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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-9148
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THE BRINK'S COMPANY
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(Exact name of registrant as specified in its charter)
Virginia 54-1317776
----------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1801 Bayberry Court, Richmond, Virginia 23226-8100
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (804) 289-9600
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
As of May 3, 2004, 56,751,610 shares of $1 par value common stock were
outstanding.
Part I - Financial Information
- ------------------------------
The Brink's Company
and subsidiaries
Consolidated Balance Sheets
March 31, December 31,
(In millions) 2004 2003
- ------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 141.2 128.7
Accounts receivable, net 579.3 580.3
Prepaid expenses and other 71.5 59.8
Deferred income taxes 85.1 91.7
- ------------------------------------------------------------------------------------------------------
Total current assets 877.1 860.5
Property and equipment, net 862.7 873.2
Goodwill, net 243.2 244.1
Investments held by Voluntary Employees' Beneficiary
Association trust ("VEBA") (see note 1) - 105.2
Deferred income taxes 283.7 282.7
Other assets 191.7 182.9
- ------------------------------------------------------------------------------------------------------
Total assets $ 2,458.4 2,548.6
======================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 57.7 35.8
Current maturities of long-term debt 33.2 17.2
Accounts payable 299.9 286.9
Accrued liabilities 483.7 504.2
- ------------------------------------------------------------------------------------------------------
Total current liabilities 874.5 844.1
Long-term debt 176.1 221.5
Accrued pension costs 96.2 86.6
Postretirement benefits other than pensions (see note 1) 397.1 504.2
Deferred revenue 132.7 130.7
Deferred income taxes 24.9 26.5
Other liabilities 235.5 239.4
- ------------------------------------------------------------------------------------------------------
Total liabilities 1,937.0 2,053.0
Commitments and contingent liabilities (notes 4 and 8)
Shareholders' equity:
Common stock 56.8 54.3
Capital in excess of par value 448.7 383.0
Retained earnings 261.6 237.2
Accumulated other comprehensive loss (171.9) (164.9)
Employee benefits trust, at market value (73.8) (14.0)
- ------------------------------------------------------------------------------------------------------
Total shareholders' equity 521.4 495.6
- ------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,458.4 2,548.6
======================================================================================================
See accompanying notes to consolidated financial statements.
2
The Brink's Company
and subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended
March 31,
(In millions, except per share amounts) 2004 2003
- ---------------------------------------------------------------------------------------------------------
Revenues $1,094.5 928.9
Expenses:
Operating expenses 929.9 806.6
Selling, general and administrative expenses 134.4 124.8
- ---------------------------------------------------------------------------------------------------------
Total expenses 1,064.3 931.4
Other operating income, net 3.5 2.5
- ---------------------------------------------------------------------------------------------------------
Operating profit 33.7 -
Interest expense (5.8) (6.1)
Interest and other income, net 4.4 1.8
Minority interest (3.3) (0.8)
- ---------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes 29.0 (5.1)
Provision (benefit) for income taxes 11.8 (1.9)
- ---------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 17.2 (3.2)
Income from discontinued operations, net of tax 8.6 1.5
- ---------------------------------------------------------------------------------------------------------
Net income (loss) $ 25.8 (1.7)
=========================================================================================================
Net income (loss) per common share:
Basic:
Continuing operations $ 0.32 (0.06)
Discontinued operations 0.16 0.03
- ---------------------------------------------------------------------------------------------------------
$ 0.48 (0.03)
=========================================================================================================
Diluted:
Continuing operations $ 0.32 (0.06)
Discontinued operations 0.15 0.03
- ---------------------------------------------------------------------------------------------------------
$ 0.47 (0.03)
=========================================================================================================
See accompanying notes to consolidated financial statements.
3
The Brink's Company
and subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
(In millions) 2004 2003
- -----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 25.8 (1.7)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Income from discontinued operations, net of tax (8.6) (1.5)
Depreciation and amortization 42.7 40.2
Impairment charges from subscriber disconnects 8.7 7.5
Amortization of deferred revenue (6.1) (5.8)
Aircraft heavy maintenance expense 6.4 5.4
Deferred income taxes 2.0 (4.5)
Provision for uncollectible accounts receivable 1.3 -
Postretirement benefit funding (more) less than expense:
Pension 9.9 7.1
Other than pension (1.7) 2.0
Other operating, net 0.9 3.7
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (8.4) 10.5
Accounts payable and accrued liabilities (0.5) (21.0)
Deferred subscriber acquisition costs (4.7) (4.3)
Deferred revenue from new subscribers 8.1 6.5
Other, net (20.0) 1.4
Discontinued operations, net 0.2 3.8
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 56.0 49.3
- -----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (50.0) (45.3)
Aircraft heavy maintenance expenditures (3.8) (3.9)
Proceeds from disposal of:
Timber business 31.8 -
Less purchase of equipment formerly leased (6.2) -
Gold business 1.1 -
Property and equipment and other assets 1.9 1.3
Monetization of notes receivable related to sale of coal business - 6.2
Acquisitions (13.2) (4.5)
Other, net (5.4) (1.6)
Discontinued operations, net (0.8) (1.5)
- -----------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (44.6) (49.3)
- -----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Long term debt:
Additions 20.1 8.0
Repayments (46.2) (17.1)
Short-term borrowings, net 25.9 24.9
Dividends (1.3) (1.3)
Other 4.3 0.1
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2.8 14.6
- -----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (1.7) 0.2
- -----------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 12.5 14.8
Cash and cash equivalents at beginning of period 128.7 102.3
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 141.2 117.1
=================================================================================================================
See accompanying notes to consolidated financial statements.
THE BRINK'S COMPANY
and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of presentation and accounting changes
The Brink's Company (along with its subsidiaries, the "Company") has three
operating segments:
o Brink's, Incorporated ("Brink's")
o Brink's Home Security, Inc. ("BHS")
o BAX Global Inc. ("BAX Global")
The Company has significant liabilities associated with its former coal
operations and expects to have significant ongoing expenses and cash outflows
related to these operations.
Effective January 1, 2004, the Company restricted the use of the assets held by
its Voluntary Employees' Beneficiary Association trust ("VEBA") to only pay
obligations of its coal-related retiree medical plan and, accordingly, began
accounting for the VEBA as a plan asset in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." These investments were previously
accounted for as available-for-sale securities under SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." With the restriction in
the use of the VEBA, unrealized net gains of $4.4 million were recognized in the
first quarter of 2004 within Interest and other income, net.
In addition, the carrying value of the VEBA is now reflected as a direct offset
to the liability within Postretirement benefits other than pensions on the
balance sheet. The carrying value at March 31, 2004 is approximately $108
million.
The Company's unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") for interim financial reporting and applicable quarterly
reporting regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and notes required by GAAP for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Certain prior period amounts have been
reclassified to conform to the current period's financial statement
presentation. Operating results for the interim periods of 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004. For further information, refer to the Company's Annual Report
on Form 10-K for the year ended December 31, 2003.
Pro forma earnings per share
The Company accounts for its equity-based compensation plans using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, since options are granted with an exercise price equal to the
market price of the stock on the date of grant, the Company has not recognized
any compensation expense related to its stock option plans.
5
Had compensation costs for equity-based compensation plans been determined based
on the fair value of awards at the grant dates consistent with the optional
recognition provision of SFAS No. 123, "Accounting for Stock Based
Compensation," net income (loss) per share would have approximated the pro forma
amounts indicated below:
Three Months Ended
(In millions, except March 31,
per share amounts) 2004 2003
- ----------------------------------------------------------------------------------------------
Net income (loss):
As reported $ 25.8 (1.7)
Less: stock-based compensation expense determined
under fair value method, net of related tax effects (0.5) (1.1)
- ----------------------------------------------------------------------------------------------
Pro forma $ 25.3 (2.8)
==============================================================================================
Net income (loss) per share:
Basic, as reported $ 0.48 (0.03)
Basic, pro forma 0.47 (0.05)
Diluted, as reported $ 0.47 (0.03)
Diluted, pro forma 0.46 (0.05)
- ----------------------------------------------------------------------------------------------
The fair value of each stock option grant has been estimated at the time of the
grant using the Black-Scholes option-pricing model. Pro forma net income (loss)
and per share disclosures are computed by amortizing the estimated fair value of
the grants over option vesting periods. If a different option-pricing model had
been used, results may have been different.
The assumptions used and the resulting weighted-average grant-date estimates of
fair value for options granted are as follows:
Three Months Ended
- -------------------------------------------------------------------------
March 31, 2004
Options granted:
In millions 0.1
Weighted average exercise price $ 24.48
Assumptions:
Expected dividend yield 0.5%
Expected volatility 31%
Risk-free interest rate 2.4%
Expected term (in years) 3.4
Fair value estimates:
In millions $ 0.6
Per share $ 6.01
=========================================================================
6
Recent accounting pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003, "FIN 46R"), "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 and, accordingly,
whether the business enterprise should consolidate the entity. The Company
implemented this accounting interpretation in the first quarter of 2004. The
implementation did not have a material effect on the Company's results of
operations or financial position.
Beginning in the first quarter of 2004, as required by SFAS No. 132R,
"Employers' Disclosure about Pensions and Other Postretirement Benefits,"
disclosures applicable to the Company's U.S. pension plan have been expanded.
The standard requires, among other things, additional interim disclosures about
the amount and components of pension and other postretirement benefit expense.
See note 3.
Note 2 - Earnings per share
Basic and diluted weighted average share information used to compute the
Company's earnings per share in the first quarter of 2004 and 2003 was as
follows:
Three Months Ended
March 31,
(Shares in millions) 2004 2003
- --------------------------------------------------------------------------------
Basic weighted average common shares outstanding 53.9 52.6
Effect of dilutive stock options 0.5 -
- --------------------------------------------------------------------------------
Diluted weighted average common shares outstanding 54.4 52.6
================================================================================
Antidilutive stock options excluded from computation 3.8 4.0
================================================================================
Unallocated shares of the Company's common stock held by The Brink's Company
Employee Benefits Trust (the "Trust") are treated as treasury shares for
earnings per share purposes. Accordingly, such shares are excluded from earnings
per share calculations. The Trust held 2.7 million shares at March 31, 2004 and
1.5 million shares at March 31, 2003.
Note 3 - Pension and other postretirement benefits
Pension
The Company has defined benefit pension plans covering substantially all U.S.
non-union employees who meet certain minimum requirements. The Company also has
other defined benefit plans for eligible non-U.S. employees. The net pension
cost for the Company's pension plans in the first quarter of 2004 and 2003 was
as follows:
(In millions) U.S. Plans Non-U.S. Total
- -----------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2004 2003 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------
Service cost $ 6.7 6.1 2.2 1.8 8.9 7.9
Interest cost on projected benefit obligation 10.3 10.0 2.4 1.9 12.7 11.9
Return on assets - expected (12.4) (12.4) (2.2) (1.8) (14.6) (14.2)
Other amortization, net 3.7 2.5 0.9 0.7 4.6 3.2
- -----------------------------------------------------------------------------------------------------------------
Net pension cost $ 8.3 6.2 3.3 2.6 11.6 8.8
=================================================================================================================
7
Based on December 31, 2003 data, assumptions and funding regulations, the
Company does not expect to be required to make a contribution to the primary
U.S. plan for the 2004 plan year. No decision has been made as to whether or not
a voluntary contribution will be made this year.
Other postretirement benefits
Company-Sponsored Plans
The Company provides certain postretirement health care and life insurance
benefits (the "Company-sponsored plans") for eligible active and retired
employees in the U.S. and Canada of the Company's current and former businesses,
including eligible participants of the former coal operations (the
"coal-related" plans). The components of net periodic postretirement costs
related to Company-sponsored plans were as follows:
(In millions) Coal-related plans Other plans Total
- ---------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2004 2003 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------
Service cost $ - - $ 0.2 0.2 $ 0.2 0.2
Interest cost on accumulated
postretirement benefit
obligations ("APBO") 8.2 8.7 0.4 0.4 8.6 9.1
Return on assets - expected (2.3) - - - (2.3) -
Amortization of losses 3.5 3.5 - - 3.5 3.5
- ---------------------------------------------------------------------------------------------------------------
Net periodic postretirement costs $ 9.4 12.2 $ 0.6 0.6 $ 10.0 12.8
===============================================================================================================
As discussed in note 1, the Company began accounting for assets held by its VEBA
as plan assets for the Company-sponsored coal-related plans in 2004. The Company
assumed an 8.75% expected return on assets to determine its net periodic
postretirement costs.
The Company's coal-related retiree medical plan is expected to qualify for a
federal subsidy introduced as part of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003. As a result, the Company included an
actuarial gain in its estimate of the December 31, 2003 projected benefit
obligation. This resulted in a $1.5 million reduction in the Company's
postretirement benefit expense in the first quarter of 2004 compared to what it
would have been otherwise. The effect on the full year is expected to be $5.8
million.
Pneumoconiosis (Black Lung) Benefits
The Company is self-insured with respect to almost all black lung benefits. The
components of net periodic postretirement benefit costs related to black lung
benefits were as follows:
Three Months Ended
March 31,
(In millions) 2004 2003
- ---------------------------------------------------------------------------
Interest cost on APBO and other $ 1.0 1.0
Amortization of losses 0.5 0.5
- ---------------------------------------------------------------------------
Net periodic postretirement costs $ 1.5 1.5
===========================================================================
8
Note 4 - Discontinued operations
Three Months Ended
March 31,
(In millions) 2004 2003
- -------------------------------------------------------------------------------------------------
Gain (loss) on sales of:
Timber $ 18.8 -
Gold (0.9) -
Results from operations:
Natural Gas - 3.0
Timber (0.5) 0.2
Gold (1.2) (0.1)
Adjustments to contingent liabilities of former operations (2.9) (0.6)
- -------------------------------------------------------------------------------------------------
Income from discontinued operations before income taxes 13.3 2.5
Income tax expense (4.7) (1.0)
- -------------------------------------------------------------------------------------------------
Income from discontinued operations $ 8.6 1.5
=================================================================================================
Gain (loss) on sales
Timber. In December 2003, the Company sold a portion of its timber business for
$5.4 million in cash and recognized a $4.8 million pretax gain in discontinued
operations. The Company received an additional $31.8 million from escrow in
January 2004 for the remaining portion of its timber business. After deducting
the book value of related assets and the payment of $6.2 million in January 2004
to purchase equipment formerly leased, the Company recognized an $18.8 million
pretax gain in discontinued operations in the first quarter of 2004. The Company
expects to recognize up to a $1.9 million pretax gain in the second quarter of
2004 in discontinued operations as the final $1.9 million of cash is released.
Gold. In February 2004 the Company completed the sale of its gold operations for
approximately $1.1 million in cash plus the assumption of liabilities and
recognized a $0.9 million loss.
Results of operations
In addition to the sales of timber and gold businesses, the Company sold its
natural gas business in 2003. The results of operations of these businesses
through the date of the related sale have been classified as discontinued
operations for all periods presented.
Adjustments to contingent liabilities of former operations
The Company recognized $2.9 million of additional expense in the first quarter
of 2004 associated with the settlement of legal matters related to its former
coal operations.
9
Note 5 - Costs associated with exit activities
Brink's - Headquarters
In 2003, management initiated a plan to close the Brink's corporate headquarters
in Darien, Connecticut and relocate employees to either the Brink's U.S.
headquarters in Coppell, Texas or The Brink's Company headquarters in Richmond,
Virginia. The following summarizes the 2004 payments and liability for the exit
activity:
One-time Contract
Termination Termination
(In millions) Benefits Costs Other Total
- ----------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $ 0.3 0.6 0.2 1.1
Payments (0.3) (0.2) - (0.5)
- ----------------------------------------------------------------------------------------------------
Balance at March 31, 2004 $ - 0.4 0.2 0.6
====================================================================================================
A total of $5.4 million was expensed in the last nine months of 2003 associated
with the Darien exit.
BAX Global - 2000
The Company restructured BAX Global's operation in 2000, and recorded accruals
for leases of idled facilities it did not expect to be able to sublease. The
Company has entered into a sublease in 2004 and has reduced the amount of the
remaining accrual by $0.6 million. The adjustment to the accrual also reduced
operating expenses in the first quarter of 2004. The remaining accrual for the
2000 restructuring was $0.3 million at March 31, 2004, representing future
expected lease obligations, net of expected sublease offsets.
Note 6 - Supplemental cash flow information
Three Months Ended
March 31,
(In millions) 2004 2003
- --------------------------------------------------------------------------------------------
Cash paid for:
Interest $ 5.4 5.6
Income taxes, net of refunds 4.8 7.6
============================================================================================
Depreciation of property and equipment $ 40.6 38.4
Amortization of BHS deferred subscriber acquisition costs 2.1 1.8
- --------------------------------------------------------------------------------------------
Total depreciation and amortization $ 42.7 40.2
============================================================================================
10
Note 7 - Comprehensive income
Three Months Ended
March 31,
(In millions) 2004 2003
- ------------------------------------------------------------------------------------------------
Net income (loss) $ 25.8 (1.7)
Other comprehensive income (loss), net of reclasses and taxes:
Foreign currency translation adjustments (4.0) 4.4
Cash flow hedges (0.2) 3.1
Marketable securities (2.8) -
- ------------------------------------------------------------------------------------------------
Comprehensive income $ 18.8 5.8
================================================================================================
Note 8 - Contingencies
The Company records adjustments to contingent assets and liabilities that are
related to former operations within discontinued operations.
Litigation
The Company is defending various potentially significant civil suits related to
both current and former operations. Although the Company is defending these
cases vigorously and believes that its defenses have merit, it is possible that
one or more of these suits ultimately may be decided in favor of the plaintiffs.
If so, the Company expects that the ultimate amount of unaccrued losses could
range from $0 to $25 million.
Health Benefit Act
The Company is obligated to pay premiums to the United Mine Workers of America
("UMWA") Combined Benefit Fund, as described in the Company's 2003 Annual Report
on Form 10-K. At March 31, 2004, the Company has $195.3 million recorded for the
obligation, reflecting the recorded liability at December 31, 2003 less payments
made in 2004. This liability will be adjusted as new historical data is received
and assumptions used to estimate the obligation change.
Multiemployer plan withdrawal liability
The Company participates in the UMWA 1950 and 1974 pension plans at defined
contribution rates, but expects to ultimately withdraw from these plans. At
March 31, 2004, the Company's estimated withdrawal liabilities were $52.0
million. The Company's estimate of the obligation is based on several factors,
including funding status and benefit levels of the plans and the date the
Company is determined to have completely withdrawn from the plans. Since these
factors may change over time, the ultimate withdrawal obligation, if any, could
change materially.
Other loss contingencies
The Company also has recorded estimated liabilities for other contingent
liabilities related to former operations, including those for expected
settlement of coal-related workers' compensation claims and certain reclamation
obligations.
Federal Black Lung Excise Tax
In 1999, the U.S. District Court of the Eastern District of Virginia entered a
final judgment in favor of certain of the Company's subsidiaries, ruling that
the Federal Black Lung Excise Tax ("FBLET") is unconstitutional as applied to
export coal sales. Through March 31, 2004, the Company had received refunds
including interest of $27.2 million. The Company continues to pursue the refund
of other FBLET payments. Due to uncertainty as to the ultimate receipt of
additional amounts, if any, which could amount to as much as $18 million (before
income taxes), as well as the timing of any additional FBLET refunds, the
Company has not currently recorded receivables for such additional FBLET
refunds.
11
THE BRINK'S COMPANY
and Subsidiaries
Management's Discussion and Analysis of
Results of Operations and Financial Condition
================================================================================
Operations
================================================================================
The Brink's Company (along with its subsidiaries, the "Company") has three
operating segments:
o Brink's, Incorporated ("Brink's") Brink's offers services globally
including armored car transportation,
automated teller machine ("ATM")
replenishment and servicing, currency
and deposit processing including its
"Cash Logistics" operations, coin
sorting and wrapping, arranging the
secure air transportation of
valuables ("Global Services") and the
deploying and servicing of safes and
safe control devices, including its
patented CompuSafe(R) service.
o Brink's Home Security, Inc. ("BHS") BHS offers monitored security
services in North America primarily
for owner-occupied, single-family
residences. To a lesser extent, BHS
offers security services for
commercial properties. BHS typically
installs and owns the on-site
security systems and charges fees to
monitor and service the systems.
o BAX Global Inc. ("BAX Global") BAX Global provides freight
transportation and supply chain
management services on a global
basis, specializing in the heavy
freight market for business-to-
business shipping.
The Company has significant liabilities associated with its former coal
operations and expects to have significant ongoing expenses and cash outflows
related to former coal operations. The Company has funded a portion of its
retiree benefit obligation using a Voluntary Employees' Beneficiary
Association trust (the "VEBA"). At March 31, 2004, the balance of the VEBA is
reflected in the Company's balance sheet as a reduction of the retiree benefit
obligations.
12
RESULTS OF OPERATIONS
================================================================================
Overview
Three Months Ended
March 31,
(In millions) 2004 2003
- -----------------------------------------------------------------------------
Income (loss) from:
Continuing operations $ 17.2 (3.2)
Discontinued operations 8.6 1.5
- -----------------------------------------------------------------------------
Net income (loss) $ 25.8 (1.7)
=============================================================================
The income (loss) items in the above table are reported after tax.
Results from continuing operations improved in the first quarter of 2004
compared to the 2003 period due to higher operating profit at each of the
Business and Security Services segments and lower expenses related to former
coal operations. In addition, a one-time $4.4 million pretax gain was recognized
in 2004 upon conversion of the Company's VEBA from a general corporate asset to
one specifically restricted to pay certain coal-related postretirement
liabilities.
Discontinued operations in the first quarter of 2004 include an after-tax gain
on the sale of the timber business. The after-tax results of operations for the
natural gas, timber and gold businesses have been classified as discontinued
operations for all periods presented.
Consolidated Review
Three Months Ended
March 31, %
(In millions) 2004 2003 Change
- --------------------------------------------------------------------------------------------
Revenues:
Brink's $ 458.0 391.4 17
BHS 82.0 73.9 11
BAX Global 554.5 463.6 20
- --------------------------------------------------------------------------------------------
Revenues $ 1,094.5 928.9 18
============================================================================================
Operating profit (loss):
Brink's $ 32.8 13.1 150
BHS 19.4 16.7 16
BAX Global 3.1 (5.5) NM
- --------------------------------------------------------------------------------------------
Business and Security Services 55.3 24.3 128
Former coal operations (12.5) (17.3) 28
Corporate (9.1) (7.0) (30)
- --------------------------------------------------------------------------------------------
Operating profit $ 33.7 - NM
============================================================================================
13
In comparison to the first quarter of 2003, this quarter the Company reported
higher operating profits at each of its three Business and Security Services
segments on higher revenue. Operating profit at Brink's in the first quarter
increased from the prior year on improved performance in Europe and South
America. BHS continued its steady growth, reporting 16% higher operating profit.
BAX Global's results in the Americas are above last year's level primarily as a
result of an increase in the volume of shipments through its Intra-America air
transportation network. The higher number of shipments reflect an improving
economy and the ramping up of shipments and revenues related to the wholesale
freight forwarding product that was introduced in the second half of 2003.
In addition to improved operating profit from the segments, expenses related to
former coal operations were lower in the 2004 period compared to the prior year.
The lower expenses primarily related to retiree medical plans. As of January 1,
2004, the Company restricted the use of the VEBA assets to pay only coal-related
retiree medical obligations. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," projected investment earnings on the funds in the
VEBA are now reported as an offset to the associated plan's expense. Expenses
related to retiree medical plans were also lower because of the effect of
Medicare reform legislation that provides subsidies to companies whose benefits
are at least as generous as those provided by Medicare. Neither of these
positive factors affected costs in 2003.
Throughout this report, the reference to constant currency is made so that a
segment's revenues can be viewed without the impact of changing foreign currency
exchange rates, facilitating a comparative view of underlying performance.
Relative to most other currencies, the U.S. dollar weakened in the first quarter
of 2004 over the same prior-year period, so international revenue growth at
constant currency exchange rates was lower than growth at actual currency
exchange rates. Changes in foreign currency exchange rates have not materially
affected period-to-period comparisons of operating profit.
Brink's, Incorporated
Three Months Ended
March 31, %
(In millions) 2004 2003 Change
- ---------------------------------------------------------------------------------------------
Revenues:
North America (a) $ 180.1 175.8 2
International (b) 277.9 215.6 29
- ---------------------------------------------------------------------------------------------
$ 458.0 391.4 17
=============================================================================================
Operating profit:
North America (a) $ 12.9 10.8 19
International (b) 19.9 2.3 200+
- ---------------------------------------------------------------------------------------------
$ 32.8 13.1 150
=============================================================================================
Cash flow information:
Depreciation and amortization $ 19.1 15.6 22
Capital expenditures 16.1 16.4 (2)
=============================================================================================
(a) U.S. and Canada.
(b) Europe, South America and Asia-Pacific.
Overview
Increased revenues and operating profit for the quarter at Brink's reflected
improved results in Europe and South America. Operating profit in Europe in the
first quarter of 2003 reflected $1.8 million in severance costs and reduced
volumes of business due to the effects of the buildup to the conflict in the
Middle East. Results in South America were depressed in the prior-year's first
quarter due to poor economic and political conditions.
14
North America
Operating profits were 19% higher in the first quarter of 2004 versus the prior
year on a 2% increase in revenues (1% increase in revenues on a constant
currency basis). North American revenues were only slightly higher than the
prior-year quarter as the result of higher Global Services revenue, partially
offset by lower armored car volume in the U.S. Operating profit increased
primarily due to improved performance from the coin wrapping and Cash Logistics
operations, the benefit of lower U.S. overhead costs and improved performance in
Canada. These improvements were partially offset by a lower contribution from
the U.S. armored car operation as a result of lower revenue and because of
higher employee benefit expenses related to the Company's U.S. pension plan.
International
International operating profits were $17.6 million higher in the first quarter
of 2004 versus the 2003 period on a 29% increase in revenues (14% increase in
revenues on a constant currency basis). Improved results in the quarter included
higher local currency revenues and operating profits in Europe and South America
as discussed in more detail below.
Europe. Revenues increased 28% (10% increase in revenues on a constant currency
basis) due to better performance and improved business conditions. Revenues in
2003 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. European operating profit in the first quarter of
2004 reflected improvements in a number of countries and the benefits of the
management and operational changes, particularly in France. The favorable
comparison to prior year also benefited from the absence of $1.8 million in
severance expense incurred in the first quarter of 2003 associated with European
workforce reductions. The Company expects that European operations will continue
to benefit from the staff reductions and management changes implemented last
year.
South America. In South America, operating profit in the first quarter of 2004
was higher than the first quarter last year primarily reflecting better
performance in Venezuela and Brazil. Favorable market conditions and lower labor
costs as a percentage of revenue benefited Venezuela's performance in 2004.
Higher operating performance in Brazil was the result of increased volumes as
well as the benefit of cost reductions taken in late 2003. Overall, economic
conditions in South America seem to be improving, although conditions there
remain volatile.
Asia-Pacific. Asia-Pacific operating profits in the first quarter of 2004 were
higher than for the same period last year primarily due to improved results in
Global Services partially offset by higher costs in Australia.
15
Brink's Home Security
Three Months Ended
March 31, %
(In millions) 2004 2003 Change
- -------------------------------------------------------------------------------------------------------
Revenues $ 82.0 73.9 11
- -------------------------------------------------------------------------------------------------------
Operating profit:
Recurring services (a) $ 35.1 30.3 16
Investment in new subscribers (b) (15.7) (13.6) 15
- -------------------------------------------------------------------------------------------------------
$ 19.4 16.7 16
=======================================================================================================
Monthly recurring revenues (c) $ 24.0 21.6 11
=======================================================================================================
Cash flow information:
Depreciation and amortization (d) $ 12.5 11.6 8
Impairment charges from subscriber disconnects 8.7 7.5 16
Amortization of deferred revenue (e) (6.1) (5.8) 5
Deferral of subscriber acquisition costs
(current year payments) (4.7) (4.3) 9
Deferral of revenue from new subscribers
(current year receipts) 8.1 6.5 25
Capital expenditures (26.7) (23.1) 16
=======================================================================================================
(a) Reflects operating profit generated from the existing subscriber base
including the amortization of deferred revenues and deferred expenses.
(b) Primarily marketing and selling expenses, net of the deferral of direct
selling expenses (primarily a portion of sales commissions), incurred in
the acquisition of new subscribers.
(c) See "Reconciliation of Non-GAAP Measures - Monthly Recurring Revenues."
(d) Includes amortization of deferred subscriber acquisition costs.
(e) Includes amortization of deferred revenue related to active subscriber
accounts as well as the immediate recognition of deferred revenue related
to subscriber disconnects.
Revenues
The increase in BHS' revenues for the first quarter of 2004 over the comparable
2003 period was primarily due to a 9% larger average subscriber base and
slightly higher average monitoring rates. The slight increase in average
monitoring rates is primarily due to new customers initiating service at
generally higher monitoring rates than the average rate being paid by existing
customers. The above factors also contributed to an 11% increase in monthly
recurring revenues for March 2004 as compared to March 2003.
Operating profit
Operating profit increased $2.7 million for the first quarter of 2004 from the
same period of 2003 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 the larger subscriber base and improved
productivity in the provision of field service.
Other
Police departments in two major western 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 respond to calls from alarm companies without
visual verification, this could have an adverse effect on future results of
operations for BHS.
16
Subscriber activity
Three Months Ended
March 31, %
(Subscriber data in thousands) 2004 2003 Change
- --------------------------------------------------------------------------------
Number of subscribers:
Beginning of period 833.5 766.7 9
Installations 34.1 27.4 24
Disconnects (13.5) (12.6) 7
- --------------------------------------------------------------------------------
End of period 854.1 781.5 9
================================================================================
Average number of subscribers 843.5 774.0 9
Annualized disconnect rate (a) 6.4% 6.5%
================================================================================
(a) The disconnect rate is a ratio, the numerator of which is the number of
customer cancellations during the period and the denominator of which is
the average number of subscribers for the period. The gross number of
customer cancellations is reduced for customers who cancel service at one
location but continue service at a new location, accounts charged back to
the dealers because the customers cancelled service during the specified
contractual term and inactive sites that return to active service during
the period.
Installations increased 24% for the first quarter of 2004 as compared to the
same period of 2003 primarily as a result of growth in traditional installation
volume along with a large increase in installations obtained through the dealer
network. BHS believes its 2004 annualized disconnect rate improved over the
first quarter of 2003 largely due to the cumulative effect of having improved
its subscriber selection and retention processes in recent years and its high
quality customer service. Disconnect rates are typically higher in the second
and third quarters of the year because of an increase in residential moves
during summer months.
Reconciliation of Non-GAAP Measures - Monthly Recurring Revenues
Three Months Ended
March 31,
(In millions) 2004 2003
- --------------------------------------------------------------------------------
March:
Monthly recurring revenues ("MRR") (a) $ 24.0 21.6
Amounts excluded from MRR:
Amortization of deferred revenue 2.1 2.0
Other revenues (b) 1.8 1.3
- --------------------------------------------------------------------------------
Revenues on a GAAP basis $ 27.9 24.9
- --------------------------------------------------------------------------------
Revenues on a GAAP basis:
March $ 27.9 24.9
January - February 54.1 49.0
- --------------------------------------------------------------------------------
January - March $ 82.0 73.9
================================================================================
(a) MRR is calculated based on the number of subscribers at period end
multiplied by the average fee per subscriber received in the last month of
the period for contracted monitoring and maintenance services.
(b) Revenues that are not pursuant to monthly contractual billings.
The Company believes the presentation of MRR is useful to investors because the
measure is widely used in the industry to assess the amount of recurring
revenues from subscriber fees a home security business produces.
17
BAX Global
Three Months Ended
March 31, %
(In millions) 2004 2003 Change
- ----------------------------------------------------------------------------------------------
Revenues:
Americas (a) $ 264.7 236.6 12
International (b) 309.1 244.3 27
Eliminations (19.3) (17.3) (12)
- ----------------------------------------------------------------------------------------------
$ 554.5 463.6 20
==============================================================================================
Operating profit (loss):
Americas (a) $ (1.9) (9.7) 80
International (b) 8.7 7.1 23
Corporate (3.7) (2.9) (28)
- ----------------------------------------------------------------------------------------------
$ 3.1 (5.5) NM
==============================================================================================
Cash flow information:
Depreciation and amortization $ 10.7 12.2 (12)
Capital expenditures 6.9 5.8 19
==============================================================================================
Intra-America revenue $ 125.1 110.9 13
Worldwide expedited freight services (c):
Revenues $ 415.6 354.0 17
Weight in pounds 418.0 367.2 14
==============================================================================================
(a) U.S., Mexico, Latin America and Canada.
(b) Europe-Middle East-Africa("EMEA") and Asia-Pacific.
(c) Includes U.S. deferred freight services.
Overview
In the first quarter of 2004, BAX Global's operating results were $8.6 million
above the same quarter last year on a 20% increase in revenues (15% increase in
revenues on a constant currency basis). Results were higher primarily due to
higher volumes in the Intra-America network. Increased air export volumes and
supply chain management activity in Asia-Pacific also improved revenues in 2004.
Americas
Intra-America. BAX Global's first quarter 2004 operating loss in the Americas
region was $7.8 million lower than the same 2003 period on a 12% increase in
revenues. Revenues and operating results improved on an increase in
Intra-America volumes of expedited airfreight. Higher volumes related to BAX
Global's new wholesale freight forwarding product were partially offset by lower
volumes of the overnight airfreight products. Volumes for freight with deferred
delivery also increased in the quarter.
The year-over-year increase in expedited freight volume reverses a recent trend
in the air freight industry and at BAX Global of declining year-over-year
expedited freight volume. The recent unfavorable trend has been generally
attributed to customers shifting to deferred delivery options to reduce freight
costs. Although the Company believes that customers will continue to optimize
their logistics operations and that this trend may continue over the long-term,
the Company believes that the absolute demand for expedited freight should
improve with a growing economy.
The 2004 operating loss in the Americas includes higher expense from the
Company's primary U.S. pension plan. Heavy maintenance expense was $1.0 million
higher in the first quarter of 2004 compared to the same 2003 period primarily
due to adjustments recorded in the first quarter of 2003 in conjunction with the
renegotiation of certain return provisions of its aircraft lease agreements and
the completion of a study of the lease agreements.
18
Other. U.S. air export volumes were higher in the 2004 period over 2003, while
revenue per pound (excluding fuel and other surcharges) declined in the 2004
period as compared to the same period of 2003. Charter activity was also higher
in the 2004 quarter. Growth in the U.S. supply chain management business
improved revenues in the first quarter of 2004 as compared to the same period of
2003 due to the addition of new customers as well as increased activity for
existing customers. Air exports and ocean imports and exports in the U.S. were
each slightly higher in the first quarter of 2004 compared to the same quarter
of 2003.
International
International operating profits increased 23% for the first quarter compared to
the 2003 period on a 27% increase in revenues (17% increase in revenues on a
constant currency basis).
Asia-Pacific. Revenues and operating profit for the first quarter of 2004
benefited from an increase in Asia-Pacific air export volumes, particularly on
exports from mainland China and Hong Kong, primarily as a result of higher
exports by high-tech customers. Although operating profit increased, margins
declined as carriers raised rates due to tight supply and much of these
increases could not initially be passed on to customers. In addition, due to
competitive pressure margins have been generally lower in China and Hong Kong
than in other parts of Asia.
Asia-Pacific's results also benefited from growth in supply chain management
operations, including the effects of continued growth in China during the first
quarter of 2004.
EMEA. Competitive market pressures in the EMEA region continued during the
quarter with a weak European economy resulting in lower export volumes compared
with the 2003 quarter.
BAX Global corporate
BAX Global corporate expense increased $0.8 million in the first quarter of 2004
versus the prior-year period partially due to foreign currency transaction
losses in 2004.
Corporate Expense - The Brink's Company
Three Months Ended
March 31, %
(In millions) 2004 2003 Change
- -------------------------------------------------------------------------------
Corporate expense $ 9.1 7.0 30
===============================================================================
Corporate expense was higher in the 2004 period primarily as a result of higher
professional fees related to the Company's documentation and testing of its
internal controls as required by Section 404 of the Sarbanes-Oxley Act of 2002.
Costs related to Section 404 of the Sarbanes-Oxley Act are expected to be $4
million to $5 million higher in the full-year 2004 compared to 2003.
19
Former Coal Operations
Costs of former coal operations included in continuing operations
Three Months Ended
March 31, %
(In millions) 2004 2003 Change
- ---------------------------------------------------------------------------------------------------------
Company-sponsored postretirement benefits other than pensions $ 9.4 12.2 (23)
Black lung 1.5 1.5 -
Pension 0.6 0.1 200+
Administrative, legal and other expenses, net 2.5 2.1 19
Idle and closed mine expense 0.2 1.9 (90)
Gains on sales of property and equipment and other income (1.7) (0.5) 200+
- ---------------------------------------------------------------------------------------------------------
$ 12.5 17.3 (28)
- ---------------------------------------------------------------------------------------------------------
Company-sponsored postretirement benefits other than pension
Effective January 1, 2004, the Company began accounting for the investments held
by its VEBA as plan assets of its coal-related retiree medical plan in
accordance with SFAS No. 106, as described in note 1 to the consolidated
financial statements. Accordingly, the Company has reduced its postretirement
benefit expenses by the expected earnings of the plan assets; $2.3 million in
the quarter ended March 31, 2004.
The Company's coal-related retiree medical plan is expected to qualify for a
federal subsidy introduced as part of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003. As a result, the Company included an
actuarial gain in the estimate of the December 31, 2003 projected benefit
obligation. This resulted in a $1.5 million reduction in the Company's
postretirement benefit expense in the first quarter of 2004 compared to what it
would have been otherwise. The effect on the full year is expected to be $5.8
million.
Administrative, legal and other expenses, net
Administrative, legal and other expenses, net, are expected to decline as
administrative functions are reduced and residual assets are sold. Expenses
related to residual assets include property taxes, insurance and lease payments.
Idle and closed mine expense
Expenses associated with idle and closed mines were significantly lower in 2004
as compared to 2003 as a result of the sale in late 2003 of most remaining
properties.
Gains on sale of property and equipment
Gains or losses on the disposal of coal-related assets which were initially
retained after production and marketing ended are included in continuing
operations as part of the net expenses related to former coal operations.
The Company sold substantially all of its remaining coal-related assets in West
Virginia in the fourth quarter of 2003 for $28.8 million of proceeds, including
$14.8 million of liabilities contractually assumed by the buyer. However, the
transfer of many of these liabilities is not final until the purchaser replaces
the Company's bonds with surety bonds of its own. Accordingly, the Company is
recording gains associated with the sale of these properties as surety bonds are
replaced. During the first quarter of 2004, the Company recorded a $0.3 million
gain related to liability transfers. The Company will record additional gains of
approximately $6 million as remaining bonds are replaced.
The Company sold additional coal-related assets in April 2004 and expects to
record a $2.3 million pretax gain in the second quarter of 2004.
20
Foreign Operations
The Company operates in more than 100 countries, each with a local currency
other than the U.S. dollar. Because the financial results of the Company are
reported in U.S. dollars, its results are affected by changes in the value of
the various foreign currencies in relation to the U.S. dollar. Changes in
exchange rates may also affect transactions which are denominated in currencies
other than the functional currency. The diversity of foreign operations helps to
mitigate a portion of the impact that foreign currency fluctuations in any one
country may have on the Company's consolidated results. The Company, from time
to time, uses foreign currency forward contracts to hedge transactional risks
associated with foreign currencies. Translation adjustments of net monetary
assets and liabilities denominated in the local currency relating to operations
in countries with highly inflationary economies are included in net income,
along with all transaction gains or losses for the period.
Brink's Venezuelan subsidiaries were considered to be operating in a highly
inflationary economy during 2002. However, Venezuela was no longer treated as
having a highly inflationary economy effective January 1, 2003. It is possible
that the economy in Venezuela may be considered highly inflationary again in the
future.
The Company is also subject to other risks customarily associated with doing
business in foreign countries, including labor and economic conditions,
political instability, controls on repatriation of earnings and capital,
nationalization, expropriation and other forms of restrictive action by local
governments. The future effects, if any, of such risks on the Company cannot be
predicted.
Other Operating Income, Net
The line items below are recorded within operating profit of a Business and
Security Services segment, or corporate or former coal operation expenses.
Three Months Ended
March 31, %
(In millions) 2004 2003 Change
- ---------------------------------------------------------------------------------------------------
Gains on sales of operating assets, net $ 1.4 0.2 200+
Foreign currency transaction gains, net 0.1 0.4 (75)
Share in earnings of equity affiliates 0.8 0.9 (11)
Royalty income 0.5 0.4 25
Other 0.7 0.6 17
- ---------------------------------------------------------------------------------------------------
Total $ 3.5 2.5 40
===================================================================================================
Nonoperating Income and Expense
Interest and other income (expense), net
Three Months Ended
March 31, %
(In millions) 2004 2003 Change
- ---------------------------------------------------------------------------------------------------
Recognition of gain on investments held by VEBA $ 4.4 - NM
Interest income 1.1 1.6 (31)
Discounts and other fees of accounts receivable
securitization program (0.4) (0.4) -
Other, net (0.7) 0.6 NM
- ---------------------------------------------------------------------------------------------------
Total $ 4.4 1.8 144
===================================================================================================
21
As discussed earlier, as of January 1, 2004, the Company restricted the use of
the VEBA to pay only benefits associated with the coal-related postretirement
medical benefits plan. Prior to that time, unrealized gains and losses on
securities still held (not sold and reinvested in other securities) by the VEBA
were recorded in other comprehensive income. With the restriction of the use of
the VEBA, the unrealized net gain at the transition date was recorded as a
one-time pretax gain of $4.4 million in the first quarter of 2004.
Minority interest
Three Months Ended
March 31, %
(In millions) 2004 2003 Change
- ------------------------------------------------------------------------------
Minority interest $ 3.3 0.8 200+
==============================================================================
The increase in minority interest expense is primarily due to improved results
in Venezuela.
Income Taxes
Income tax expense (benefit) Effective tax rate
- ------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------
(in millions) (in percentages)
Continuing operations $ 11.8 (1.9) 40.6% 37.3%
Discontinued operations 4.7 1.0 35.3% 40.0%
======================================================================================================
The effective income tax rate on continuing operations in the first quarter of
both years was higher than the 35% U.S. statutory tax rate due primarily to the
effect of state taxes. State taxes have been recorded at a higher than normal
rate due to the inability to use losses in certain U.S. state jurisdictions
where the Company has recorded valuation allowances. In addition, the tax rate
in 2004 reflects higher costs related to expected taxes on undistributed
earnings of foreign equity affiliates and estimated non-deductible expenses.
The Company's effective tax rate may fluctuate materially from period to period
due to changes in the expected geographical mix of earnings, changes in
valuation allowances or accruals for contingencies and other factors. Subject to
the above factors, the Company currently expects that the effective tax rate for
the full year 2004 will approximate 40%.
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. Because of continuing losses in certain European
subsidiaries, the Company may conclude in the future that a valuation allowance
should be recorded related to approximately $7 million of deferred tax assets at
March 31, 2004, if operating results do not improve.
Discontinued Operations
In July 2003 the Company agreed to sell its timber business for approximately
$39 million in cash. The Company received $5.4 million in the fourth quarter of
2003 and $31.8 million in the first quarter of 2004. The Company expects to
receive up to $1.9 million in the second quarter of 2004. The Company recognized
a $4.8 million pretax gain in the fourth quarter of 2003 and an $18.8 million
pretax gain in the first quarter of 2004 on the sale of the timber business. The
Company expects to recognize up to a $1.9 million pretax gain in the second
quarter of 2004.
22
LIQUIDITY AND CAPITAL RESOURCES
================================================================================
Overview
Cash flows before financing activities increased $11.4 million in the first
three months of 2004 compared to the first three months of 2003. Cash provided
by operating activities increased primarily due to improved operating profit.
Cash flows from investing activities increased primarily because of amounts
collected related to the sale of the timber business. Cash flows from
discontinued operations reflect the operating results of the former natural gas,
timber and gold operations.
Summary of Cash Flow Information
Three Months Ended
March 31, $
(In millions) 2004 2003 Change
- -------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Continuing operations: 55.8 45.5 10.3
Discontinued operations 0.2 3.8 (3.6)
- -------------------------------------------------------------------------------------------------------
Operating activities 56.0 49.3 6.7
- -------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Continuing operations:
Net proceeds from:
Sale of timber business 25.6 - 25.6
Monetization of notes receivable related to
sale of coal operations - 6.2 (6.2)
Capital expenditures and aircraft heavy
maintenance expenditures (53.8) (49.2) (4.6)
Acquisitions (13.2) (4.5) (8.7)
Other (2.4) (0.3) (2.1)
Discontinued operations (0.8) (1.5) 0.7
- -------------------------------------------------------------------------------------------------------
Investing activities (44.6) (49.3) 4.7
- -------------------------------------------------------------------------------------------------------
Cash flows before financing activities $ 11.4 - 11.4
=======================================================================================================
Operating Activities
Cash provided by operating activities was $6.7 million higher in the first three
months of 2004 compared to the same period in 2003 primarily due to improved
operating profit at Business and Security Services segments, partially offset by
lower cash provided by discontinued operations.
Investing Activities
Cash used by investing activities in the first three months of 2004 included
$25.6 million of net cash proceeds from the sale of the timber business ($31.8
million in cash received less $6.2 million paid to buy out related equipment
leases). The 2003 period includes $6.2 million of cash related to the collection
of a note receivable related to the 2002 sale of coal operations.
23
Capital expenditures and aircraft heavy maintenance expenditures were as
follows:
Three Months Ended
March 31, $
(In millions) 2004 2003 Change
- --------------------------------------------------------------------------------------------
Capital expenditures:
Brink's $ 16.1 16.4 (0.3)
Brink's Home Security 26.7 23.1 3.6
BAX Global 6.9 5.8 1.1
Corporate 0.3 - 0.3
- --------------------------------------------------------------------------------------------
Capital expenditures $ 50.0 45.3 4.7
============================================================================================
Aircraft heavy maintenance expenditures $ 3.8 3.9 (0.1)
============================================================================================
Capital expenditures for the first three months of 2004 were $4.7 million higher
than for the same period in 2003 primarily due to an increase in subscriber
installations at BHS as well as an increase in spending on information
technology projects at BAX Global.
Capital expenditures for the full-year 2004 are currently expected to range from
$210 million to $230 million versus the $203 million spent in 2003. The expected
increase reflects an increase in customer installations at BHS and information
technology spending at Brink's and BAX Global. The Company expects to spend
between $20 million and $25 million on aircraft heavy maintenance in 2004.
Business Segment Cash Flows
The Company's cash flows before financing activities for each of the operating
segments are presented below:
Three Months Ended
March 31, $
(In millions) 2004 2003 Change
- -----------------------------------------------------------------------------------------------
Cash flows before financing activities
Continuing operations:
Business and Security Services:
Brink's $ (13.3) (11.2) (2.1)
BHS 16.5 12.7 3.8
BAX Global 8.0 1.6 6.4
- -----------------------------------------------------------------------------------------------
Subtotal of Business and Security Services 11.2 3.1 8.1
Corporate and former operations:
Net proceeds from:
Sale of timber business 25.6 - 25.6
Monetization of notes receivable related to
sale of coal operations - 6.2 (6.2)
Other (24.8) (11.6) (13.2)
- -----------------------------------------------------------------------------------------------
Subtotal of continuing operations 12.0 (2.3) 14.3
Discontinued operations (0.6) 2.3 (2.9)
- -----------------------------------------------------------------------------------------------
Cash flows before financing activities $ 11.4 - 11.4
===============================================================================================
24
Overview
Cash flows before financing activities increased as a result of higher cash
flows from Business and Security services and the sale of the timber business,
partially offset by the 2003 monetization of a note receivable related to the
coal business.
Brink's
Cash flows before financing activities at Brink's decreased primarily due to a
year-over-year increase in the amount of cash used for acquisitions ($12.9
million in 2004 for an acquisition in Greece and $4.5 million in 2003 for an
acquisition in Belgium) partially offset by higher 2004 operating profit. Cash
used for working capital needs was slightly lower in the first quarter of 2004.
BHS
The increase in BHS' cash flows before financing activities is primarily due to
higher operating profit partially offset by an increase in capital expenditures
reflecting the growth in installations.
BAX Global
Cash flows before financing activities at BAX Global increased $6.4 million
reflecting better operating results in the first quarter of 2004. A decrease in
the cash used to cover working capital needs included the net effects of
increasing levels of International receivables and accounts payable in 2004,
primarily in the Asia-Pacific region as a result of its higher sales volume.
Corporate and former operations
The increase in cash out flows for other corporate and former coal operations
for the three months ended March 31, 2004 reflected higher corporate expenses in
the 2004 period. In addition, the first quarter 2003 cash flow benefited from
the liquidation of retained net working capital from the Company's former coal
operations.
Discontinued operations
Cash flows from discontinued operations includes the cash from operations and
capital expenditures of the former natural resource businesses.
Financing activities
Summary of cash flows from financing activities
March 31, March 31,
(In millions) 2004 2003
- -----------------------------------------------------------------------------
Short-term debt $ 25.9 24.9
U.S. Revolving Facility (20.9) (7.0)
Other (5.2) (2.1)
- -----------------------------------------------------------------------------
Net borrowings (repayments) of debt (0.2) 15.8
Dividends (1.3) (1.3)
Other, net 4.3 0.1
- -----------------------------------------------------------------------------
Financing activities $ 2.8 14.6
=============================================================================
The Company's operating liquidity needs are typically financed by short-term
debt, the Company's accounts receivable securitization facility and the
Company's U.S. Revolving Facility, described below.
In the first quarter of 2004 and 2003, the Company paid $0.025 per share
quarterly dividends on its common stock (annual rate of $0.10 per share).
Dividends paid on common stock totaled $1.3 million in each first quarter
period. Future dividends are dependent on the earnings, financial condition,
cash flow and business requirements of the Company, as determined by the Board.
25
Capitalization
The Company uses a combination of debt, leases, an asset securitization facility
and equity to capitalize its operations.
Debt
The Company has an unsecured $350 million U.S. revolving bank credit facility
(the "U.S. Revolving Facility") with a syndicate of banks under which it may
borrow (or otherwise satisfy credit needs) on a revolving basis over a
three-year term ending September 2005. Approximately $260.8 million was
available for borrowing under this facility on March 31, 2004.
The Company has three unsecured multi-currency revolving bank credit facilities
with a total of $110 million in available credit, of which approximately $39.0
million was available at March 31, 2004. When rates are favorable, the Company
also borrows from other U.S. banks under short-term uncommitted agreements.
Various foreign subsidiaries maintain other secured and unsecured lines of
credit and overdraft facilities with a number of banks. Amounts outstanding
under these agreements are included in short-term borrowings.
At December 31, 2003, the Company had $95.0 million of Senior Notes outstanding
that are scheduled to be repaid in 2005 through 2008. The Company has the option
to prepay all or a portion of the Senior Notes prior to maturity with a
prepayment penalty. The Senior Notes are unsecured.
The Company's Brink's, BHS, and BAX Global subsidiaries have guaranteed the U.S.
Revolving Facility and the Senior Notes. The U.S. Revolving Facility, the
agreement under which the Senior Notes were issued and the multi-currency
revolving bank credit facilities each contain various financial and other
covenants. The financial covenants, among other things, limit the Company's
total indebtedness, provide for minimum coverage of interest costs, and require
the Company to maintain a minimum level of net worth. If the Company were not to
comply with the terms of its various loan agreements, the repayment terms could
be accelerated. An acceleration of the repayment terms under one agreement could
trigger the acceleration of the repayment terms under the other loan agreements.
The Company was in compliance with all financial covenants at March 31, 2004.
Reconciliation of Net Debt and Net Financings to GAAP measures
March 31, December 31,
(In millions) 2004 2003
- -------------------------------------------------------------------------------------------------
Short-term debt and current maturities of long-term debt $ 90.9 53.0
Long-term debt 176.1 221.5
- -------------------------------------------------------------------------------------------------
Debt 267.0 274.5
Less cash and cash equivalents (141.2) (128.7)
- -------------------------------------------------------------------------------------------------
Net Debt 125.8 145.8
Amounts sold under accounts receivable securitization facility 73.0 77.0
- -------------------------------------------------------------------------------------------------
Net Financings $ 198.8 222.8
=================================================================================================
The Company believes that Net Debt and Net Financings are useful measures of the
Company's financial leverage. Net Debt and Net Financings were lower in the
quarter ended March 31, 2004 primarily as a result of the sale of the timber
business, partially offset by acquisitions at Brink's.
The Company believes it has adequate sources of liquidity to meet its near-term
requirements.
Equity
At March 31, 2004, the Company had 100 million shares of common stock authorized
and 56.8 million shares issued and outstanding. The Company has the authority to
issue up to 2.0 million shares of preferred stock, par value $10 per share. The
Company has the authority to purchase up to 1.0 million shares of common stock
with an aggregate purchase price of $19.1 million. No purchases were made in
2003 or the first three months of 2004.
26
Contingencies
See notes 4 and 8 of the March 31, 2004 consolidated financial statements for a
description of the Company's contingencies.
Recent Accounting Pronouncements
See note 1 of the March 31, 2004 consolidated financial statements for a
description of recent accounting pronouncements.
Market Risks and Hedging and Derivative Activities
The Company has activities in more than 100 countries and a number of different
industries. These operations expose the Company to a variety of market risks,
including the effects of changes in foreign currency exchange rates and interest
rates. In addition, the Company consumes certain commodities in its businesses,
exposing it to the effects of changes in the prices of such commodities. These
financial and commodity exposures are monitored and managed by the Company as an
integral part of its overall risk management program. The diversity of foreign
operations helps to mitigate a portion of the impact that foreign currency rate
fluctuations in any one country may have on the Company's consolidated results.
The Company's risk management program considers this favorable diversification
effect as it measures the Company's exposure to financial markets and as
appropriate, seeks to reduce the potentially adverse effects that the volatility
of certain markets may have on its operating results. The Company has not had
any material change in its market risk exposures in the three months ended March
31, 2004.
Controls and Procedures
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, the
Company carried out an evaluation, with the participation of the Company's
management, including the Company's Chief Executive Officer and Vice President
and Chief Financial Officer, of the effectiveness of the Company's disclosure
controls and procedures (as defined under Rule 13a-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this report. Based
upon that evaluation, the Company's Chief Executive Officer and Vice President
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company required to be included in the Company's periodic SEC
filings.
There has been no change in the Company's internal control over financial
reporting during the three months ended March 31, 2004, that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
Forward-looking information
Certain of the matters discussed in this document involve forward-looking
information. Words such as "anticipates," "estimates," "expects," "projects,"
"intends," "plans," "believes," "may," and similar expressions may identify
forward-looking information. Forward-looking information in this document
includes, but is not limited to, statements regarding the expectation of
significant ongoing expenses and cash outflows related to former coal
operations, the continued benefits to Brink's European operating results of
management changes and workforce reductions, the impact on BHS of the refusal of
police departments to respond to alarms without visual verification, seasonal
fluctuations in BHS' disconnect rate, the duration of the shift from expedited
to deferred delivery, possible increases in the absolute demand for expedited
freight, the effects on BAX Global of the European economy, the possibility that
Venezuela may be considered highly inflationary again, expected costs relating
to Section 404 of Sarbanes-Oxley, expected receipt of payments in the second
quarter of 2004 related to the transfer of the timber business, the recognition
of gains related to natural resources transactions, the impact of the
prescription drug reform on the Company's postretirement benefit obligation for
the full year, the anticipated decline of administrative, legal and other
expenses, net, related to the former coal business, the expected replacement of
bonds, changes in the effective tax rate, the need to record additional
valuation allowances, capital expenditures in 2004, expenditures for aircraft
heavy maintenance in 2004 and the adequacy of sources of liquidity to meet the
Company's near term requirements. The forward-looking information in this
document is subject to known and unknown risks, uncertainties and contingencies
that could cause actual results to differ materially from those that are
anticipated.
27
These risks, uncertainties and contingencies, many of which are beyond the
control of the Company, include, but are not limited to, the timing of the
pass-through of costs by third parties and governmental authorities relating to
the disposal of the coal assets, retirement decisions by mine workers, black
lung claims incidence, the financial stability of companies with payment
obligations under the Health Benefit Act, the number of dependents for whom
benefits are provided, actual medical and legal expenses related to benefits,
the funding and benefit levels of multi-employer plans and pension plans,
changes in inflation rates and interest rates, the ability of Brink's management
to effectively address economic and other pressures in Europe, costs associated
with Brink's workforce reductions, the incidence of false alarms, the
willingness of BHS' customers to pay for private response personnel or other
alternatives to police responses to alarms, the number of BHS customers who move
during the second and third quarters, the ability of businesses to satisfy their
obligations through the use of deferred delivery, BAX Global's ability to manage
costs, the utilization of internal resources and the availability of external
resources for use in documentation and testing of internal controls, additional
Section 404 guidance from the PCAOB or the Company's auditors, the completion
and processing of permit replacement documentation and the ability of the
purchasers of coal assets to post the required replacement bonds, social,
political or economic changes in Venezuela, the release of the remaining
escrowed timber purchase price, changes in valuation allowances and the expected
geographical mix of earnings, initiatives to control costs and increase
profitability, the financial performance of the Company, acquisitions made by
the Company, extensions of aircraft leases and the renegotiation of maintenance
obligations, changes in the utilization of aircraft, the willingness and ability
of the Company's lenders to provide liquidity, overall domestic and
international economic, political, social and business conditions, foreign
currency exchange rates, pricing and other competitive industry factors, labor
relations, fuel prices, legislative initiatives, new government regulations,
judicial decisions, variations in costs or expenses and the ability of
counterparties to perform.
28
Part II - Other Information
---------------------------
Item 2. Changes in Securities and Use of Proceeds
- -------
In 1992, the Company established an irrevocable grantor trust (the "Trust") that
provides a flexible structure to pre-fund a wide variety of compensation and
benefit plans. Shares are issued by the Company to the Trust in exchange for a
promissory note for the fair market value of the shares deposited. As shares are
released from the Trust in connection with Company sponsored plans, the
promissory note is effectively amortized.
On March 31, 2004, 2.5 million shares of Brink's Common Stock were issued to the
Trust to provide shares for future issuance under certain of the Company's
compensation and benefit plans in exchange for a promissory note for the fair
market value of the shares, $61.5 million.
The shares issued to the Trust are exempt from registration pursuant to Section
4(2) of the Securities Act of 1933 because the shares were privately placed.
29
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits:
Exhibit
Number
------
31.1 Certification of Michael T. Dan, Chief Executive
Officer (Principal Executive Officer) of The Brink's
Company, pursuant to Rules 13a-14(a) and 15d-14(a)
promulgated under the Securities Exchange Act of
1934, as amended, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Robert T. Ritter, Vice President and
Chief Financial Officer (Principal Financial Officer)
of The Brink's Company, pursuant to Rules 13a-14(a)
and 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Michael T. Dan, Chief Executive
Officer (Principal Executive Officer) of The Brink's
Company, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of Robert T. Ritter, Vice President and
Chief Financial Officer (Principal Financial Officer)
of The Brink's Company, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
(i) Report on Form 8-K furnished on February 4, 2004,
providing the Registrant's earnings press release for
the fourth quarter of 2003 pursuant to Item 12 of
Form 8-K.
30
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE BRINK'S COMPANY
May 5, 2004 By: /s/ Robert T. Ritter
------------------------
Robert T. Ritter
(Vice President -
Chief Financial Officer)
31