------------------------------------------------------
Years Ended December 31, 2005 2004 2003 2005 2004 2003 2005 2004 2003
- ----------------------------------------------------------------------------------------------------------
Continuing operations $ 6.5 7.3 8.2 $ 2.6 2.1 1.9 $ 9.1 9.4 10.1
Discontinued operations 3.6 3.6 3.3 4.3 3.7 3.1 7.9 7.3 6.4
- ----------------------------------------------------------------------------------------------------------
$ 10.1 10.9 11.5 $ 6.9 5.8 5.0 $ 17.0 16.7 16.5
==========================================================================================================
Postretirement Benefits Other Than Pensions
Summary
The Company has various postretirement benefits other than pensions. The related
liability amounts recorded on the balance sheets for the last two years are
detailed below.
December 31,
(In millions) 2005 2004
- -------------------------------------------------------------------------
Company-sponsored plans $ 156.8 157.1
Health Benefit Act 174.9 185.5
Black Lung 39.5 41.5
- -------------------------------------------------------------------------
$ 371.2 384.1
=========================================================================
Included in:
Current, included in accrued liabilities $ 56.4 52.9
Liabilities held for sale 10.0 -
Noncurrent 304.8 331.2
- -------------------------------------------------------------------------
$ 371.2 384.1
=========================================================================
98
Company-Sponsored Plans
The Company provides postretirement health care benefits (the "Company-sponsored
plans") for eligible active and retired employees in the U.S. and Canada of the
Company's current and former businesses, including eligible participants of the
former coal operations (the "coal-related" plans). The U.S. postretirement
obligations related to BAX Global were assumed by the purchaser in January 2006.
At December 31, 2005, $10.0 million was classified as a component of liabilities
held for sale for these plans. BAX Global's postretirement expenses have been
included in discontinued operations. The components of net periodic
postretirement costs related to Company-sponsored plans were as follows:
(In millions) Coal-related plans Other plans Total
- ------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2005 2004 2003 2005 2004 2003 2005 2004 2003
- ------------------------------------------------------------------------------------------------------------
Service cost $ - - - $ 1.0 1.0 0.9 $ 1.0 1.0 0.9
Interest cost on accumulated
postretirement benefit
obligations ("APBO") 33.9 32.2 34.7 1.5 1.6 1.5 35.4 33.8 36.2
Return on assets - expected (15.1) (9.2) - - - - (15.1) (9.2) -
Amortization of losses 15.7 13.5 14.3 0.3 0.3 0.1 16.0 13.8 14.4
- ------------------------------------------------------------------------------------------------------------
Net periodic postretirement
costs $ 34.5 36.5 49.0 $ 2.8 2.9 2.5 $ 37.3 39.4 51.5
============================================================================================================
Included in:
Continuing operations $ 34.5 36.5 49.0 $ 1.3 1.5 1.3 $ 35.8 38.0 50.3
Discontinued operations - - - 1.5 1.4 1.2 1.5 1.4 1.2
- ------------------------------------------------------------------------------------------------------------
Net periodic postretirement
costs $ 34.5 36.5 49.0 $ 2.8 2.9 2.5 $ 37.3 39.4 51.5
============================================================================================================
99
Reconciliations of the APBO and funded status to the accrued other
postretirement benefit cost (the amount recorded on the balance sheet) for
Company-sponsored plans at December 31, 2005 and 2004 are as follows:
(In millions) Coal-related plans Other plans Total
- --------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2005 2004 2005 2004 2005 2004
- --------------------------------------------------------------------------------------------------------------------
APBO at beginning of year $ 617.7 526.2 $ 30.2 26.8 $ 647.9 553.0
Service cost - - 1.0 1.0 1.0 1.0
Interest cost 33.9 32.2 1.5 1.6 35.4 33.8
Plan amendments - - (2.1) - (2.1) -
Benefits paid (35.6) (35.0) (2.0) (2.3) (37.6) (37.3)
Actuarial (gain) loss, net 17.0 96.3 (2.8) 3.1 14.2 99.4
Foreign currency exchange - - 0.2 - 0.2 -
Other - (2.0) - - - (2.0)
- --------------------------------------------------------------------------------------------------------------------
APBO at end of year $ 633.0 617.7 $ 26.0 30.2 $ 659.0 647.9
====================================================================================================================
Fair value of plan assets at beginning of year $ 172.4 - $ - - $ 172.4 -
Employer contributions:
Restriction of VEBA at January 1, 2004 (see note 1) - 105.2 - - - 105.2
Payments to beneficiaries 35.6 35.0 2.0 2.3 37.6 37.3
Payments to VEBA - 50.0 - - - 50.0
Return on assets - actual 12.9 17.2 - - 12.9 17.2
Benefits paid (35.6) (35.0) (2.0) (2.3) (37.6) (37.3)
- --------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 185.3 172.4 $ - - $ 185.3 172.4
====================================================================================================================
Funded status $ (447.7) (445.3) $ (26.0) (30.2) $ (473.7) (475.5)
Unrecognized experience loss 318.1 314.6 0.3 3.1 318.4 317.7
Unrecognized prior service cost (credit) - - (1.5) 0.7 (1.5) 0.7
- --------------------------------------------------------------------------------------------------------------------
Accrued other postretirement benefit cost
at end of year $ (129.6) (130.7) $ (27.2) (26.4) $ (156.8) (157.1)
====================================================================================================================
The APBO for each of the plans was determined using the unit credit method and
an assumed discount rate as follows:
Company-sponsored plans 2005 2004 2003
- ----------------------------------------------------------------
Weighted-average discount rate:
Postretirement cost 5.75% 6.25% 6.75%
Benefit obligation at year end 5.50% 5.75% 6.25%
Expected long-term rate of return
on assets - postretirement cost 8.75% 8.75% N/A
================================================================
For Company-sponsored coal-related plans, the assumed health care cost trend
rate used to compute the 2005 APBO was 10% for 2006, declining ratably to 5% in
2011 and thereafter (in 2004: 10% for 2005 declining ratably to 5% in 2010 and
thereafter). Other plans in the U.S. provide for fixed-dollar value coverage for
eligible participants and, accordingly, are not adjusted for inflation.
The RP-2000 Combined Healthy Blue Collar mortality table is primarily used to
estimate expected lives of participants at December 31, 2005. The 1983 Group
Annuity Mortality table was used to estimate expected lives of participants at
December 31, 2004 and 2003.
100
The table below shows the estimated effects of a one percentage point change in
the assumed health care cost trend rates for each future year.
Effect of Change in Assumed
Health Care Trend Rates
------------------------------------
(In millions) Increase 1% Decrease 1%
- ------------------------------------------------------------------------------
Higher (lower):
Service and interest cost in 2005 $ 3.9 (3.3)
APBO at December 31, 2005 76.8 (64.6)
==============================================================================
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law. The Act introduced a
prescription drug benefit under Medicare as well as a federal subsidy to
sponsors of retiree health care benefit plans that provide a benefit that is at
least actuarially equivalent to Medicare prescription drug benefits. Because of
the broadness of coverage provided under the Company's plan, the Company
believes that the plan benefits are at least actuarially equivalent to the
Medicare benefits. The Company reflected the estimated effect of the new
legislation in 2003 as a $45.7 million reduction to the actuarial loss, as
permitted by FSP 106-1, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003." The
estimated value of the projected federal subsidy assumes no changes in
participation rates and assumes that the subsidy is received in the year after
claims are paid. The estimated reduction in per capita claim costs for
participants over 65 years old was 12%.
The Act had no effect on 2003 expense. The Company's net periodic postretirement
costs were approximately $5.8 million lower in 2004 and $6.1 million lower in
2005 due to the Act as a result of lower amortization of losses. The estimated
net present value of the subsidy, reflected as a reduction to the APBO, was
approximately $62 million at December 31, 2005 and $59 million at December 31,
2004.
The coal-related plans had an actuarial loss in 2005 primarily related to the
reduction in the discount rate and longer projected lives, partially offset by
actuarial gains pursuant to enrollment verification death audit performed by the
Company. The Company's other plans had net actuarial gains in 2005 primarily due
to expected reduced per capita claims as a result of an amendment of the
Canadian Plan. The plans had net actuarial losses in 2004 due to a combination
of the increase in expected medical inflation and the reduction in the discount
rate.
In 2004, the Company restricted the use of the VEBA to be used to only pay
benefits related to the Company's coal-related postretirement medical plan.
Accordingly, under SFAS 106, estimated returns on the VEBA assets were included
in the determination of net periodic postretirement costs for 2005 and 2004.
The Company's asset allocations at December 31, 2005 and 2004 by asset category
are as follows:
December 31, December 31,
(In millions, except percentages) 2005 2004
- --------------------------------------------------------------------------------
Equity securities 71% 73%
Debt securities 28% 26%
Other 1% 1%
- --------------------------------------------------------------------------------
Total 100% 100%
================================================================================
Plan assets at fair value $ 185.3 $ 172.4
Actual return on assets during year $ 12.9 $ 17.2
================================================================================
101
Plan assets of the Company-sponsored postretirement medical plan held by the
VEBA are invested primarily using actively managed accounts with asset
allocation targets of 70% equities, which include a broad array of market
capitalization sizes and investment styles, and 30% fixed income securities. The
Company's policy does not permit certain investments, including investments in
The Brink's Company common stock, unless part of a commingled fund. Fixed-income
investments must have an investment grade rating at the time of purchase. The
plan rebalances its assets on a quarterly basis if actual allocations of assets
are outside predetermined ranges. Among other factors, the performance of asset
groups and investment managers will affect the long-term rate of return.
The Company selects the expected long-term rate of return assumption after
reviewing advice from its investment advisor and its actuary considering the
plan's asset allocation targets and expected overall investment manager
performance and after reviewing the most recent ten-year historical average
compounded rate of return for the primary U.S. pension plan which is invested
similarly.
In January 2006, the Company contributed $225 million to the VEBA with a portion
of the proceeds from the sale of BAX Global. The Company determines whether it
will make other discretionary contributions on an annual basis, although it does
not currently expect to make further contributions in the next several years if
investment returns are adequate to pay future obligations.
The Company's projected benefit payments at December 31, 2005 for each of the
next five years and the aggregate five years thereafter are as follows:
Before Medicare Subsidy
----------------------------------------------- Medicare Net Projected
(In millions) Coal-related Plans Other Plans (a) Subtotal Subsidy (b) payments
- ---------------------------------------------------------------------------------------------
2006 $ 41.6 1.1 42.7 (2.0) 40.7
2007 44.9 1.1 46.0 (3.1) 42.9
2008 47.3 1.0 48.3 (3.4) 44.9
2009 49.8 1.0 50.8 (3.5) 47.3
2010 51.3 1.0 52.3 (3.7) 48.6
2011 through 2015 254.0 5.0 259.0 (20.6) 238.4
- ---------------------------------------------------------------------------------------------
Total $ 488.9 10.2 499.1 (36.3) 462.8
=============================================================================================
(a) The projected benefit payments do not include BAX Global's projected benefit
payments.
(b) Only the coal-related plans are expected to meet the requirements to receive
the Medicare subsidy.
Health Benefit Act Liabilities
Background
In October 1992, The Coal Industry Retiree Health Benefit Act of 1992 (the
"Health Benefit Act") was enacted as part of the Energy Policy Act of 1992. The
Health Benefit Act established rules for the payment of future health care
benefits for thousands of retired union mine workers and their dependents.
Assigned Beneficiaries. The Health Benefit Act established a trust fund, The
United Mine Workers of America Combined Benefit Fund (the "Combined Fund"), to
which "signatory operators" and "related persons," including The Brink's Company
and some of its subsidiaries and former subsidiaries (collectively, the "Brink's
Companies"), are jointly and severally liable to pay annual premiums for those
beneficiaries directly assigned to a signatory operator and its related persons,
on the basis set forth in the Health Benefit Act.
102
On an annual basis, the Brink's Companies receive notices from the Social
Security Administration (the "SSA") with regard to the current number of
assigned beneficiaries for which the Brink's Companies are deemed responsible
under the Health Benefit Act.
Unassigned Beneficiaries. In addition, the Health Benefit Act provides that
assigned companies, including the Brink's Companies, are required to fund, pro
rata according to the total number of assigned beneficiaries, a portion of the
health benefits for unassigned beneficiaries if these benefits are not funded
from other designated sources. To date, almost all of the funding for unassigned
beneficiaries has been provided from transfers from the Abandoned Mine Land
Reclamation Fund (the "AML Fund") or other government sources.
Information and Assumptions Used to Estimate Obligation
The Company's liability for Health Benefit Act obligations is equal to the
undiscounted estimated amount of future annual premiums the Company expects to
pay to the Combined Fund. The Company's estimated annual premium is equal to the
total number of beneficiaries (including assigned beneficiaries and an allocated
percentage of the total unassigned beneficiaries) at October 1, the beginning of
the plan year, multiplied by the premium per beneficiary for that year. The
Company expects to pay annual premiums over the next 60 to 70 years, but it
expects these annual premiums to gradually decline over time as the number of
beneficiaries decreases.
The estimated liability at December 31, 2005 assumes that almost all of the
costs for unassigned beneficiaries for the plan year ending September 30, 2006
will continue to be paid with transfers of cash from the AML Fund and other
government sources. Transfers to the Combined Fund from the AML Fund beyond this
date are not sufficiently assured and the Company's current estimate of its
obligations assumes that no future transfers will be made by the AML Fund. The
Company's estimate of its probable contingent liability for premiums for
unassigned beneficiaries could materially decrease in future periods depending
on the availability of future funding from the AML Fund or other sources.
Moreover, the Company's estimate of its contingent liability for unassigned
beneficiaries could increase materially in the future if other responsible coal
operators become insolvent. This liability could also change materially if the
percentage of unassigned beneficiaries that are allocated to the Company changes
due to relative mortality rates of the Company's assigned beneficiaries compared
to the total assigned beneficiaries.
Information provided by the Combined Fund and assumptions made by the Company
are as follows:
At the beginning of the plan year 2005 2004
- -----------------------------------------------------------------------------------------
Number of assigned beneficiaries for the Brink's Companies 2,140 2,343
Total unassigned pool of beneficiaries 15,349 16,502
Percent of total unassigned pool allocated to the Brink's Companies 10.0% 9.7%
Health benefit premium per beneficiary $ 3,228 3,099
=========================================================================================
According to the Health Benefit Act, the rate of inflation for per-beneficiary
health care premiums cannot exceed the medical care component of the Consumer
Price Index. At December 31, 2005 and 2004, annual inflation rates for
per-beneficiary health care premiums were assumed to be 4.5% for all future
years. The U.S. Life 79-81 mortality table has been used to estimate a gradual
decline in the number of beneficiaries. The Company's estimate assumes that
there will be no additions to the Combined Fund unassigned beneficiary group as
a result of future coal operator insolvencies.
103
Undiscounted Obligation for Health Benefit Act Liabilities
December 31,
(In millions) 2005 2004
- ------------------------------------------------------------------
Combined Fund:
Assigned beneficiaries $ 103.7 112.4
Unassigned beneficiaries 64.7 66.1
Other 6.5 7.0
- ------------------------------------------------------------------
$ 174.9 185.5
==================================================================
Reconciliation of Health Benefit Act Liabilities
Years Ended December 31,
(In millions) 2005 2004 2003
- ----------------------------------------------------------------------------
Beginning of the year $ 185.5 197.5 174.1
Actuarial (gain) loss, net (a) (2.3) (3.2) 31.3
Payments (8.3) (8.8) (7.9)
- ----------------------------------------------------------------------------
End of the year $ 174.9 185.5 197.5
============================================================================
(a) Included in income (loss) from discontinued operations.
The $2.3 million actuarial gain in 2005 was primarily related to a one-year
extension of funding by the AML of unassigned benefits and a
lower-than-projected per-beneficiary health care premium rate, partially offset
by a higher number of unassigned beneficiaries attributed to the Company.
The $3.2 million actuarial gain in 2004 is primarily related to a slight
decrease in the number of beneficiaries assigned to the Company at October 1,
2004 compared to the amount estimated at the end of 2003. As a result, the
estimate of assigned beneficiaries in future periods was also lower.
The $31.3 million charge in 2003 is primarily related to the assumed increase in
the number of unassigned beneficiaries allocated to the Company. The increased
allocation was due to two factors. First, the Company increased its allocation
percentage because of a change in the way the Company interprets the statute
governing the allocation, based on findings of court cases in 2003. Second,
other coal operations became insolvent during the period and their assigned
beneficiaries were transferred to the unassigned pool. These actions reduced the
denominator (the total assigned pool) in the computation of the allocation
percentage, increasing the Company's allocation assumption, and increased the
unassigned pool.
104
The Company currently estimates that its annual cash funding under the Health
Benefit Act will be slightly higher in 2006, increase in 2007 to $11.7 million
as a result of the assumption that premiums for unassigned beneficiaries will
not be funded through transfers from the AML Fund. In subsequent years, payments
are expected to decline as the number of beneficiaries decreases. The Company's
projected benefit payments at December 31, 2005 for each of the next five years
and the aggregate five years thereafter are as follows:
Projected
(In millions) Payments
---------------------------------------
2006 $ 8.5
2007 11.7
2008 11.1
2009 10.5
2010 9.8
2011 through 2015 40.3
---------------------------------------
Total $ 91.9
=======================================
Pneumoconiosis (Black Lung) Obligations
The Company acts as self-insurer with respect to almost all black lung
obligations. Provision is made for estimated benefits based on annual reports
prepared by independent actuaries. Unrecognized losses, representing the excess
of the present value of expected future benefits over existing accrued
liabilities, are amortized over the average remaining life expectancy of
participants (approximately 10 years). The components of net periodic
postretirement benefit costs related to black lung obligations were as follows:
Years Ended December 31,
(In millions) 2005 2004 2003
- --------------------------------------------------------------------------
Interest cost on APBO $ 2.9 3.6 4.5
Amortization of losses 1.2 1.2 1.5
- --------------------------------------------------------------------------
Net periodic postretirement costs $ 4.1 4.8 6.0
==========================================================================
Reconciliations of the APBO and funded status to the accrued other
postretirement benefit costs for black lung obligations at December 31, 2005 and
2004 are as follows:
Years Ended December 31,
(In millions) 2005 2004
- --------------------------------------------------------------------------------
APBO at beginning of year $ 55.2 63.0
Interest costs 2.9 3.6
Benefits paid (6.1) (7.0)
Actuarial gain, net (0.3) (4.4)
- --------------------------------------------------------------------------------
APBO at end of year $ 51.7 55.2
================================================================================
Funded status $ (51.7) (55.2)
Unrecognized experience loss 12.2 13.7
- --------------------------------------------------------------------------------
Accrued other postretirement benefit cost at end of year $ (39.5) (41.5)
================================================================================
105
The 1983 Group Annuity Mortality table is used to estimate expected lives of
participants. The following are the other key actuarial assumptions for the
black lung obligations:
Black Lung Benefits 2005 2004
- -------------------------------------------------------------------------
Discount rate:
Postretirement cost 5.75% 6.25%
Benefit obligation at year end 5.50% 5.75%
Medical cost inflation 8.00% 8.00%
=========================================================================
The Company's projected benefit payments for black lung benefits at December 31,
2005 for each of the next five years and the aggregate five years thereafter are
as follows:
Projected
(In millions) Payments
---------------------------------------
2006 $ 5.0
2007 4.8
2008 4.7
2009 4.5
2010 4.4
2011 through 2015 19.5
---------------------------------------
Total $ 42.9
=======================================
106
Note 5 - Discontinued Operations
================================================================================
Years Ended December 31,
(In millions) 2005 2004 2003
- -------------------------------------------------------------------------------
Gain (loss) on sale of
BAX Global (costs associated with the sale) $ (2.8) - -
Timber - 20.7 4.8
Gold - (0.9) -
Natural Gas - - 56.2
Coal - 5.0 -
Results from operations
BAX Global 86.8 49.5 (0.4)
Timber - (0.5) (0.2)
Gold - (1.2) (4.1)
Natural Gas - - 11.2
Adjustments to contingent liabilities of former operations
Litigation settlement gain 15.1 - -
Health Benefit Act liabilities (see note 4) 2.3 3.2 (31.3)
Withdrawal liabilities (see note 4) 6.1 15.4 (17.0)
Reclamation liabilities (6.2) (0.1) (3.2)
Workers' compensation liabilities 0.4 (4.9) 0.2
Recovery of environmental costs - - 5.3
Other 0.1 (3.3) (2.7)
- -------------------------------------------------------------------------------
Income from discontinued operation before income taxes 101.8 82.9 18.8
Income tax (expense) benefit 3.7 (32.9) (27.3)
- -------------------------------------------------------------------------------
Income (loss) from discontinued operations $ 105.5 50.0 (8.5)
===============================================================================
BAX Global
The Company sold BAX Global, a wholly owned freight transportation subsidiary,
on January 31, 2006 for $1.1 billion in cash. The final purchase price and the
gain on the sale will change for closing adjustments the Company believes are
customary for a transaction of this nature. Net after-tax proceeds are expected
to approximate $1.0 billion. The Company has either retained or indemnified the
purchaser for some pre-sale liabilities including those for income taxes and for
existing litigation as discussed in note 22. The resolution of these matters is
expected to take several years.
The Company initially retained ownership of BAX Global's airline subsidiary, Air
Transport International, LLC ("ATI"), pending the receipt of required regulatory
approval. Regulatory approval was obtained and ATI was sold on February 28, 2006
for nominal consideration. The Company has concluded that under FIN 46R,
"Consolidation of Variable Interest Entities," ATI should not be included in the
consolidated results of the Company after January 31, 2006.
The Company immediately contributed $225 million of the proceeds to the VEBA
designated to pay retiree medical obligations of former coal operations, paid
down $46 million of short-term debt. On February 28, 2006, the Company gave
notice to pay down $58.4 million of long-term debt.
107
BAX Global's results of operations, including ATI, have been reported as
discontinued operations for all periods presented.
The following tables show selected financial information included in
discontinued operations for the three years ended December 31, 2005.
Years Ended December 31,
(In millions) 2005 2004 2003
- -------------------------------------------------------------------------
BAX Global
Revenues $ 2,899.4 2,440.6 1,999.2
Pretax income (loss) 86.8 49.5 (0.4)
=========================================================================
In accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." BAX Global ceased depreciating and amortizing long-lived
assets after November 2005, the date BAX Global was classified as held for sale.
Had BAX Global not ceased depreciation and amortization, its pretax income in
2005 would have been $4.9 million lower.
Interest expense included in discontinued operations was $2.0 million in 2005,
$2.1 million in 2004 and $1.8 million in 2003. Interest expense recorded in
discontinued operations includes only interest on third-party borrowings made
directly by BAX Global. The Company has not allocated other consolidated
interest expense to discontinued operations.
Assets and liabilities for BAX Global and ATI for 2005 have been classified as
held for sale. The assets and liabilities that are held for sale comprise the
following:
December 31,
- ------------------------------------------------------------------------------
(In millions) 2005
ASSETS
Cash and cash equivalents $ 78.6
Accounts receivable, net 497.9
Prepaid expenses and other current assets 26.5
Property and equipment, net 145.9
Goodwill 165.2
Deferred income taxes and other 62.4
- ------------------------------------------------------------------------------
Assets held for sale $ 976.5
==============================================================================
LIABILITIES
Short-term borrowings and current maturities of long-term debt $ 7.1
Accounts payable and accrued liabilities 436.4
Long-term debt 1.9
Accrued pension costs and postretirement benefits 23.2
Deferred income taxes and other 22.8
- ------------------------------------------------------------------------------
Liabilities held for sale $ 491.4
==============================================================================
108
Operating Leases
As of December 31, 2005, BAX Global's future minimum lease payments under
noncancellable operating leases with initial or remaining lease terms in excess
of one year are as follows:
(In millions) Facilities Other Total
- -------------------------------------------------------------------
2006 $ 61.4 6.2 67.6
2007 50.7 4.3 55.0
2008 39.0 2.2 41.2
2009 27.8 1.0 28.8
2010 20.0 0.5 20.5
Later years 94.0 0.4 94.4
- -------------------------------------------------------------------
$ 292.9 14.6 307.5
===================================================================
At December 31, 2005 BAX Global had 13 DC-8 aircraft under one-year lease
agreements. The lease agreements expire in 2006 with operating lease payments
aggregating $10.9 million. These payments are not included in the table above.
Net rent expense for BAX Global was $96.2 million in 2005, $84.7 million in 2004
and $75.9 million in 2003, which amounts are included in income from
discontinued operations.
Former Natural Resource Operations
In February 2005, the Company received additional cash proceeds from the
previous sale of its coal business in Virginia; the related pre-tax gain of $5
million was recorded in 2004.
The Company sold a portion of its timber business for $5.4 million in cash in
2003 and recognized a $4.8 million pretax gain. In 2004, the Company received an
additional $33.7 million for the remaining portion of its timber business. After
deducting the book value of related assets and the payment of $6.2 million in
2004 to purchase equipment formerly leased, the Company recognized a $20.7
million pretax gain in 2004.
In February 2004, the Company sold its gold operations for approximately $1.1
million in cash plus the assumption of liabilities and recognized a $0.9 million
loss.
In August 2003, the Company sold its natural gas business and received $81.2
million in cash and recognized a $56.2 million gain.
109
The following tables show selected financial information included in
discontinued operations for the three years ended December 31, 2005.
Years Ended December 31,
(In millions) 2005 2004 2003
- --------------------------------------------------------
Timber
Revenues $ - 1.2 21.1
Pretax loss - (0.5) (0.2)
========================================================
Gold
Revenues $ - 4.4 23.5
Pretax loss - (1.2) (4.1)
========================================================
Natural Gas
Revenues $ - - 7.3
Pretax income - - 11.2
========================================================
Adjustments to Contingent Liabilities of Former Operations
Ongoing expenses related to former operations, including expenses related to
Company-sponsored postretirement benefit obligations, Black Lung obligations,
pension obligations and expenditures for legal fees and other administrative
activities, are classified within continuing operations. Adjustments to
contingent assets and liabilities related to former operations, including those
related to reclamation matters, worker's compensation claims, multi-employer
pension plan withdrawal liabilities, the Health Benefit Act liabilities and
remaining legal contingencies are reported within discontinued operations.
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 the Company, ruling that the Federal Black Lung
Excise Tax ("FBLET") is unconstitutional as applied to export coal sales.
Through December 31, 2004, the Company had received refunds including interest
of $27.2 million, including $2.8 million received in 2003. In December 2005, the
Company reached a final settlement agreement related to all claims for FBLET
refunds and recorded a pretax gain of $15.1 million. The Company has received
payments covering this refund during the first quarter of 2006.
Other
The Company recorded $6.2 million in 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.
In 2004, the Company recognized $4.9 million of expense to reflect an increase
in the expected settlement of coal-related workers' compensation claims. In
2004, the Company settled legal and other contingencies related to its former
coal operations and recognized additional expense of $3.3 million.
In 2003, the Company and a third party reached an agreement that establishes the
allocation of costs related to an environmental remediation project, and as a
result, the Company recognized a $5.3 million pretax gain. The Company estimates
its portion of the remaining clean-up and operational and maintenance costs
related to the environmental matter to be $2.7 million.
110
Income taxes
Discontinued operations includes the tax provision or benefit associated with
the Company's BAX Global and former natural resource businesses, including the
resolution of associated contingent tax matters.
The effective tax rate in 2005 was lower than the 35% U.S. statutory tax rate
primarily as a result of an income tax benefit of $27.4 million recorded upon
the resolution of income tax matters with the Internal Revenue Service related
to the former natural resource business. In addition, the Company recognized a
$7.0 million net deferred tax benefit as a result of its decision to sell the
stock of BAX Global.
The effective tax rate in 2004 was higher than the U.S. statutory tax rate due
to state income tax expense. The effective tax rate in 2003 was higher than the
U.S. statutory rate due to state deferred tax valuation allowances related to
BAX Global and additional accruals made in 2003 for tax contingencies related to
the natural resource business.
Note 6 - Property and Equipment
================================================================================
The following table presents the Company's property and equipment that is
classified as held and used:
December 31,
(In millions) 2005 2004
- ---------------------------------------------------------------------------
Land $ 27.1 23.2
Buildings 125.2 159.6
Leasehold improvements 146.0 171.2
Security systems 734.1 647.3
Vehicles 209.3 210.5
Capitalized software 80.4 155.8
Aircraft and related assets - 64.0
Other machinery and equipment 340.1 480.2
- ---------------------------------------------------------------------------
1,662.2 1,911.8
Accumulated depreciation and amortization (794.8) (997.8)
- ---------------------------------------------------------------------------
Property and equipment, net (a) $ 867.4 914.0
===========================================================================
(a) Includes $134.0 million in 2004 related to BAX Global.
Amortization of capitalized software costs included in continuing operations was
$13.3 million in 2005, $10.6 million in 2004 and $8.9 million in 2003.
111
Note 7 - Acquisitions
================================================================================
The Company acquired security operations in seven countries over the last two
years. These operations have all been included in the Company's Brink's
operating segment.
Acquisition completed
(In millions) in the quarter ended Purchase price
- ------------------------------------------------------------------------------
Greece March 31, 2004 $ 11.9
Other September 30, 2004 2.9
- ------------------------------------------------------------------------------
$ 14.8
==============================================================================
Luxembourg, Scotland and Ireland March 31, 2005 $ 41.9
Hungary, Poland and the Czech Republic June 30, 2005 10.7
Other December 31, 2005 0.6
- ------------------------------------------------------------------------------
$ 53.2
==============================================================================
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 fair value on the date of acquisition. The
consolidated statements of operations include the results of operations for an
acquired entity from the date of acquisition. The results of the acquired
operations were not material to the Company's consolidated statements of
operation for the periods presented.
Purchase prices for 2005 acquisitions 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 8 -Goodwill and Other Intangible Assets
================================================================================
Goodwill
The changes in the carrying amount of goodwill for the years ended December 31,
2005 and 2004 are as follows:
(In millions) Brink's BAX Global Total
- -------------------------------------------------------------------------------
December 31, 2003 $ 77.7 166.4 244.1
Acquisitions 7.7 - 7.7
Foreign currency exchange 6.7 1.1 7.8
- -------------------------------------------------------------------------------
December 31, 2004 92.1 167.5 259.6
Acquisitions 22.8 - 22.8
Adjustments (a) (1.1) - (1.1)
Foreign currency exchange (10.0) (2.3) (12.3)
Reclassification to assets held for sale - (165.2) (165.2)
- -------------------------------------------------------------------------------
December 31, 2005 103.8 - 103.8
===============================================================================
(a) Purchase accounting adjustment occurring in the year following the
acquisition and adjustments to valuation allowances for deferred tax
assets.
112
Other Intangible Assets
December 31,
(In millions) 2005 2004
- --------------------------------------------------------------------------------
Finite-lived intangible assets $ 21.6 9.6
Accumulated amortization (5.0) (2.5)
- --------------------------------------------------------------------------------
Intangible assets, net (a) $ 16.6 7.1
================================================================================
(a) Includes $0.9 million in 2004 related to BAX Global.
The Company's intangible assets are included in other assets on the balance
sheet and consist primarily of covenants not to compete and customer lists.
Note 9 - Other Assets
================================================================================
December 31,
(In millions) 2005 2004
- ---------------------------------------------------------------------------------------------------------
Deferred subscriber acquisition costs $ 72.1 65.1
Investment in unconsolidated entities:
Cost method (a) 23.4 23.4
Equity method 15.7 17.1
Deferred charges for aircraft heavy maintenance - 18.7
Long-term receivables 15.9 16.7
Prepaid pension assets (see note 4) - 14.1
Intangible assets, net (see note 8) 16.6 7.1
Other 23.3 29.6
- ---------------------------------------------------------------------------------------------------------
Other assets (b) $ 167.0 191.8
=========================================================================================================
(a) As discussed in note 1, the Company retrospectively adjusted its cost method
investment in 2004 to reflect the adoption of FSP APB 18-1, increasing the
investment by $14.5 million for cumulative currency translation losses.
(b) Includes $32.2 million in 2004 related to BAX Global.
Note 10 - Accrued Liabilities
================================================================================
December 31,
(In millions) 2005 2004
- ---------------------------------------------------------------------------------------------------------
Payroll and other employee liabilities $ 103.2 135.9
Taxes 92.4 111.5
Postretirement benefits other than pensions (see note 4) 56.4 52.9
Aircraft lease turnback obligations (a) - 52.2
Withdrawal obligation for coal related multi-employer pension plan (see note 4) 30.5 36.6
Workers' compensation and other claims 31.9 37.6
Other 140.2 185.8
- ---------------------------------------------------------------------------------------------------------
Accrued liabilities (b) $ 454.6 612.5
=========================================================================================================
(a) Aircraft lease turnback obligations represent amounts estimated to be paid
related to heavy maintenance upon the expiration of aircraft lease
agreements.
(b) Includes $167.7 million in 2004 related to BAX Global.
113
Note 11 - Other Liabilities
================================================================================
December 31,
(In millions) 2005 2004
- --------------------------------------------------------------------------------------------------------------
Workers' compensation and other claims $ 61.9 65.1
Minority interest 41.5 40.0
Other 74.0 71.7
- --------------------------------------------------------------------------------------------------------------
Other liabilities (a) $ 177.4 176.8
==============================================================================================================
(a) Includes $15.3 million in 2004 related to BAX Global.
Note 12 - Long-Term Debt
================================================================================
- --------------------------------------------------------------------------------------------------------------
December 31,
(In millions, denominated in U.S. dollars unless noted) 2005 2004
- --------------------------------------------------------------------------------------------------------------
Bank credit facilities:
Revolving Facility (year-end weighted average rate of 3.75% in 2005 and 2.90% in 2004) $ 123.6 18.4
Euro-denominated credit facilities of French subsidiaries (year-end weighted average
rate of 3.23% in 2005 and 3.11% in 2004) 3.9 7.5
Other non-U.S. dollar denominated facilities (year-end weighted average rate of 9.53%
in 2005 and 9.92% in 2004) 15.9 20.6
- --------------------------------------------------------------------------------------------------------------
143.4 46.5
- --------------------------------------------------------------------------------------------------------------
Senior Notes:
Series A, 7.84%, due 2006-2007 36.7 55.0
Series B, 8.02%, due 2008 20.0 20.0
Series C, 7.17%, due 2006-2008 20.0 20.0
- --------------------------------------------------------------------------------------------------------------
76.7 95.0
- --------------------------------------------------------------------------------------------------------------
Other:
Capital leases (average rates: 5.55% in 2005 and 5.35% in 2004) 24.1 32.0
Dominion Terminal Associates 6.0% bonds, due 2033 43.2 43.2
- --------------------------------------------------------------------------------------------------------------
Total long-term debt (a) 287.4 216.7
Current maturities of long-term debt:
Bank credit facilities 2.9 6.0
Senior Notes 25.0 18.3
Capital leases 7.6 10.8
- --------------------------------------------------------------------------------------------------------------
Total current maturities of long-term debt 35.5 35.1
- --------------------------------------------------------------------------------------------------------------
Total long-term debt excluding current maturities $ 251.9 181.6
==============================================================================================================
(a) Includes $2.7 million in 2004 related to BAX Global.
114
The Company has an unsecured $400 million revolving bank credit facility
("Revolving Facility") with a syndicate of banks against which it may borrow (or
otherwise satisfy credit needs) on a revolving multi-currency basis over a
five-year term ending in October 2009. At December 31, 2005, $276.4 million was
available for use under the Revolving Facility. The Company has the option to
borrow based on LIBOR plus a margin, prime rate or a competitive bid among the
individual banks. The margin on LIBOR borrowings, which can range from 0.3% to
1.0% depending on the Company's credit rating, was 0.6% at December 31, 2005.
When borrowings and letters of credit under the Revolving Facility are in excess
of $200 million, the applicable interest rate is increased by 0.125%. The
Company also pays an annual facility fee on the Revolving Facility based on the
Company's credit rating. The facility fee, which can range from 0.1% to 0.25%,
was 0.15% as of December 31, 2005.
The Company 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 costs of these letters of
credit are expected to be approximately the same as borrowings under its $400
million facility discussed above. As of December 31, 2005, $5.9 million was
available for use under this revolving credit facility. The Revolving Facility
and the multi-currency revolving credit facilities described below are also used
for the issuance of letters of credit and bank guarantees.
The Company has three unsecured multi-currency revolving bank credit facilities
totaling $121.4 million in available credit at December 31, 2005, of which $50.8
million was unused. When rates are favorable, the Company also borrows from
other banks under short-term uncommitted agreements. Various foreign
subsidiaries maintain other secured and unsecured lines of credit and overdraft
facilities with a number of banks. Amounts borrowed under these agreements are
included in short-term borrowings.
At December 31, 2005, the Company had $76.7 million of Senior Notes outstanding
that are scheduled to be repaid in 2006 through 2008, including $18.3 million
which was paid as scheduled in January 2006. Interest on each series of the
Senior Notes is payable semiannually, and the Company has the option to prepay
all or a portion of the Senior Notes prior to maturity subject to a make-whole
provision. The Senior Notes are unsecured. On February 28, 2006, the Company
gave notice to the holders of the Senior Notes that the Company would elect to
prepay the remaining $58.4 million outstanding in the first quarter of 2006. A
make-whole payment of approximately $1.7 million is expected to be paid in
connection with this prepayment.
Minimum repayments of long-term debt, excluding the repayments of Senior Notes
discussed above, are as follows:
Capital Other long-
(In millions) Leases term debt Total
--------------------------------------------------------------
2006 $ 7.6 2.9 10.5
2007 5.3 11.2 16.5
2008 3.9 1.8 5.7
2009 3.5 124.4 127.9
2010 2.2 0.8 3.0
Later years 1.6 45.5 47.1
--------------------------------------------------------------
Total (a) $ 24.1 186.6 210.7
==============================================================
(a) Excludes repayments of BAX Global's $2.9 million long-term debt.
115
Capital Leases
Property under capital leases are included in property and equipment as follows:
Asset Balance at December 31,
- --------------------------------------------------------------------------
(In millions) 2005 2004
- --------------------------------------------------------------------------
Asset class:
Buildings $ 28.3 31.7
Vehicles 54.5 61.2
Machinery and equipment 15.2 17.1
- --------------------------------------------------------------------------
98.0 110.0
Less: accumulated amortization 56.4 59.3
- --------------------------------------------------------------------------
Total (a) $ 41.6 50.7
==========================================================================
(a) Includes $2.2 million in 2004 related to BAX Global.
The Company's Brink's, BHS, and BAX Global subsidiaries have guaranteed the
Revolving Facility, the Letter of Credit Facility and the Senior Notes. As of
January 31, 2006, BAX Global is no longer a guarantor as a result of the sale of
BAX Global. The Revolving Facility, the Letter of Credit Facility, the agreement
under which the Senior Notes were issued and the multi-currency revolving bank
credit facilities each contain various financial and other covenants. The
financial covenants, among other things, limit the Company's total indebtedness,
limit the use of proceeds on sales of assets (including the sale of BAX Global),
provide for minimum coverage of interest costs, and require the Company to
maintain a minimum level of net worth. The credit agreements do not provide for
the acceleration of payments should the Company's credit rating be reduced. If
the Company were not to comply with the terms of its various loan agreements,
the repayment terms could be accelerated and the commitment could be withdrawn.
An acceleration of the repayment terms under one agreement could trigger the
acceleration of the repayment terms under the other loan agreements. The Company
was in compliance with all financial covenants at December 31, 2005.
In 2003, at the Company's request, the Peninsula Ports Authority of Virginia
issued a new series of bonds to replace the previous bonds related to Dominion
Terminal Associates, a deep water coal terminal in which the Company no longer
has an interest. The Company continues to pay interest on and guarantee payment
of the $43.2 million principle of the new bonds and ultimately will have to pay
for the retirement of the new bonds in accordance with the terms of the
guarantee. The new bonds bear a fixed interest rate of 6.0% and mature in 2033.
The new bonds may mature prior to 2033 upon the occurrence of specified events
such as the determination that the bonds are taxable or the failure of the
Company to abide by the terms of its guarantee.
At December 31, 2005, the Company had undrawn unsecured letters of credit and
guarantees totaling $221.1 million, including $144.1 million issued under the
Letter of Credit Facility, and $44.1 million issued under the multi-currency
revolving bank credit facility. These letters of credit primarily support the
Company's obligations under various self-insurance programs, credit facilities
and aircraft leases.
116
Note 13 - Accounts Receivable and Asset Securitization
================================================================================
December 31,
(In millions) 2005 2004
- ---------------------------------------------------------------------------
Trade $ 372.0 716.1
Other 58.4 60.1
- ---------------------------------------------------------------------------
430.4 776.2
Estimated uncollectible amounts (11.3) (26.7)
- ---------------------------------------------------------------------------
Accounts receivable, net (a) $ 419.1 749.5
===========================================================================
(a) Includes $377.6 million for trade and other receivables, net of $10.6
million in estimated uncollectible amounts in 2004, related to BAX Global
in 2004.
In December 2000, the Company entered into a five-year agreement to sell a
revolving interest in BAX Global's U.S. domestic accounts receivable through a
commercial paper conduit program. The primary purpose of the agreement was to
obtain access to a lower-cost source of funds. The securitization program
terminated in December 2005 under the terms of the agreement.
Qualifying accounts receivable of BAX Global's U.S. operations were sold on a
monthly basis, without recourse, to BAX Funding Corporation ("BAX Funding"), a
wholly owned consolidated special-purpose subsidiary of BAX Global. BAX Funding
then sold an undivided interest in the entire pool of accounts receivable to a
bank-sponsored conduit entity. The conduit issued commercial paper to finance
the purchase of its interest in the receivables. Under the program, BAX Funding
could sell up to a $90 million interest in the receivables pool to the conduit.
During the term of the agreement, the conduit's interest in daily collections of
accounts receivable was reinvested in newly originated receivables.
December 31,
(In millions) 2004
- -------------------------------------------------------------------
Accounts receivable purchased by BAX Funding:
Total pool $ 118.9
Revolving interest sold to conduit (25.0)
- -------------------------------------------------------------------
Amount included in accounts receivable $ 93.9
===================================================================
Due to the short-term nature of the Company's retained interest in accounts
receivable, its fair value approximated carrying value, net of an appropriate
allowance. The Company did not record a servicing asset or liability because the
average servicing period for accounts receivable approximated one month.
The discounts and other fees of the accounts receivable securitization are
included as a component of the Company's income (loss) from discontinued
operations. Expense recorded was as follows:
Years Ended December 31,
(In millions) 2005 2004 2003
- ------------------------------------------------------------------------------
Discounts and other fees of BAX Global's accounts
receivable securitization program $ 2.7 1.7 1.7
==============================================================================
117
Note 14 -Operating Leases
================================================================================
The Company leases facilities, vehicles, computers and other equipment under
long-term operating and capital leases with varying terms. Most of the operating
leases contain renewal and/or purchase options. The Company expects that in the
normal course of business, the majority of operating leases will be renewed or
replaced by other leases.
As of December 31, 2005, future minimum lease payments under noncancellable
operating leases with initial or remaining lease terms in excess of one year are
included below. The table excludes operating leases related to BAX Global. See
note 5 for information about leases related to BAX Global.
(In millions) Facilities Vehicles Other Total
- -------------------------------------------------------------------
2006 $ 34.1 29.0 3.6 66.7
2007 27.8 23.4 2.9 54.1
2008 20.7 17.9 2.4 41.0
2009 15.9 11.1 1.7 28.7
2010 11.6 7.5 1.0 20.1
Later years 35.8 10.7 0.7 47.2
- -------------------------------------------------------------------
$ 145.9 99.6 12.3 257.8
===================================================================
The table above includes lease payments for the initial accounting lease term
and all renewal periods for most vehicles under operating leases used in Brink's
and BHS' U.S. operations. If the Company were to not renew these leases, it
would be subject to a residual value guarantee. The Company's maximum residual
value guarantee was $58.3 million at December 31, 2005. If the Company continues
to renew the leases and pays all of the lease payments for the vehicles that
have been included in the above table (which aggregate lease payments decline
over four to eight years), this residual value guarantee will reduce to zero at
the end of the final renewal period. In addition, the Company has $4.9 million
of maximum guaranteed residuals on another operating lease.
Net rent expense included in continuing operations amounted to $84.3 million in
2005, $74.4 million in 2004 and $76.1 million in 2003.
118
Note 15 - Share-Based Compensation Plans
================================================================================
The Company has stock incentive plans to encourage employees and nonemployee
directors to remain with the Company and to more closely align their interests
with those of the Company's shareholders.
Stock Option Plans
In May 2005, the shareholders of the Company approved the 2005 Equity Incentive
Plan (the "2005 Plan") as the successor plan to the 1988 Stock Option Plan (the
"1988 Plan"). As a result, the 1988 Plan terminated in May 2005 except as to
options still outstanding. The 2005 Plan is similar to the 1988 Plan but also
allows for grants of restricted stock and restricted stock units as well as
performance units and other share-based awards. No restricted stock, restricted
stock units, performance units or share-based awards other than stock options
were granted in 2005 under the 2005 Plan. The Company also has a Non-Employee
Directors' Stock Option Plan (the "Directors' Plan").
Options are granted at a price not less than the average quoted market price on
the date of grant. All grants in the last three years under the 2005 Plan and
the 1998 Plan have a maximum term of six years and all of these grants either
vest over three years from the date of grant or vest 100% at the end of the
third year. The Directors' Plan options are granted with a maximum term of ten
years and vest in full at the end of six months. There are 4.6 million shares
underlying options that are authorized, but not yet granted. Although it has not
expressed any intent to do so, the Company has the right to amend, suspend, or
terminate its stock incentive plans at any time by action of the Company's Board
of Directors.
The table below summarizes the activity in all plans for options of the
Company's common stock for 2005, 2004 and 2003.
Per Share
Weighted Average
(Shares in thousands) Shares Exercise Price
- -----------------------------------------------------------------------
Outstanding at December 31, 2002 4,059 $ 23.29
Granted 629 15.24
Exercised (121) 14.10
Forfeited or expired (611) 30.79
- -----------------------------------------------------------------------
Outstanding at December 31, 2003 3,956 21.14
Granted 937 31.88
Exercised (1,262) 19.63
Forfeited or expired (362) 35.18
- -----------------------------------------------------------------------
Outstanding at December 31, 2004 3,269 23.24
Granted 699 35.95
Exercised (1,498) 21.06
Forfeited or expired (131) 26.62
- -----------------------------------------------------------------------
Outstanding at December 31, 2005 2,339 $ 28.25
=======================================================================
119
The following table summarizes information about stock options outstanding and
exercisable as of December 31, 2005.
(Shares in thousands) Stock Options Outstanding Stock Options Exercisable
- ---------------------------------------------------------------------------------------------------
Weighted Average Per Share Per Share
Range of Remaining Contractual Weighted Average Weighted Average
Exercise Prices Shares Life (Years) Exercise Price Shares Exercise Price
- ---------------------------------------------------------------------------------------------------
$ 13.66 to 14.99 52 4.2 $ 14.15 52 $ 14.15
15.00 to 15.49 429 3.5 15.27 153 15.27
15.50 to 21.49 309 2.5 21.37 309 21.37
21.50 to 31.99 99 3.4 23.64 99 23.64
32.00 to 33.99 741 4.6 32.71 157 32.81
34.00 to 35.99 648 5.5 35.79 - -
36.00 to 159.12 61 5.9 39.79 20 41.67
- ---------------------------------------------------------------------------------------------------
Total 2,339 4.3 $ 28.25 790 $ 22.77
===================================================================================================
There were 1.5 million shares of exercisable options with a weighted-average
exercise price of $20.68 per share at December 31, 2004 and 2.3 million shares
of exercisable options with a weighted-average exercise price of $22.62 per
share at December 31, 2003.
In conjunction with the sale of BAX Global in the first quarter of 2006, 0.3
million options held by BAX Global employees were modified such that the options
became immediately vested. This modification will result in additional
compensation expense of $7.4 million and will be recorded within discontinued
operations in the first quarter of 2006. The weighted-average exercise price of
these options is $25.67 and the options must be exercised within 90 days.
Employee Stock Purchase Plan
Under the 1994 Employee Stock Purchase Plan (the "ESPP"), as amended in 2004,
the Company was authorized to issue common stock to eligible employees. The ESPP
was terminated in June 2005. The ESPP was a noncompensatory plan that allowed
eligible employees to buy the Company's common stock at below market value,
subject to plan limitations on the amount an employee could purchase annually.
Under the ESPP, the Company sold approximately 0.1 million shares of common
stock to employees in both 2005 and 2004, and approximately 0.2 million shares
in 2003.
120
Note 16 - Capital Stock
================================================================================
Repurchase Program
The Company has the remaining authority to purchase up to 1.0 million shares of
common stock under a share repurchase program authorized by the board of
directors, with an aggregate purchase price limitation of $19.1 million.
Employee Benefits Trust
The Brink's Company Employee Benefits Trust (the "Trust") holds shares of the
Company's common stock to fund obligations under compensation and employee
benefit programs that provide for the issuance of stock. The Company issued 2.1
million shares in 2005 and 2.5 million shares in 2004 of common stock to the
Trust. Shares held by the Trust that have not been allocated to employees are
accounted for at fair value as a reduction of shareholders' equity similar to
treasury stock. Shares of common stock will be voted by the trustee in the same
proportion as those voted by the Company's employees participating in the
Company's 401(k) plan.
Preferred Stock
At December 31, 2005, the Company has authority to issue up to 2.0 million
shares of preferred stock, par value $10 per share.
Series A Preferred Stock Rights Agreement
Under the Amended and Restated Rights Agreement dated as of September 2003,
holders of common stock have rights to purchase a new Series A Participating
Cumulative Preferred Stock (the "Series A Preferred Stock") of the Company at
the rate of one right for each share of common stock. Each right, if and when it
becomes exercisable, will entitle the holder to purchase one-thousandth of a
share of Series A Preferred Stock at a purchase price of $60.00, subject to
adjustment.
Each fractional share of Series A Preferred Stock will be entitled to
participate in dividends and to vote on an equivalent basis with one whole share
of common stock. Each right will not be exercisable until after a third party
acquires more than 15% of the total voting rights of all outstanding common
stock or on specific dates as may be designated by the Board after commencement
of a tender offer or exchange offer by a third party for more than 15% of the
total voting rights of all outstanding common stock.
If after the rights become exercisable, the Company is acquired in a merger or
other business combination, each right will entitle the holder to purchase, for
the purchase price, common stock of the surviving or acquiring company having a
market value of twice the purchase price. In the event a third party acquires
more than 15% of all outstanding common stock, the rights will entitle each
holder to purchase, at the purchase price, that number of fractional shares of
Series A Preferred Stock equivalent to the number of shares of common stock
which at the time of the triggering event would have a market value of twice the
purchase price. As an alternative to the purchase described in the previous
sentence, the Board may elect to exchange the rights for other forms of
consideration, including that number of shares of common stock obtained by
dividing the purchase price by the market price of the common stock at the time
of the exchange or for cash equal to the purchase price. The rights may be
redeemed by the Company at a price of $0.01 per right and expire on September
25, 2007.
121
Note 17 - Income Taxes
================================================================================
Years Ended December 31,
(In millions) 2005 2004 2003
- -------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes
U.S. $ 45.1 56.5 34.7
Foreign 46.7 55.6 39.6
- -------------------------------------------------------------------------------------------------------
Total $ 91.8 112.1 74.3
=======================================================================================================
Income tax expense (benefit)
Current
U.S. federal $ (0.3) 0.1 17.7
State 1.9 5.4 1.0
Foreign 36.1 26.5 14.8
- -------------------------------------------------------------------------------------------------------
37.7 32.0 33.5
- -------------------------------------------------------------------------------------------------------
Deferred
U.S. federal 10.0 13.2 (12.6)
State (2.1) - 3.7
Foreign 3.9 (4.6) 11.8
- -------------------------------------------------------------------------------------------------------
11.8 8.6 2.9
- -------------------------------------------------------------------------------------------------------
$ 49.5 40.6 36.4
=======================================================================================================
The U.S. federal current income tax provision on continuing operations in 2003
was offset by U.S. federal current tax benefits included in the loss from
discontinued operations.
Years Ended December 31,
(In millions) 2005 2004 2003
- -------------------------------------------------------------------------------------------------------
Comprehensive provision (benefit) for income taxes allocable to
Continuing operations $ 49.5 40.6 36.4
Discontinued operations (3.7) 32.9 27.3
Change in accounting principle (0.9) - -
Other comprehensive income (loss) (13.6) (3.9) 15.9
Shareholders' equity (15.1) (4.7) (0.2)
- -------------------------------------------------------------------------------------------------------
$ 16.2 64.9 79.4
=======================================================================================================
122
The components of the net deferred tax asset are as follows:
December 31,
- -------------------------------------------------------------------------------------------------
(In millions) 2005 2004
- -------------------------------------------------------------------------------------------------
Deferred tax assets
Postretirement benefits other than pensions $ 115.6 125.2
Pension liabilities 78.1 56.0
Multi-employer pension plan withdrawal liabilities 10.9 12.8
Workers' compensation and other claims 42.4 46.8
Deferred revenue 69.1 60.4
Deferred tax on investment in BAX Global 9.2 -
Other assets and liabilities 70.0 137.3
Net operating loss carryforwards 44.1 78.4
Alternative minimum and other tax credits 79.4 56.1
- -------------------------------------------------------------------------------------------------
Subtotal 518.8 573.0
Valuation allowances (42.1) (55.8)
- -------------------------------------------------------------------------------------------------
Total deferred tax assets 476.7 517.2
- -------------------------------------------------------------------------------------------------
Deferred tax liabilities
Property and equipment, net 84.3 130.1
Prepaid pension assets 6.2 9.5
Other prepaid assets 25.3 20.4
Other assets and miscellaneous 12.3 33.4
- -------------------------------------------------------------------------------------------------
Total deferred tax liabilities 128.1 193.4
- -------------------------------------------------------------------------------------------------
Net deferred tax asset $ 348.6 323.8
=================================================================================================
Included in:
Current assets $ 174.0 116.0
Noncurrent assets 196.9 234.7
Current liabilities, included in accrued liabilities (3.5) (0.9)
Noncurrent liabilities (18.8) (26.0)
- -------------------------------------------------------------------------------------------------
Net deferred tax asset (a) $ 348.6 323.8
=================================================================================================
(a) Includes a net deferred tax asset of $26.6 million in 2004 related to BAX
Global.
The valuation allowances relate to deferred tax assets in various state and
non-U.S. jurisdictions. Based on the Company's historical and expected future
taxable earnings, and a consideration of available tax-planning strategies,
management believes it is more likely than not that the Company will realize the
benefit of the existing deferred tax assets, net of valuation allowances, at
December 31, 2005.
123
The following table reconciles the difference between the actual tax provision
from continuing operations and the amounts obtained by applying the statutory
U.S. federal income tax rate of 35% in each year to the income from continuing
operations before income taxes.
Years Ended December 31,
(In millions) 2005 2004 2003
- --------------------------------------------------------------------------------
Income tax expense computed at 35% statutory rate $ 32.1 39.2 26.0
Increases (reductions) in taxes due to:
Adjustments to valuation allowances 18.6 2.1 15.5
State income taxes, net 1.9 2.7 3.1
Medicare subsidy of postretirement costs (2.1) (2.0) -
Repatriation of foreign earnings under the AJCA 2.9 - -
Foreign income taxes 4.7 (0.3) (0.5)
Foreign tax credit carryover (3.9) - -
Taxes on undistributed earnings of foreign affiliates 0.7 (1.7) 1.2
Changes in accrual for tax contingencies (3.8) 1.2 (2.0)
Adjustments to current and deferred tax accounts (0.9) (0.3) (5.8)
Other (0.7) (0.3) (1.1)
- --------------------------------------------------------------------------------
Actual income tax expense on continuing operations $ 49.5 40.6 36.4
================================================================================
Adjustments to the beginning-of-year valuation allowance of $10.0 million in
2005, $1.4 million in 2004 and $15.1 million in 2003 related primarily to
several international operations with a recent history of losses. The valuation
allowance also increased by $8.6 million in 2005, $0.7 million in 2004 and $0.4
million in 2003 to offset the net increase in deferred tax assets in
jurisdictions where the Company had previously concluded that valuation
allowances were necessary. The valuation allowances were required due to the
Company's assessment that these assets did not meet the more-likely-than-not
recognition criteria of SFAS 109.
Adjustments were made to the Company's current and deferred tax assets and
liabilities in each of the prior three years based on a detailed analysis
conducted by the Company. The Company also recognized tax benefits related to
uncertain tax positions upon favorable settlements of issues relating primarily
to the Company's state tax returns in 2005 and U.S. federal tax returns in 2003.
As of December 31, 2005, the Company has not recorded U.S. federal deferred
income taxes on approximately $145 million of undistributed earnings of its
foreign subsidiaries and equity affiliates related to continuing operations. It
is expected that these earnings will be permanently reinvested in operations
outside the U.S. It is not practical to compute the estimated deferred tax
liability on these earnings.
The Company repatriated cash of $71.2 million in 2005, including $22.4 million
related to BAX Gobal's non-U.S. subsidiaries, under the repatriation provision
of the American Jobs Creation Act of 2004. The Company recognized $3.6 million
of additional income tax expense in 2005, including $0.7 million included as a
component of discontinued operations, related to the repatriation.
The Company's U.S. entities file a consolidated U.S. federal income tax return.
124
As of December 31, 2005, the Company had approximately $72 million of
alternative minimum tax credits and $7.4 million of foreign tax credits
available to offset future U.S. federal income taxes. Under current tax law, the
carryforward period for the alternative minimum tax credits is unlimited, and
the 10-year carryforward period for the foreign tax credits will expire in 2013
with respect to $2.9 million, in 2014 with respect to $2.5 million, and in 2015
with respect to $2.0 million.
The gross amount of the net operating loss carryforwards as of December 31, 2005
was $146.3 million related to continuing operations. The tax benefit of net
operating loss carryforwards, before valuation allowances, as of December 31,
2005 was $44.1 million, and expire as follows:
(In millions) Federal State Foreign Total
- ------------------------------------------------------------------------
Year of expiration:
2006-2010 $ - 0.3 6.2 6.5
2011-2015 - - 1.6 1.6
2016 and thereafter - 1.2 - 1.2
Unlimited - - 34.8 34.8
- ------------------------------------------------------------------------
$ - 1.5 42.6 44.1
========================================================================
The Company and its subsidiaries are subject to tax examinations in various U.S.
and foreign jurisdictions and the Company has accrued approximately $13 million
for related contingencies at December 31, 2005. 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, penalties and interest.
Note 18 - Supplemental Cash Flow Information
================================================================================
Years Ended December 31,
(In millions) 2005 2004 2003
- --------------------------------------------------------------------------------
Cash paid for:
Interest $ 23.9 19.3 23.9
Income taxes, net 70.4 34.4 25.3
================================================================================
Other noncash financing activities - settlement of
employee benefits with Company common shares $ 20.2 16.3 16.8
================================================================================
As part of the Company's changes to its U.S. pension plans, beginning on January
1, 2006, the Company will make matching contributions related to its 401(k)
plans in cash rather than in the Company's common stock.
The Company's sales of natural resource assets in 2004 and 2003 included noncash
proceeds, primarily the assumption of liabilities by the purchaser. Noncash
proceeds were $14.8 million in 2004 and $2.6 million in 2003.
125
Note 19- Other Operating Income, Net
================================================================================
Years Ended December 31,
(In millions) 2005 2004 2003
- --------------------------------------------------------------------------------
Gain on sale of equity interest $ - - 10.4
Gains on sale of operating assets and mineral rights, net 9.6 5.7 7.7
Share in earnings of equity affiliates 3.4 1.0 0.3
Royalty income 2.0 1.6 1.7
Foreign currency transaction losses, net (3.1) (0.2) -
Impairment losses (1.3) (0.3) -
Penalties on unpaid value-added taxes - (0.4) -
Other 4.4 3.7 1.9
- --------------------------------------------------------------------------------
Total $ 15.0 11.1 22.0
================================================================================
In October 2003, the Company sold its 23.3% equity interest in MPI Mines Ltd.,
an Australian exploration and development company with interests in gold and
nickel, for $18.8 million in cash and recognized a $10.4 million pretax gain in
continuing operations.
In November 2003, the Company sold substantially all of its remaining
coal-related assets for $14 million in cash plus the assumption of reclamation
and other liabilities for total proceeds of $28.8 million. The Company
recognized gains of $5.8 million in 2005 and $0.3 million in 2004 as liabilities
related to reclamation were formally transferred to the buyer.
In addition, a $3.1 million gain on the sale of residual assets and mineral
rights related to former mining operations in Kentucky was recognized in 2005.
Note 20 - Interest and Other Nonoperating Income (Expense), Net
================================================================================
Years Ended December 31,
- -------------------------------------------------------------------------------
(In millions) 2005 2004 2003
- -------------------------------------------------------------------------------
Interest income $ 4.7 3.8 5.4
Dividend income from real estate investment 4.1 - -
Gains (losses) on sales of marketable securities 0.2 4.3 (0.2)
Gain on monetization of coal royalty agreement - - 2.6
Other, net 0.3 (0.2) 1.2
- -------------------------------------------------------------------------------
Total $ 9.3 7.9 9.0
===============================================================================
126
Note 21 - Risk Management
================================================================================
The Company has risk management policies designed to minimize the impact on
earnings and cash flows from fluctuations in interest rates, commodity prices
and foreign exchange rates. The Company utilizes derivative and non-derivative
financial instruments in order to manage these risks. The Company does not use
derivative financial instruments for purposes other than hedging underlying
commercial or financial exposures of the Company. The risk that counterparties
to these derivative financial instruments may be unable to perform is minimized
by limiting the counterparties to major financial institutions with investment
grade credit ratings. The Company does not expect to incur a loss from the
failure of any counterparty to perform under the agreements. In addition,
depending on market conditions, the Company has been able to adjust its pricing
through the use of surcharges to partially offset large increases in the cost of
commodities such as jet fuel.
Derivative Financial Instruments
The Company had net fair value liabilities of $0.1 million at December 31, 2005
and net fair value assets of $0.2 million at December 31, 2004 associated with
BAX Global's foreign currency forward contacts. The outstanding derivative
financial instruments were assumed by the purchaser of BAX Global in January
2006.
Non-Derivative Financial Instruments
Non-derivative financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and cash equivalents
and trade receivables. The carrying amounts of cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities approximate fair
value because of the short-term nature of these instruments.
The fair value of the Company's floating-rate short-term and long-term debt
approximates the carrying amount. The fair value of the Company's significant
fixed rate long-term debt is described below. Fair value is estimated by
discounting the future cash flows using rates for similar debt instruments at
the valuation date.
December 31,
2005 2004
- ---------------------------------------------------------------------------
Fair Carrying Fair Carrying
(In millions) Value Values Value Values
- ---------------------------------------------------------------------------
Senior Notes $ 79.5 76.7 102.6 95.0
DTA bonds 48.8 43.2 46.6 43.2
===========================================================================
127
Note 22 - Other Commitments and Contingencies
================================================================================
Purchase Obligations
At December 31, 2005, the Company had noncancelable commitments for $23.0
million for equipment purchases, and information technology and other services.
Value-added taxes ("VAT") and customs duties
During 2004, the Company determined that one of its non-U.S. Brink's business
units had not paid customs duties and VAT with respect to the importation of
certain goods and services. The Company was advised that civil and criminal
penalties could be asserted for the non-payment of these customs duties and VAT.
Although no penalties have been asserted to date, they could be asserted at any
time. The business unit has provided the appropriate government authorities with
an accounting of unpaid customs duties and VAT and has made payments covering
its calculated unpaid VAT. As a result of its investigation, the Company accrued
charges of $1.1 million to operating profit and recorded estimated interest
expense of $0.7 million related to this matter during 2004. The Company believes
that the range of reasonably possible losses is between $0.4 million and $3.0
million for potential penalties on unpaid VAT and between $0 and $35 million for
unpaid customs duties and associated penalties. The Company believes that the
assertion of the penalties on unpaid customs duties would be excessive and would
vigorously defend against any such assertion. The Company does not expect to be
assessed interest charges in connection with any penalties that may be asserted.
The Company continues 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.
BAX Global's 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. The Company has
contractually indemnified the purchaser of BAX Global for this contingency.
BAX Global's Taxes
The Company has retained all pre-closing tax assets and liabilities related to
BAX Global, except deferred income taxes. The Company has $23.3 million accrued
for these net tax liabilities at December 31, 2005.
Former Coal Operations
At December 31, 2005, the Company had obligations of $8.6 million (at net
present value) under mineral lease agreements that give it the right to access
and mine coal properties in exchange for required minimum annual payments. These
agreements require that the Company pay royalties to lessors based on production
of coal or minimum amounts if coal is not produced.
128
BHS contingency for a component
BHS has been notified by one of its equipment suppliers that it is reviewing
data associated with the reliability of a component. The supplier is examining
currently available data and developing additional data in order to complete the
review. The conclusions from the review could range from the confirmation of the
reliability of the component to a requirement to replace the component. The
Company does not currently believe that actions, if any, stemming from this
review will have a material impact on the Company's financial position. The
Company expects to be reimbursed for costs, if any, that may be incurred in
responding to the review. However, depending upon the timing and amounts of
expenditures and reimbursements, there could be an impact on results of
operations for individual quarters in 2006.
Gain Contingency - Insurance claims
The Company expects to file insurance claims of $4.0 million to $6.5 million
related to property damage and business interruption insurance coverage for
losses sustained from Hurricane Katrina. As of December 31, 2005 the Company has
recorded a receivable of $2.2 million for claims to be filed, which equals the
amount of hurricane-related property losses recognized to date. Because the
Company's property damage insurance coverage provides for replacement value, the
Company expects to record proceeds in excess of realized losses when the claims
are ultimately settled. Claims for lost revenues under business interruption
coverage will be recognized as operating income when the claims are settled.
Surety Bonds
The Company is required by various state and federal laws to provide security
with regard to its obligations to pay workers' compensation, to reclaim lands
used for mining by the Company's former coal operations and to satisfy other
obligations. As of December 31, 2005, the Company had outstanding surety bonds
with third parties totaling approximately $71.8 million that it has arranged in
order to satisfy various security requirements. Most of these bonds provide
financial security for previously recorded liabilities. The Company expects $9.4
million of the outstanding surety bonds to be replaced with surety bonds
provided by the purchaser of BAX Global. Surety bonds are typically renewable on
a yearly basis; however, there can be no assurance the bonds will be renewed or
that premiums in the future will not increase.
If the remaining surety bonds are not renewed, the Company believes that it has
adequate available borrowing capacity under its Letter of Credit Facility and
its Revolving Facility to provide letters of credit or other collateral to
secure its obligations.
The Company has issued letters of credit under its Letter of Credit Facility,
described in "Debt" above, to satisfy a portion of its security requirements. At
December 31, 2005, $135.8 million of the $144.1 million issued letters of credit
was used to satisfy security requirements.
129
Note 23 - Selected Quarterly Financial Data (unaudited)
================================================================================
2005 Quarters 2004 Quarters
(In millions, except per share amounts) 1st 2nd 3rd 4th (a) 1st 2nd 3rd 4th (b)
- -------------------------------------------------------------------------------------------------------------
Revenues $ 601.1 633.5 651.3 663.1 $ 540.0 551.2 580.3 606.0
Operating profit 29.0 18.3 44.0 24.1 31.4 25.7 45.0 35.3
Income (loss) from:
Continuing operations $ 10.5 2.2 23.4 6.2 $ 14.9 11.8 28.3 16.5
Discontinued operations 3.1 13.1 42.4 46.9 10.9 6.8 9.8 22.5
Cumulative effect of change in
accounting principle - - - (5.4) - - - -
- -------------------------------------------------------------------------------------------------------------
Net income $ 13.6 15.3 65.8 47.7 $ 25.8 18.6 38.1 39.0
=============================================================================================================
Net income (loss) per common share:
Basic:
Continuing operations $ 0.19 0.04 0.41 0.11 $ 0.28 0.21 0.52 0.30
Discontinued operations 0.05 0.23 0.76 0.82 0.20 0.13 0.17 0.41
Cumulative effect of change in
accounting principle - - - (0.09) - - - -
- -------------------------------------------------------------------------------------------------------------
Basic $ 0.24 0.27 1.17 0.84 $ 0.48 0.34 0.69 0.71
=============================================================================================================
Diluted:
Continuing operations $ 0.19 0.04 0.41 0.11 $ 0.27 0.21 0.51 0.29
Discontinued operations 0.05 0.23 0.74 0.81 0.20 0.13 0.17 0.41
Cumulative effect of change in
accounting principle - - - (0.09) - - - -
- -------------------------------------------------------------------------------------------------------------
Diluted $ 0.24 0.27 1.15 0.83 $ 0.47 0.34 0.68 0.70
=============================================================================================================
Dividends declared per common share $ 0.025 0.025 0.025 0.025 $ 0.025 0.025 0.025 0.025
Stock prices:
High $ 39.70 37.36 41.50 49.17 $ 28.38 34.47 34.29 39.91
Low 33.43 29.73 35.50 37.85 22.71 27.57 25.80 30.00
=============================================================================================================
(a) The Company's results of operations in the fourth quarter of 2005 includes
an after-tax charge of $5.4 million to reflect the cumulative effect of a
change in accounting principle related to the adoption of FIN 47. During
the fourth quarter of 2005, the Company reached a final settlement
agreement related to all claims for Federal Black Lung Excise Tax and
recorded a pretax gain of $15.1 million in discontinued operations. The
Company received this refund in 2006. The Company results in the fourth
quarter of 2005 included a $3.0 million gain as liabilities related to
reclamation were formally transferred to the buyer. During the fourth
quarter of 2005 the Company repatriated cash of $71.2 million, including
$22.4 million related to BAX Global's non-U.S. subsidiaries, under the
provision of the American Jobs Creation Act of 2004. The Company recorded
additional income tax expense of $3.6 million in the fourth quarter of
2005, including $0.7 million included as a component of discontinued
operations, related to the repatriation. During the fourth quarter of 2005,
the Company recognized a $7.0 million deferred tax benefit in discontinued
operations as a result of changing its intention regarding its investment
in BAX Global.
(b) Income (loss) from discontinued operations in the fourth quarter of 2004
includes a $5.0 million pretax gain as a result of additional proceeds from
the sale of a former coal operation, and $7.3 million of pretax income as a
result of a decrease in the estimate of the Company's obligation related to
the withdrawal from coal-related multiemployer pension plans.
(c) In November 2005, the Company's Board of Directors approved the sale of BAX
Global. Accordingly, the quarterly results presented in this table have
been reclassified to reflect BAX Global as discontinued operations.
At December 31, 2005, approximately $350 million of stockholders' equity was not
available for dividends to shareholders due to limitations imposed by the
Company's Revolving Facility and other lending arrangements (see note 12).
Earnings per share amounts for each quarter are required to be computed
independently. As a result, their sum may not equal the annual earnings per
share. The Company's quarterly financial data has been reclassified to reflect
the Company's BAX Global, natural gas, timber and gold as part of discontinued
operations. The Company's common stock trades on the New York Stock Exchange as
"BCO." As of March 1, 2006, there were approximately 2,657 shareholders of
record of common stock.
130
THE BRINK'S COMPANY
and subsidiaries
SELECTED FINANCIAL DATA
================================================================================
Five Years in Review
(In millions, except per share amounts) 2005 2004 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------
Revenues and Income
Revenues $ 2,549.0 2,277.5 1,999.4 1,862.3 1,793.9
Income from continuing operations 42.3 71.5 37.9 57.6 58.5
Income (loss) from discontinued operations (a) 105.5 50.0 (8.5) (31.5) (41.9)
Cumulative effect of change in accounting principle (b) (5.4) - - - -
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 142.4 121.5 29.4 26.1 16.6
==================================================================================================================
Financial Position
Property and equipment, net $ 867.4 914.0 873.2 871.2 915.5
Total assets 3,036.9 2,692.7 2,548.6 2,459.9 2,423.2
Long-term debt, less current maturities 251.9 181.6 221.5 304.2 257.4
Shareholders' equity 837.5 688.5 495.6 381.2 476.1
==================================================================================================================
Per Common Share
Basic, net income (loss):
Continuing operations $ 0.75 1.31 0.71 1.08 1.13
Discontinued operations (a) 1.88 0.92 (0.16) (0.60) (0.82)
Cumulative effect of change in accounting principle (b) (0.10) - - - -
- ------------------------------------------------------------------------------------------------------------------
Total basic $ 2.53 2.23 0.55 0.48 0.31
- ------------------------------------------------------------------------------------------------------------------
Diluted, net income (loss):
Continuing operations $ 0.74 1.29 0.71 1.08 1.12
Discontinued operations (a) 1.85 0.91 (0.16) (0.60) (0.81)
Cumulative effect of change in accounting principle (b) (0.09) - - - -
- ------------------------------------------------------------------------------------------------------------------
Total diluted $ 2.50 2.20 0.55 0.48 0.31
- ------------------------------------------------------------------------------------------------------------------
Cash dividends $ 0.10 0.10 0.10 0.10 0.10
==================================================================================================================
Weighted Average Common Shares Outstanding
Basic 56.3 54.6 53.1 52.1 51.2
Diluted 57.0 55.3 53.2 52.4 51.4
==================================================================================================================
(a) Income (loss) from discontinued operations reflects the operations and
gains and losses on disposal of the Company's former coal, natural gas,
timber, gold and BAX Global operations. Some of the expenses recorded
within discontinued operations through 2002 are continuing after the
disposition of the coal business and are recorded within continuing
operations in 2003, 2004 and 2005. The expenses that continue primarily
consist of postretirement and other employee benefits associated with
Company-sponsored plans and black lung obligations, and administrative and
legal expenses to oversee residual assets and retained benefit obligations.
See notes 4 and 5. In accordance with APB 30, the Company included these
expenses within discontinued operations for periods prior to 2003.
Beginning in 2003, expenses related to Company-sponsored pension and
postretirement benefit obligations, black lung obligations and related
administrative costs are recorded as a component of continuing operations.
The amount of expenses related to postretirement and other employee
benefits associated with the Company-sponsored plans and black lung
obligations that were charged to discontinued operations were $2 million
and $53 million, for the years ended 2002 and 2001, respectively.
Adjustments to contingent liabilities are continuing to be recorded within
discontinued operations.
(b) The Company's 2005 results of operations includes a noncash after-tax
charge of $5.4 million or $0.09 per diluted share to reflect the cumulative
effect of a change in accounting principle pursuant to the adoption of FIN
47.
131
BOARD OF DIRECTORS AND SENIOR MANAGEMENT
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The Board of Directors, as elected by the shareholders, is divided into three
classes, with the term of office of one of the three classes of directors
expiring each year, and with each class being elected for a three-year term.
Presently, there are twelve members of the Board of Directors, eleven of whom
are outside directors with broad experience in business, finance and public
affairs.
Roger G. Ackerman /1/, /3/, /4/
Retired Chairman and Chief Executive Officer - Corning Incorporated (specialty
glass, ceramics and communications)
Betty C. Alewine /1/, /4/, /6/
Retired President and Chief Executive Officer - COMSAT Corporation (provider of
global satellite services and digital networking services and technology)
James R. Barker /1/, /2/, /3/
Chairman - The Interlake Steamship Co. (vessel owners and operators of self
unloaders); Chairmen - New England Fast Ferry Company, LLC (ferry owners and
operators); Vice Chairman - Mormac Marine Group, Inc. (vessel operating
Company); and Vice Chairman - Moran Towing Corporation (tug and barge owners and
operators)
Marc C. Breslawsky /1/, /5/, /6/
Retired Chairman and Chief Executive Officer - Imagistics International Inc.
(direct sales, service and marketing of enterprise office imaging and document
solutions)
John S. Brinzo /1/, /2/, /5/
Chairman and Chief Executive Officer - Cleveland - Cliffs Inc (supplier of iron
ore products to the steel industry in North America, China and Europe)
James L. Broadhead /1/, /3/, /6/
Retired Chairman and Chief Executive Officer - FPL Group, Inc. (public utility
holding company)
Michael T. Dan /1/
Chairman of the Board, President and Chief Executive Officer - The Brink's
Company
Ronald M. Gross /1/, /2/, /4/
Chairman Emeritus, Former Chairman and Chief Executive Officer - Rayonier Inc.
(a global supplier of specialty pulps, timber and wood products)
Murray D. Martin /1/, /5/, /6/
President and Chief Operating Officer - Pitney Bowes Inc. (provider of
integrated mail and document management solutions)
Lawrence J. Mosner /1/, /2/, /5/
Retired Chairman and Chief Executive Officer - Deluxe Corporation (helps
financial institutions and small businesses better manage, promote, and grow
their businesses)
Carl S. Sloane /1/, /2/, /6/
Private Consultant and Ernest L. Arbuckle Professor of Business Administration,
Emeritus, Harvard University, Graduate School of Business Administration
Ronald L. Turner /1/ /4/, /5/
Chairman, President and Chief Executive Officer - Ceridian Corporation
(information services company engaged in providing outsourcing services to human
resources, transportation and retail markets in the United States, Canada and
Europe)
/1/ Executive Committee
/2/ Audit and Ethics Committee
/3/ Compensation and Benefits Committee
/4/ Corporate Governance and Nominating Committee
/5/ Finance Committee
/6/ Pension Committee
THE BRINK'S COMPANY
EXECUTIVE OFFICERS
Michael T. Dan
Chairman of the Board, President and Chief Executive Officer
James B. Hartough
Vice President - Corporate Finance and Treasurer
Frank T. Lennon
Vice President and Chief Administrative Officer
Austin F. Reed
Vice President, General Counsel and Secretary
Robert T. Ritter
Vice President and Chief Financial Officer
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