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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 September 30, 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
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 November 1, 2004, 56,743,554 shares of $1 par value common stock were
outstanding.
Part I - Financial Information
- ------------------------------
The Brink's Company
and subsidiaries
Consolidated Balance Sheets
September 30, December 31,
(In millions) 2004 2003
- ---------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 150.1 128.7
Accounts receivable, net 661.4 580.3
Prepaid expenses and other 67.4 59.8
Deferred income taxes 84.5 91.7
- ------------------------------------------------------------------------------------------
Total current assets 963.4 860.5
Property and equipment, net 867.0 873.2
Goodwill, net 250.1 244.1
Investments held by Voluntary Employees' Beneficiary
Association trust ("VEBA") (see note 1) - 105.2
Deferred income taxes 265.8 282.7
Other assets 178.0 182.9
- ------------------------------------------------------------------------------------------
Total assets $ 2,524.3 2,548.6
==========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 24.4 35.8
Current maturities of long-term debt 33.2 17.2
Accounts payable 308.4 286.9
Accrued liabilities 522.4 504.2
- ------------------------------------------------------------------------------------------
Total current liabilities 888.4 844.1
Long-term debt 182.5 221.5
Accrued pension costs 98.9 86.6
Postretirement benefits other than pensions (see note 1) 339.9 504.2
Deferred revenue 137.2 130.7
Deferred income taxes 30.4 26.5
Other liabilities 249.0 239.4
- ------------------------------------------------------------------------------------------
Total liabilities 1,926.3 2,053.0
Commitments and contingent liabilities (notes 4 and 9)
Shareholders' equity:
Common stock 56.7 54.3
Capital in excess of par value 450.2 383.0
Retained earnings 315.5 237.2
Accumulated other comprehensive loss (170.2) (164.9)
Employee benefits trust, at market value (54.2) (14.0)
- ------------------------------------------------------------------------------------------
Total shareholders' equity 598.0 495.6
- ------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,524.3 2,548.6
==========================================================================================
See accompanying notes to consolidated financial statements.
2
The Brink's Company
and subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
(In millions, except per share amounts) 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------
Revenues $ 1,195.0 999.4 3,421.0 2,888.9
Expenses:
Operating expenses 995.4 853.3 2,883.8 2,487.5
Selling, general and administrative expenses 141.5 130.6 413.4 380.7
- -------------------------------------------------------------------------------------------------------------
Total expenses 1,136.9 983.9 3,297.2 2,868.2
Other operating income, net 0.6 6.9 6.4 14.9
- -------------------------------------------------------------------------------------------------------------
Operating profit 58.7 22.4 130.2 35.6
Interest expense (6.0) (6.6) (17.6) (19.4)
Interest and other income (expense), net 2.4 0.7 6.7 6.6
Minority interest (3.4) (2.8) (8.1) (5.4)
- -------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes 51.7 13.7 111.2 17.4
Provision for income taxes 14.0 2.2 43.7 3.5
- -------------------------------------------------------------------------------------------------------------
Income from continuing operations 37.7 11.5 67.5 13.9
Income from discontinued operations, net of tax 0.4 38.5 15.0 40.5
- -------------------------------------------------------------------------------------------------------------
Net income $ 38.1 50.0 82.5 54.4
=============================================================================================================
Net income per common share:
Basic:
Continuing operations $ 0.69 0.22 1.24 0.26
Discontinued operations - 0.72 0.28 0.77
- -------------------------------------------------------------------------------------------------------------
$ 0.69 0.94 1.52 1.03
=============================================================================================================
Diluted:
Continuing operations $ 0.68 0.22 1.23 0.26
Discontinued operations - 0.72 0.27 0.77
- -------------------------------------------------------------------------------------------------------------
$ 0.68 0.94 1.50 1.03
=============================================================================================================
Cash dividends paid per common share $ 0.025 0.025 0.075 0.075
=============================================================================================================
See accompanying notes to consolidated financial statements.
3
The Brink's Company
and subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months
Ended September 30,
(In millions) 2004 2003
- ---------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 82.5 54.4
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations, net of tax (15.0) (40.5)
Depreciation and amortization 128.1 124.0
Impairment charges from subscriber disconnects 29.4 26.0
Amortization of deferred revenue (19.5) (18.9)
Impairment of other long lived assets 5.1 -
Aircraft heavy maintenance expense 20.6 15.8
Deferred income taxes 23.1 (5.8)
Provision for uncollectible accounts receivable 4.3 (2.3)
Postretirement benefit funding (more) less than expense:
Pension 14.6 18.7
Other than pension (58.9) 7.7
Other operating, net 12.2 8.3
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (86.5) 6.6
Accounts payable and accrued liabilities 67.5 25.5
Deferred subscriber acquisition costs (14.4) (13.7)
Deferred revenue from new subscribers 25.9 20.7
Prepaid and other current assets (16.3) (16.7)
Other, net (11.0) (13.5)
Discontinued operations, net 0.2 17.3
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 191.9 213.6
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (153.9) (144.8)
Aircraft heavy maintenance expenditures (17.5) (17.7)
Proceeds from disposal of:
Timber business 33.7 -
Less purchase of equipment formerly leased (6.2) -
Gold business 1.1 -
Natural Gas - 81.2
Property and equipment and other assets 9.8 14.4
Monetization of notes receivable related to sale of coal business - 26.0
Contributions to Voluntary Employees' Beneficiary Association trust (see note 1) - (82.0)
Acquisitions (14.8) (8.1)
Other, net 1.4 (1.9)
Discontinued operations, net (0.8) (6.4)
- ---------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (147.2) (139.3)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Long term debt:
Additions 59.0 81.4
Repayments (82.0) (108.6)
Deferred financing costs - (0.4)
Short-term borrowings, net (7.0) 3.7
Dividends (4.0) (3.9)
Proceeds from exercise of stock options 12.7 0.2
Other 0.2 (0.1)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (21.1) (27.7)
- ---------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (2.2) 6.5
- ---------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 21.4 53.1
Cash and cash equivalents at beginning of period 128.7 102.3
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 150.1 155.4
===============================================================================================================
See accompanying notes to consolidated financial statements.
4
THE BRINK'S COMPANY
and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of presentation
The Brink's Company (along with its subsidiaries, the "Company") has three
operating segments:
o Brink's, Incorporated ("Brink's")
o Brink's Home Security, Inc. ("BHS")
o BAX Global Inc. ("BAX Global")
The Company has significant liabilities associated with its former coal
operations and expects to have significant ongoing expenses and cash outflows
related to these operations.
Effective January 1, 2004, the Company restricted the use of the assets held by
its Voluntary Employees' Beneficiary Association trust ("VEBA") to pay only
obligations of its coal-related retiree medical plan and, accordingly, began
accounting for the VEBA as a plan asset in accordance with 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." Accordingly, the
investments held by the VEBA were reflected as assets through December 31, 2003.
Since January 1, 2004, the carrying value of the VEBA is reflected as a direct
offset to the liability within Postretirement benefits other than pensions on
the Company's balance sheet.
The Company contributed $50 million to the VEBA in the third quarter of 2004. At
September 30, 2004 the fair value of the assets within the VEBA was
approximately $159 million.
The accounting method for Brink's 20%-owned Mexican subsidiary changed in the
third quarter of 2004 from the equity method of accounting to the cost method of
accounting reflecting management's conclusion that the Company no longer
sufficiently influences the management of the operation to merit equity-method
accounting. The Company's investment in the subsidiary at September 30, 2004 was
$9 million. The Company has approximately $14 million of currency exchange
losses in accumulated other comprehensive loss related to the subsidiary.
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 interim periods are not necessarily
indicative of the results that may be expected for the full year. For further
information, refer to the Company's Annual Report on Form 10-K for the year
ended December 31, 2003.
Pro forma earnings per share
The Company accounts for its share-based compensation plans using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, since options are granted with an exercise price equal to the
market price of the stock on the date of grant, the Company has not recognized
any compensation expense related to its stock option plans.
5
Had compensation costs for share-based compensation plans been determined based
on the fair value of awards at the grant dates consistent with the optional
recognition provision of SFAS No. 123, "Accounting for Stock Based
Compensation," net income per share would have approximated the pro forma
amounts indicated below:
Three Months Nine Months
Ended September 30, Ended September 30,
2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------
Net income (in millions):
As reported $ 38.1 50.0 82.5 54.4
Less: share-based compensation expense determined
under fair value method, net of related tax effects (1.1) (1.0) (2.5) (3.3)
- ---------------------------------------------------------------------------------------------------------------
Pro forma $ 37.0 49.0 80.0 51.1
===============================================================================================================
Net income per share:
Basic, as reported $ 0.69 0.94 1.52 1.03
Basic, pro forma 0.67 0.92 1.47 0.97
Diluted, as reported $ 0.68 0.94 1.50 1.03
Diluted, pro forma 0.67 0.92 1.45 0.97
- ---------------------------------------------------------------------------------------------------------------
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 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 Nine Months
Ended September 30, Ended September 30,
2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------
Options granted:
In millions 0.8 0.6 0.9 0.6
Weighted average exercise price $ 32.71 15.24 31.82 15.24
Assumptions:
Expected dividend yield 0.5% 0.5% 0.5% 0.5%
Expected volatility 32% 37% 32% 37%
Risk-free interest rate 3.4% 2.3% 3.3% 2.3%
Expected term (in years) 3.8 4.0 3.8 4.0
Fair value estimates:
In millions $ 7.6 3.0 8.2 3.0
Per share $ 9.17 4.69 8.82 4.69
===============================================================================================================
6
Note 2 - Earnings per share
Basic and diluted weighted average share information used to compute the
Company's earnings per share was as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
(In millions) 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------
Basic weighted average shares outstanding 54.8 53.3 54.4 53.0
Effect of dilutive stock options 0.7 0.1 0.6 -
- -------------------------------------------------------------------------------------------------------------
Diluted weighted average shares outstanding 55.5 53.4 55.0 53.0
=============================================================================================================
Antidilutive stock options excluded from computation 0.8 3.0 0.5 3.4
=============================================================================================================
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 1.8 million shares at September 30, 2004
and 0.8 million shares at September 30, 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 third quarter and first nine months
of 2004 and 2003 was as follows:
U.S. Plans Non-U.S. Total
- ---------------------------------------------------------------------------------------------------------------
(In millions) 2004 2003 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------
Three months ended September 30,
Service cost $ 5.6 5.6 2.1 1.9 7.7 7.5
Interest cost on projected benefit obligation 10.2 9.5 2.3 2.0 12.5 11.5
Return on assets - expected (12.4) (12.2) (2.2) (1.9) (14.6) (14.1)
Other amortization, net 3.5 1.7 0.8 0.8 4.3 2.5
- ---------------------------------------------------------------------------------------------------------------
Net pension cost $ 6.9 4.6 3.0 2.8 9.9 7.4
===============================================================================================================
Nine months ended September 30,
Service cost $ 17.9 17.3 6.4 5.6 24.3 22.9
Interest cost on projected benefit obligation 30.8 29.0 7.0 5.9 37.8 34.9
Return on assets - expected (37.2) (36.8) (6.5) (5.6) (43.7) (42.4)
Other amortization, net 10.8 5.8 2.4 2.3 13.2 8.1
- ---------------------------------------------------------------------------------------------------------------
Net pension cost $ 22.3 15.3 9.3 8.2 31.6 23.5
===============================================================================================================
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. The Company made a discretionary contribution
of $11 million to its primary U.S. pension plan in July 2004. The Company does
not expect to make further discretionary contributions 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:
Coal-related plans Other plans Total
- -----------------------------------------------------------------------------------------------------------
(In millions) 2004 2003 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------
Three months ended September 30,
Service cost $ - - 0.3 0.3 0.3 0.3
Interest cost on accumulated
postretirement benefit
obligations ("APBO") 8.0 8.9 0.4 0.4 8.4 9.3
Return on assets - expected (2.3) - - - (2.3) -
Amortization of losses 3.3 3.5 0.1 0.1 3.4 3.6
- -----------------------------------------------------------------------------------------------------------
Net postretirement benefit costs $ 9.0 12.4 0.8 0.8 9.8 13.2
===========================================================================================================
Nine months ended September 30,
Service cost $ - - 0.9 0.7 0.9 0.7
Interest cost on APBO 24.2 26.0 1.3 1.0 25.5 27.0
Return on assets - expected (6.9) - - - (6.9) -
Amortization of losses 10.1 10.7 0.2 0.1 10.3 10.8
- -----------------------------------------------------------------------------------------------------------
Net postretirement benefit costs $ 27.4 36.7 2.4 1.8 29.8 38.5
===========================================================================================================
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
made a discretionary contribution of $50 million in the third quarter of 2004 to
the VEBA. The Company does not expect to make further contributions to the VEBA
in 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 its estimate of the December 31, 2003 accumulated projected
benefit obligation. This resulted in a $4.4 million reduction in the Company's
postretirement benefit expense in the first nine months of 2004 compared to what
it would have been otherwise. The effect on the full year is expected to be $5.8
million.
8
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 Nine Months
Ended September 30, Ended September 30,
(In millions) 2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------
Interest cost on APBO $ 0.8 1.1 2.6 3.2
Amortization of losses and other 0.2 0.3 1.1 1.1
- ----------------------------------------------------------------------------------------------------
Net periodic postretirement costs $ 1.0 1.4 3.7 4.3
====================================================================================================
Note 4 - Discontinued operations
Three Months Nine Months
Ended September 30, Ended September 30,
(In millions) 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------
Gain (loss) on sales of:
Natural Gas $ - 57.3 - 57.3
Timber - - 20.7 -
Gold - - (0.9) -
Results from operations:
Natural Gas - 2.3 - 11.2
Timber - 0.1 (0.5) 0.3
Gold - (0.6) (1.2) (2.5)
Adjustments to contingent and other liabilities
of former operations:
Withdrawal liability - - 8.1 (3.0)
Other 0.7 - (2.9) (0.6)
- --------------------------------------------------------------------------------------------------------
Income from discontinued operations before
income taxes 0.7 59.1 23.3 62.7
Income tax expense 0.3 20.6 8.3 22.2
- --------------------------------------------------------------------------------------------------------
Income from discontinued operations $ 0.4 38.5 15.0 40.5
========================================================================================================
Gain (loss) on sales
Natural Gas
In August 2003, the Company sold its natural gas business and received $81.2
million in cash.
Timber
In December 2003, the Company sold a portion of its timber business for $5.4
million in cash and recognized a $4.8 million pretax gain in discontinued
operations. The Company received $33.7 million in 2004 for the remaining portion
of its timber business. After deducting the book value of related assets and the
payment of $6.2 million in 2004 to purchase equipment formerly leased, the
Company has recognized a $20.7 million pretax gain in discontinued operations in
the first half of 2004.
9
Gold
In February 2004, the Company completed the sale of its gold operations for
approximately $1.1 million in cash plus the assumption of liabilities and
recognized a $0.9 million loss.
Results of operations
The results of operations of the former natural resource businesses through the
date of the related sale have been classified as discontinued operations for all
periods presented.
Adjustments to contingent and other liabilities of former operations
Withdrawal Liability
The Company participates in the United Mine Workers of America ("UMWA") 1950 and
1974 pension plans, but expects to ultimately withdraw from these plans. Upon
withdrawal from the plans, the Company must pay the plans a portion of any
underfunded liability of the plans, in accordance with the terms of the plans.
The Company's obligation is based on several factors, including the funded
status and benefit levels of the plans. The Company's share is determined based
on the plan year that the Company ultimately is determined to have withdrawn
from the plans.
During the first nine months of 2004, the Company revised its estimate of the
plan year in which it expects to withdraw from the plans. Based on the formula
used to determine withdrawal liabilities, the Company reduced its estimate of
the withdrawal liability by $8.1 million in the first nine months of 2004 to
$43.9 million. In the first nine months of 2003, the Company increased its
estimate of the accrual by $3.0 million to reflect changes in estimates at that
time.
Since the current estimate uses information on the plans' underfunded status at
June 30, 2003, the Company expects the liability will change materially in the
future as revisions to the funded status of the plans and other assumptions are
changed. During the fourth quarter, the Company expects to receive updated
information from the UMWA plan administrator about the plans' underfunded status
and to adjust its liability.
Other
The Company revised its estimated loss associated with certain legal and other
matters related to its former coal operations and recognized $2.9 million of
additional net expense in the first nine months of 2004.
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) (0.4) (0.2) (0.9)
- -----------------------------------------------------------------------------
Balance at September 30, 2004 $ - 0.2 - 0.2
=============================================================================
10
A total of $3.3 million was included primarily in selling, general and
administrative expense in the third quarter of 2003 ($4.2 million in the first
nine months of 2003) associated with the Darien closure.
Note 6 - Supplemental cash flow information
Nine Months
Ended September 30,
(In millions) 2004 2003
- ----------------------------------------------------------------------------------------
Cash paid for:
Interest $ 14.5 18.9
Income taxes, net of refunds 17.7 17.5
========================================================================================
Depreciation of property and equipment and other amortization $ 121.7 118.3
Amortization of BHS deferred subscriber acquisition costs 6.4 5.7
- ----------------------------------------------------------------------------------------
Total depreciation and amortization $ 128.1 124.0
========================================================================================
Note 7 - Comprehensive income
Three Months Nine Months
Ended September 30, Ended September 30,
(In millions) 2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------
Net income $ 38.1 50.0 82.5 54.4
Other comprehensive income (loss), net of
reclasses and taxes:
Foreign currency translation adjustments 8.8 3.0 (2.7) 25.2
Cash flow hedges 0.3 (2.0) 0.6 2.6
Marketable securities - (0.2) (2.7) (0.1)
Minimum pension liability - - (0.5) -
- ----------------------------------------------------------------------------------------------
Comprehensive income $ 47.2 50.8 77.2 82.1
==============================================================================================
Note 8 - Impairments of Long Lived Assets
The Company recognized a $4.7 million impairment loss within its BAX Global
segment in the third quarter of 2004. The loss related to a decision to abandon
the development and installation of certain transportation logistics planning
software. The impairment loss has been recorded as a component of other
operating income, net, in the Company's consolidated statement of operations.
Note 9 - Contingencies
Value-added taxes and customs duties
One of the Company's non-U.S. Brink's, Incorporated business units has not paid
foreign customs duties and value-added taxes with respect to the importation of
certain goods and services. The Company has been advised that there may be civil
and criminal penalties asserted for the non-payment of these custom duties and
value-added taxes. To date no penalties have been asserted.
11
As a result of its investigation, the Company recorded charges in the second
quarter of 2004 of $1.3 million to operating earnings and $0.8 million to
interest expense. Based on the most recent information developed from its
ongoing investigation, the Company has recorded reductions to the expense and
reduced the range of possible penalties. A summary of the impact of this
situation on earnings for the three and nine month periods is provided below.
Three Months Ended Nine Months Ended
(In millions) September 30, 2004 September 30, 2004
- --------------------------------------------------------------------------------
Penalties on unpaid value-added taxes $ - 0.4
Duties (0.2) 0.7
- --------------------------------------------------------------------------------
Amount charged to operating expenses (0.2) 1.1
Interest expense on unpaid value-added
taxes and customs duties (0.1) 0.7
- --------------------------------------------------------------------------------
$ (0.3) 1.8
================================================================================
The Company evaluates many factors to determine whether it should recognize or
disclose a loss contingency, including the probability of an unfavorable outcome
and the ability to make a reasonable estimate of the amount of loss. The Company
believes that the range of probable penalties related to unpaid value-added
taxes is between $0.4 million and $3 million and that no amount within that
range is a better estimate than any other amount within the range. Accordingly,
the Company has accrued $0.4 million for these penalties.
The Company has concluded that a loss related to penalties on unpaid customs
duties is not probable. The Company believes that the range of reasonably
possible losses related to customs duties penalties is between $0 and
approximately $35 million. The Company believes that the assertion of these
penalties would be excessive and would vigorously defend against any such
assertion.
The Company intends to diligently pursue the timely resolution of this matter
and, accordingly, the Company's estimate of the potential losses could change
materially in future periods. The assertion of potential penalties may be
material to the Company's financial position and results of operations. These
penalties could be asserted at any time. Although the Company has accrued $0.7
million of interest on the unpaid value-added taxes and customs duties, the
Company does not expect to be assessed interest charges in connection with any
penalties that may be asserted.
The Company's investigation is ongoing. The Company has implemented measures
designed to prevent similar situations in the future. The Company believes that
the circumstances giving rise to this matter are isolated to this particular
business unit.
Litigation
BAX Global is defending a claim related to the apparent diversion by a third
party of goods being transported for a customer. Although BAX Global is
defending this claim vigorously and believes that its defenses have merit, it is
possible that this claim ultimately may be decided in favor of the claimant. If
so, the Company expects that the ultimate amount of reasonably possible
unaccrued losses could range from $0 to $10 million.
Health Benefit Act
The Company is obligated to pay premiums to the UMWA Combined Benefit Fund, as
described in the Company's 2003 Annual Report on Form 10-K. At September 30,
2004, the Company has $190.8 million recorded for the obligation, reflecting the
recorded liability at December 31, 2003 less payments made in 2004. The Company
expects to adjust the liability in the fourth quarter of 2004 with new
historical data and updated assumptions.
12
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.
Gain Contingencies
Income Tax
The Company has entered into discussions with a tax authority which, if
concluded favorably, could result in a one-time benefit recorded in discontinued
operations of up to $30 million. The benefit, if any, would not result in any
current cash receipts but would add to the Company's tax credit carryforwards.
Federal Black Lung Excise Tax
In 1999, the U.S. District Court of the Eastern District of Virginia entered a
final judgment in favor of certain of the Company's subsidiaries, ruling that
the Federal Black Lung Excise Tax ("FBLET") is unconstitutional as applied to
export coal sales. The Company has received refunds including interest of $27.2
million in prior years ($2.8 million in the nine months ended September 2003),
and continues to pursue the refund of other FBLET payments. Due to uncertainty
as to the ultimate receipt of additional amounts, if any, which could amount to
as much as $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.
Classification
The Company records adjustments to contingent assets and liabilities that are
related to former operations within discontinued operations.
13
THE BRINK'S COMPANY
and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
================================================================================
OPERATIONS
================================================================================
The Brink's Company (along with its subsidiaries, the "Company") has three
operating segments:
o Brink's, Incorporated ("Brink's") Brink's offers services globally
including armored car transportation,
automated teller machine ("ATM")
replenishment and servicing, currency
and deposit processing including its
"Cash Logistics" operations, coin
sorting and wrapping, arranging the
secure air transportation of valuables
("Global Services") and the deploying
and servicing of safes and safe control
devices, including its patented
CompuSafe(R) service.
o Brink's Home Security, Inc. ("BHS") BHS offers monitored security services
in North America primarily for owner-
occupied, single-family residences. To
a lesser extent, BHS offers security
services for commercial properties. BHS
typically installs and owns the on-site
home security systems and charges fees
to monitor and service the systems.
o BAX Global Inc. ("BAX Global") BAX Global provides freight
transportation and supply chain
management services on a global basis,
specializing in the heavy freight
market for business-to-business
shipping.
The Company has significant liabilities associated with its former coal
operations and expects to have significant ongoing expenses and cash outflows
related to former coal operations. The Company has funded a portion of its
retiree benefit obligation using a Voluntary Employees' Beneficiary Association
trust (the "VEBA"). At September 30, 2004, the balance of the VEBA is reflected
in the Company's balance sheet as a reduction of the retiree benefit
obligations.
14
RESULTS OF OPERATIONS
================================================================================
Overview
Three Months Nine Months
Ended September 30, Ended September 30,
(In millions) 2004 2003 2004 2003
- ------------------------------------------------------------------------------
Income from:
Continuing operations $ 37.7 11.5 67.5 13.9
Discontinued operations 0.4 38.5 15.0 40.5
- ------------------------------------------------------------------------------
Net income $ 38.1 50.0 82.5 54.4
==============================================================================
The income items in the above table are reported after tax.
Income from continuing operations improved in the third quarter and first nine
months of 2004 compared to the 2003 periods due to higher operating profit at
each of the Business and Security Services segments. BAX Global's performance
for 2004 rebounded from prior year losses on strong air freight volumes and its
operating leverage in the U.S. Brink's and BHS continued to report improved
operating results.
As discussed below and in note 9 to the consolidated financial statements, the
Company recorded expense of approximately $1.8 million in the first nine months
of 2004 related to unpaid value-added taxes and customs duties, including
related interest and an estimate of the penalties. At any time, the Company
could be assessed penalties materially in excess of those accrued.
BAX Global's results for the third quarter of 2004 are net of a $4.7 million
pretax impairment loss related to a decision to abandon the development and
installation of computer software that was designed to assist in planning for
transportation logistics.
Income from continuing operations was also better in 2004 due to lower expenses
related to the Company's former coal operations.
In addition, a one-time $4.4 million pretax gain was recorded in the first
quarter of 2004 upon conversion of the Company's VEBA from a general corporate
asset to one specifically restricted to pay certain coal-related postretirement
liabilities.
Higher corporate expense was primarily driven by costs to comply with the
Sarbanes-Oxley Act of 2002.
During the recently ended quarter, the Company recorded a tax benefit of $3.3
million as a result of the resolution of issues with several tax authorities.
During the quarter, the Company also recorded a net tax benefit of $1.5 million
related to adjustments stemming from an ongoing review of its deferred tax
accounts.
Discontinued operations includes a $20.7 million pretax gain on the sale of the
timber business in the first nine months of 2004 and a $57.3 million gain on the
sale of the natural gas business in the first nine months of 2003. In addition,
discontinued operations includes the effects of revising its estimated
withdrawal liability from multi-employer pension plans ($8.1 million income in
the first nine months of 2004 and $3.0 million cost in the first nine months of
2003). The after-tax results of operations for the former natural gas, timber
and gold businesses have been classified as discontinued operations for all
periods presented.
15
Value-added taxes and customs duties
One of the Company's non-U.S. Brink's, Incorporated business units has not paid
foreign customs duties and value-added taxes with respect to the importation of
certain goods and services. The Company has been advised that there may be civil
and criminal penalties asserted for the non-payment of these custom duties and
value-added taxes. To date no penalties have been asserted.
As a result of its investigation, the Company recorded charges in the second
quarter of 2004 of $1.3 million to operating earnings and $0.8 million to
interest expense. Based on the most recent information developed from its
ongoing investigation, the Company has recorded reductions to the expense and
reduced the range of possible penalties. A summary of the impact of this
situation on earnings for the three and nine month periods is provided below.
Three Months Ended Nine Months Ended
(In millions) September 30, 2004 September 30, 2004
- --------------------------------------------------------------------------------
Penalties on unpaid value-added taxes $ - 0.4
Duties (0.2) 0.7
- --------------------------------------------------------------------------------
Amount charged to operating expenses (0.2) 1.1
Interest expense on unpaid value-added
taxes and customs duties (0.1) 0.7
- --------------------------------------------------------------------------------
$ (0.3) 1.8
================================================================================
The Company evaluates many factors to determine whether it should recognize or
disclose a loss contingency, including the probability of an unfavorable outcome
and the ability to make a reasonable estimate of the amount of loss. The Company
believes that the range of probable penalties related to unpaid value-added
taxes is between $0.4 million and $3 million and that no amount within that
range is a better estimate than any other amount within the range. Accordingly,
the Company has accrued $0.4 million for these penalties.
The Company has concluded that a loss related to penalties on unpaid customs
duties is not probable. The Company believes that the range of reasonably
possible losses related to customs duties penalties is between $0 and
approximately $35 million. The Company believes that the assertion of these
penalties would be excessive and would vigorously defend against any such
assertion.
The Company intends to diligently pursue the timely resolution of this matter
and, accordingly, the Company's estimate of the potential losses could change
materially in future periods. The assertion of potential penalties may be
material to the Company's financial position and results of operations. These
penalties could be asserted at any time. Although the Company has accrued $0.7
million of interest on the unpaid value-added taxes and customs duties, the
Company does not expect to be assessed interest charges in connection with any
penalties that may be asserted.
The Company's investigation is ongoing. The Company has implemented measures
designed to prevent similar situations in the future. The Company believes that
the circumstances giving rise to this matter are isolated to this particular
business unit.
16
Consolidated Review
Three Months Nine Months
Ended September 30, % Ended September 30, %
(In millions) 2004 2003 change 2004 2003 change
- -----------------------------------------------------------------------------------------------------------------
Revenues:
Brink's $ 492.7 427.2 15 $ 1,416.0 1,229.3 15
BHS 87.6 78.9 11 255.5 229.3 11
BAX Global 614.7 493.3 25 1,749.5 1,430.3 22
- -----------------------------------------------------------------------------------------------------------------
Revenues $ 1,195.0 999.4 20 $ 3,421.0 2,888.9 18
=================================================================================================================
Operating profit (loss):
Brink's $ 44.7 33.4 34 $ 102.8 68.0 51
BHS 20.2 18.1 12 59.4 52.5 13
BAX Global 14.6 (5.3) NM 30.1 (13.3) NM
- -----------------------------------------------------------------------------------------------------------------
Business and Security Services 79.5 46.2 72 192.3 107.2 79
Former coal operations (10.9) (17.2) 37 (33.5) (51.7) 35
Corporate (9.9) (6.6) (50) (28.6) (19.9) (44)
- -----------------------------------------------------------------------------------------------------------------
Operating profit $ 58.7 22.4 162 $ 130.2 35.6 200+
=================================================================================================================
The Company reported higher operating profits at each of its three Business and
Security Services segments on higher revenue in the third quarter and first nine
months of 2004 compared to the prior year periods. Operating profit at Brink's
in the third quarter and first nine months of 2004 increased primarily due to
improved performance in the International region. BHS continued its steady
growth, reporting 12% higher operating profit for the current quarter over the
same quarter last year; 13% higher in the year-to-date periods. BAX Global's
2004 results are above last year's levels primarily as a result of an increase
in the volume of shipments through its Intra-America freight transportation
network, partially offset by a $4.7 million impairment expense related to the
decision to abandon the development and installation of a piece of
transportation planning software. The increased volume reflects an improving
economy and the ramping up of shipments from 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 periods compared to the prior
year. The lower expenses primarily related to a reduction in the cost of retiree
medical plans, the recognition of gains related to sales of residual property,
and lower mine expenses as a result of the sale of most remaining coal
properties in late 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 was weaker in the third
quarter and first nine months of 2004 over the same prior-year periods. As a
result, international revenue growth measured at constant currency exchange
rates would have been lower than reported growth at actual currency exchange
rates. Changes in foreign currency exchange rates have not materially affected
period-to-period comparisons of operating profit.
17
Brink's, Incorporated
Three Months Nine Months
Ended September 30, % Ended September 30, %
(In millions) 2004 2003 change 2004 2003 change
- -----------------------------------------------------------------------------------------------------------------
Revenues:
North America (a) $ 184.3 179.6 3 $ 545.3 531.2 3
International (b) 308.4 247.6 25 870.7 698.1 25
- -----------------------------------------------------------------------------------------------------------------
$ 492.7 427.2 15 $ 1,416.0 1,229.3 15
=================================================================================================================
Operating profit:
North America (a) $ 14.1 14.3 (1) $ 40.0 35.6 12
International (b) 30.6 19.1 60 62.8 32.4 94
- -----------------------------------------------------------------------------------------------------------------
$ 44.7 33.4 34 $ 102.8 68.0 51
=================================================================================================================
Cash flow information:
Depreciation and amortization $ 19.4 17.5 11 $ 57.9 50.5 15
Capital expenditures 17.5 19.3 (9) 49.8 54.2 (8)
=================================================================================================================
(a) U.S. and Canada.
(b) Europe, South America and Asia-Pacific.
Overview
Revenues and operating profit at Brink's were higher in the third quarter and
first nine months of 2004 compared to the prior-year periods. Operating profit
in Europe and South America in the 2004 periods was much higher than in the 2003
periods. European operating profit in the first half of last year 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
million in severance costs. European results in the first nine months of 2004
have improved because of operational changes made last year and higher local
currency revenues on improved operating conditions. Operating profit in South
America in the first half of 2003 was depressed due to poor economic and
political conditions. With improved regional conditions in 2004, operating
performance has been better. International operating profit in the first nine
months of 2004 included approximately $3.1 million of operating expenses related
to adjustments to tax accruals, including $1.1 million of operating expenses
related to unpaid value-added taxes and customs duties. Revenues and operating
profit in North America in the third quarter and nine months of 2004 were about
the same as the prior year periods.
North America
North American revenues in the 2004 periods were 3% higher than the prior-year
periods primarily as the result of higher Global Services and Canadian armored
car and ATM revenues, partially offset by lower U.S. armored car revenues.
Operating profit decreased slightly in the third quarter of 2004 from the 2003
period as last year's quarter included a $4.7 million gain on the sale of
operating assets partially offset by $3.3 million of costs associated with the
closure and relocation of the former Brink's, Incorporated headquarters. Absent
these, operating profit in the 2004 periods would have been higher than 2003 due
to improved performance from the Cash Logistics, Coin Wrapping and Global
Services operations. These improvements were partially offset by a lower
contribution from the U.S. armored car operation as a result of lower revenue in
a price competitive market.
18
International
Improved results in the 2004 periods were primarily due to higher local currency
revenues and operating profits in Europe and South America.
Europe. Revenues increased 30% in the third quarter and 26% for the first nine
months of 2004 when compared to the prior year periods. On a constant currency
basis, 2004 revenues were 19% higher in the third quarter and 15% higher in the
first nine months compared to the prior year periods. Revenues and operating
profit were higher in 2004 due to higher volumes as a result of improved
business conditions and competitor difficulties, particularly in France, and the
impact of an acquisition of security operations in Greece and the recently held
Olympic games. Revenues in 2003, particularly in the first quarter, were
adversely affected by a generally weak economy and uncertainty related to the
then-impending conflict in the Middle East. In addition, European operating
results began to improve in the last half of 2003 partially as a result of
management changes and workforce reductions made to align resources to business
needs.
South America. Operating profit in the third quarter and first nine months of
2004 was higher than the prior-year periods primarily reflecting better
operating performance throughout the region and particularly in Venezuela,
primarily due to higher volumes of armored transportation business, partially as
a result of the exit of competitors from the market. Improved operating
performance in Brazil was the result of increased volumes as well as the benefit
of cost reductions taken in late 2003. The highly competitive conditions in
Brazil could result in a loss of volume in the future if customers switch to
lower-priced competitors.
Asia-Pacific. Asia-Pacific operating profits in the third quarter and first nine
months of 2004 were higher than for the same periods last year primarily due to
improved results in Global Services.
Other. As discussed in "Value-added taxes and customs duties" above and in note
9 to the consolidated financial statements, the Company recorded operating
expense of approximately $1.1 million in the first nine months of 2004 related
to unpaid value-added taxes and customs duties, including an estimate of the
penalties. At any time, the Company could be assessed penalties materially in
excess of those accrued. International operating profit in the first nine months
of 2004 also included $2.0 million of higher tax-related expenses as a result of
unfavorable court rulings in Brazil and Mexico.
19
Brink's Home Security
Three Months Nine Months
Ended September 30, % Ended September 30, %
(In millions) 2004 2003 change 2004 2003 change
- ----------------------------------------------------------------------------------------------------------------
Revenues: $ 87.6 78.9 11 $ 255.5 229.3 11
Operating profit:
Recurring services (a) $ 37.2 31.7 17 $ 108.0 93.4 16
Investment in new subscribers (b) (17.0) (13.6) (25) (48.6) (40.9) (19)
- ----------------------------------------------------------------------------------------------------------------
$ 20.2 18.1 12 $ 59.4 52.5 13
================================================================================================================
Monthly recurring revenues (c) $ 25.2 22.7 11
================================================================================================================
Cash flow information:
Depreciation and amortization (d) $ 12.9 12.1 7 $ 38.0 35.5 7
Impairment charges from
subscriber disconnects 10.5 9.9 6 29.4 26.0 13
Amortization of deferred revenue (e) (6.8) (6.7) 1 (19.5) (18.9) 3
Deferral of subscriber acquisition
costs (current year payments) (5.0) (4.8) 4 (14.4) (13.7) 5
Deferral of revenue from new
subscribers (current year receipts) 9.1 7.5 21 25.9 20.7 25
Capital expenditures (30.7) (25.9) 19 (86.8) (71.9) 21
================================================================================================================
(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 third quarter and first nine months of
2004 over the comparable 2003 periods was primarily due to an increase in the
subscriber base of approximately 10% 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 September 2004
as compared to September 2003.
Operating profit
Operating profit increased $2.1 million for the third quarter and $6.9 million
for the first nine months of 2004 compared to the same periods of 2003 as higher
profit from recurring services was partially offset by an increased investment
in new subscribers. Higher profit from recurring services in each period was
primarily due to the larger subscriber base and improved productivity in the
provision of field service. BHS intends to expand its presence in commercial
alarm installation and monitoring. It may incur higher new business development
expenses as it develops the resources needed to achieve its objectives.
20
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 respond to calls from alarm companies without
visual verification, this could have an adverse effect on future results of
operations for BHS.
Subscriber activity
Three Months Nine Months
Ended September 30, % Ended September 30, %
(Subscriber data in thousands) 2004 2003 change 2004 2003 change
- --------------------------------------------------------------------------------------------------------
Number of subscribers:
Beginning of period 874.1 795.6 10 833.5 766.7 9
Installations 38.1 32.6 17 107.8 88.3 22
Disconnects (15.7) (15.0) (5) (44.8) (41.8) (7)
- --------------------------------------------------------------------------------------------------------
End of period 896.5 813.2 10 896.5 813.2 10
========================================================================================================
Average number of subscribers 885.4 804.3 10 864.5 788.8 10
Annualized disconnect rate (a) 7.1% 7.4% 6.9% 7.1%
========================================================================================================
(a) The disconnect rate is a ratio, the numerator of which is the number of
customer cancellations during the period and the denominator of which is
the average number of subscribers for the period. The gross number of
customer cancellations is reduced for customers who cancel service at one
location but continue service at a new location, accounts charged back to
the dealers because the customers cancelled service during the specified
contractual term, and inactive sites that return to active service during
the period.
Installations were 17% higher in the third quarter and 22% higher in the first
nine months of 2004 as compared to the same periods of 2003 primarily as a
result of growth in traditional installation volume and a higher level of
installations obtained through the growing dealer network. Disconnect rates are
typically higher in the second and third quarters of the year because of an
increase in residential moves during summer months. BHS has reduced its
disconnect rate in recent years through improving its subscriber selection and
retention processes. Since a certain amount of disconnects cannot be prevented
(e.g. customer moves), the disconnect rate may not materially improve in the
future.
Reconciliation of Non-GAAP Measures - Monthly Recurring Revenues
Nine Months
Ended September 30,
(In millions) 2004 2003
- ------------------------------------------------------------------------------
September:
Monthly recurring revenues ("MRR") (a) $ 25.2 22.7
Amounts excluded from MRR:
Amortization of deferred revenue 2.2 2.1
Other revenues (b) 1.9 1.6
- ------------------------------------------------------------------------------
Revenues on a GAAP basis $ 29.3 26.4
- ------------------------------------------------------------------------------
Revenues on a GAAP basis:
September $ 29.3 26.4
January - August 226.2 202.9
- ------------------------------------------------------------------------------
January - September $ 255.5 229.3
==============================================================================
(a) MRR is calculated based on the number of subscribers at period end
multiplied by the average fee per subscriber received in the last month of
the period for contracted monitoring and maintenance services.
(b) Revenues that are not pursuant to monthly contractual billings.
The Company believes the presentation of MRR is useful to investors because the
measure is widely used in the industry to assess the amount of recurring
revenues from subscriber fees that a home security business produces.
21
BAX Global
Three Months Nine Months
Ended September 30, % Ended September 30, %
(In millions) 2004 2003 change 2004 2003 change
- ----------------------------------------------------------------------------------------------------------------
Revenues:
Americas (a) $ 297.6 238.7 25 $ 841.6 708.9 19
International (b) 339.1 273.2 24 969.5 775.9 25
Eliminations (22.0) (18.6) (18) (61.6) (54.5) (13)
- ----------------------------------------------------------------------------------------------------------------
$ 614.7 493.3 25 $1,749.5 1,430.3 22
================================================================================================================
Operating profit (loss):
Americas (a) $ 8.1 (11.3) NM $ 12.3 (31.6) NM
International (b) 10.7 8.9 20 30.6 24.3 26
Corporate and other (4.2) (2.9) (45) (12.8) (6.0) (113)
- ----------------------------------------------------------------------------------------------------------------
$ 14.6 (5.3) NM $ 30.1 (13.3) NM
================================================================================================================
Cash flow information:
Depreciation and amortization $ 10.4 11.9 (13) $ 31.7 36.0 (12)
Capital expenditures 5.8 5.6 4 16.5 18.6 (11)
================================================================================================================
Intra-America revenue $ 145.8 118.1 23 $ 404.6 336.1 20
Worldwide expedited freight
services (c):
Revenues $ 467.3 370.3 26 $1,320.1 1,078.0 22
Weight in pounds 466.9 384.1 22 1,328.8 1,119.9 19
================================================================================================================
(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
BAX Global's operating profit in the third quarter was $19.9 million above that
of the same quarter last year on a 25% increase in revenues (22% increase in
revenues on a constant currency basis). Operating profit in the first nine
months was $43.4 million better than last year on a 22% increase in revenues
(19% on a constant currency basis). Results were better than last year primarily
due to higher volumes in the Intra-America network, partially offset by a $4.7
million impairment expense related to capitalized software. Increased air export
volumes in the Americas and Asia Pacific, supply chain management activity in
Asia-Pacific, and higher charter revenues also improved results in 2004.
Americas
BAX Global's operating profit in the Americas region in the third quarter of
2004 was $19.4 million higher than the same 2003 period on a 25% increase in
revenues.
Intra-America. Revenues and operating results improved over the prior-year
quarter primarily due to an increase in Intra-America expedited and deferred
freight volumes, including BAX Global's wholesale freight forwarding product.
Because of the significant increase in volume, Intra-America revenues increased
23% over the prior-year quarter, resulting in improved operating profit.
22
Operating profit in the Americas includes a $4.7 million impairment loss on
capitalized transportation logistics software and higher employee benefits
expense in 2004. In addition, heavy maintenance expense increased $4.8 million
in the first nine months of 2004 compared to the same 2003 period primarily due
to higher charter activity in the 2004 periods compared to the 2003 periods and
adjustments recorded in the first quarter of 2003 in conjunction with the
completion of a study of aircraft lease agreements and the renegotiation of
certain return provisions of the lease agreements.
The impact of higher market fuel costs in the 2004 periods was not significant
to the performance of BAX Global primarily as a result of the Company's ability
to pass through a portion of higher fuel costs to customers through fuel
surcharge adjustments to billings. The fuel surcharge represents approximately
8.5% of revenues in the Americas region for the recent quarter. The Company is
relying less on its hedging program because fuel surcharges are generally
accepted within the industry and are reasonably effective at hedging increases
in fuel prices.
Other. U.S. air export volumes were higher in the third quarter and first nine
months of 2004 compared to the same 2003 periods, while revenue per pound
(excluding fuel and other surcharges) declined in the 2004 periods. Charter
activity was also higher in the 2004 periods compared to the prior year. Ocean
freight has also increased slightly in 2004.
International
International operating profits increased 20% for the third quarter of 2004
compared to the 2003 period on a 24% increase in revenues (20% increase in
revenues on a constant currency basis). For the first nine months of 2004,
operating profits were 26% higher on a 25% increase in revenues (19% on a
constant currency basis).
Asia-Pacific. Revenues and operating profit for the 2004 periods benefited from
an increase in Asia-Pacific air export volumes, particularly from China and Hong
Kong, primarily as a result of increased exports by high-tech customers.
EMEA. Operating profit improved slightly in the 2004 periods compared with 2003
despite continuing competitive market pressures.
BAX Global corporate and other
BAX Global corporate expense increased $1.3 million in the third quarter of 2004
and $6.8 million for the first nine months in 2004 versus the prior-year periods
primarily due to higher bonus accruals and foreign currency transaction losses.
Other
BAX Global's revenues and operating profits are affected by the seasonal nature
of customer's businesses. BAX Global generally recognizes more revenue and
operating profit in the last half of the year compared to the first half. The
relative strength of the worldwide economies generally has a larger effect on
BAX Global's results compared to seasonal forces.
Corporate Expense - The Brink's Company
Three Months Nine Months
Ended September 30, % Ended September 30, %
(In millions) 2004 2003 change 2004 2003 change
- --------------------------------------------------------------------------------
Corporate expense $ 9.9 6.6 50 $ 28.6 19.9 44
================================================================================
Corporate expense was higher in the 2004 periods 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 $7
million to $10 million higher in the full-year 2004 compared to 2003.
23
Former Coal Operations
Costs of former coal operations included in continuing operations
Three Months Nine Months
Ended September 30, % Ended September 30, %
(In millions) 2004 2003 change 2004 2003 change
- -----------------------------------------------------------------------------------------------------
Company-sponsored postretirement
benefits other than pensions $ 9.3 12.5 (26) $ 27.9 37.2 (25)
Black lung 1.0 1.4 (29) 3.7 4.3 (14)
Pension 0.3 (0.4) NM 1.4 (0.7) NM
Administrative, legal and other
expenses, net 1.8 2.6 (31) 6.1 6.4 (5)
Idle and closed mine expense 0.3 2.1 (86) 0.7 6.9 (90)
Gains on sales of property and
equipment and other income (1.8) (1.0) 80 (6.3) (2.4) 163
- -----------------------------------------------------------------------------------------------------
$ 10.9 17.2 (37) $ 33.5 51.7 (35)
=====================================================================================================
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 Statement of Financial Accounting Standards ("SFAS") No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," 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 third quarter and $6.9 million in the
first nine months of 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 $4.4 million reduction in the Company's
postretirement benefit expense in the first nine months 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 not sold prior
to the 2002 exit from the coal business 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. The transfer of
many of these liabilities to the buyer is not considered final until the buyer
replaces the Company's bonds with surety bonds of its own. Accordingly, the
Company is recording gains associated with the sale of these properties as its
surety bonds are replaced. The Company recorded a $0.3 million gain related to
liability transfers in the first quarter of 2004. No additional bonds were
replaced in the second or third quarter. The Company may record additional gains
up to approximately $6 million in the fourth quarter of 2004 as remaining bonds
are replaced. By contract this is supposed to occur no later than November 2004.
The timing of the bond replacements is not within the Company's control,
however, so these gains could be deferred to later periods.
24
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, effective January 1, 2003, the
economy in Venezuela was no longer considered to be highly inflationary. Based
on current economic conditions and other factors, it is likely the Company will
begin to account for its Venezuela subsidiaries as operating in a highly
inflationary economy effective January 1, 2005.
The Company is exposed to certain risks when it operates in highly inflationary
economies, including the risk that
o the rate of price increases for services will not keep pace with the
effects of inflation on costs;
o adverse economic conditions in the highly inflationary country may
discourage business growth which could affect the demand for the Company's
services; and
o the devaluation of the currency may exceed the rate of inflation and
reported U.S. dollar revenues and profits may decline.
The Company is also subject to other risks customarily associated with doing
business in foreign countries, including labor and economic conditions,
political instability, controls on repatriation of earnings and capital,
nationalization, expropriation and other forms of restrictive action by local
governments. The future effects, if any, of such risks on the Company cannot be
predicted.
Other Operating Income, Net
The line items below are recorded within operating profit of the three Business
and Security Services segments, or within corporate or former coal operation
expenses.
Three Months Nine Months
Ended September 30, % Ended September 30, %
(In millions) 2004 2003 change 2004 2003 change
- -----------------------------------------------------------------------------------------------------------------
Gains on sales of operating
assets, net $ 1.6 5.3 (70) $ 6.0 6.3 (5)
Other impairment losses (4.7) - NM (5.1) - NM
Foreign currency transaction
gains, net 0.3 0.6 (50) 0.3 2.4 (88)
Share in earnings of equity affiliates 0.6 0.1 200+ 0.4 1.5 (73)
Royalty income 0.6 0.5 20 1.6 1.3 23
Penalties on unpaid value-added taxes - - - (0.4) - NM
Other 2.2 0.4 200+ 3.6 3.4 6
- -----------------------------------------------------------------------------------------------------------------
$ 0.6 6.9 (91) $ 6.4 14.9 (57)
=================================================================================================================
Gains on sales of operating assets, net, are primarily the result of disposing
of assets related to the Company's former coal operations.
25
Nonoperating Income and Expense
Interest expense
Three Months Nine Months
Ended September 30, % Ended September 30, %
(In millions) 2004 2003 change 2004 2003 change
- ----------------------------------------------------------------------------------------------------------
Interest expense $ 6.0 6.6 (9) $ 17.6 19.4 (9)
==========================================================================================================
Interest expense was lower primarily due to lower average borrowings.
Interest and other income (expense), net
Three Months Nine Months
Ended September 30, % Ended September 30, %
(In millions) 2004 2003 change 2004 2003 change
- ----------------------------------------------------------------------------------------------------------
Interest income $ 1.1 1.4 (21) $ 3.2 4.2 (24)
Recognition of gain on investments
held by VEBA - - - 4.4 - NM
Discounts and other fees of
accounts receivable securitization
program (0.1) (0.4) 75 (1.1) (1.2) 8
Other, net 1.4 (0.3) NM 0.2 3.6 (94)
- ----------------------------------------------------------------------------------------------------------
$ 2.4 0.7 200+ $ 6.7 6.6 2
==========================================================================================================
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 held 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 Nine Months
Ended September 30, % Ended September 30, %
(In millions) 2004 2003 change 2004 2003 change
- --------------------------------------------------------------------------------------------------------
Minority interest $ 3.4 2.8 21 $ 8.1 5.4 50
========================================================================================================
The increase in minority interest expense in the first nine months of 2004 is
primarily due to improved results.
26
Income Taxes
Income tax expense Effective tax rate
- --------------------------------------------------------------------------------
2004 2003 2004 2003
- --------------------------------------------------------------------------------
(in millions) (in percentages)
Three Months Ended September 30,
Continuing operations $ 14.0 2.2 27.1% 16.1%
Discontinued operations 0.3 20.6 42.9% 34.9%
================================================================================
Nine Months Ended September 30,
Continuing operations $ 43.7 3.5 39.3% 20.1%
Discontinued operations 8.3 22.2 35.6% 35.4%
================================================================================
The effective income tax rate on continuing operations in the first nine months
of 2004 was higher than the 35% U.S. statutory tax rate primarily due to state
income taxes and $7.0 million of net valuation allowance adjustments, primarily
related to certain European operations. The valuation allowance adjustments were
required due to the Company's assessment that because of continuing losses these
assets did not meet the more-likely-than-not criteria for realization under SFAS
No. 109, "Accounting for Income Taxes." The effective income tax rate for
continuing operations in 2003 was lower than the 35% U.S. statutory tax rate
primarily due to the resolution of tax issues from prior years, partially offset
by the effect of state income taxes.
The tax provision in the third quarter of 2004 also includes a tax benefit of
$3.3 million recognized as a result of the resolution of issues with several tax
authorities and $1.5 million of net tax benefits recorded as a result of an
ongoing review of deferred tax accounts.
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 39%.
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.
A new tax bill was recently signed into law in the U.S. and among its provisions
is an incentive to repatriate cash held by foreign subsidiaries. The Company is
studying the provisions of the bill. Actions resulting from this study may
affect the Company's effective tax rate in future periods.
As discussed in note 9, up to $30 million in tax benefits could be recognized in
discontinued operations upon the favorable resolution of a tax contingency.
Discontinued Operations
Sale of Natural Gas and Timber Business
The Company sold its natural gas business in August 2003 for $81.2 million. In
July 2003 the Company agreed to sell its timber business for approximately $39
million in cash. The Company received $5.4 million in the fourth quarter of
2003, $31.8 million in the first quarter of 2004, and $1.9 million in the second
quarter of 2004. The Company recognized pretax gains of $4.8 million in the
fourth quarter of 2003, $18.8 million in the first quarter of 2004, and $1.9
million in the second quarter of 2004 on the sale of the timber business.
27
Withdrawal Liability
The Company participates in the United Mine Workers of America ("UMWA") 1950 and
1974 pension plans, but expects to ultimately withdraw from these plans. Upon
withdrawal from the plans, the Company must pay the plans a portion of any
underfunded liability of the plans, in accordance with the terms of the plans.
As discussed in note 4 to the consolidated financial statements, the Company
adjusted its estimated withdrawal liability in the second quarter of 2004 and
2003. The revisions resulted in $8.1 million of income in the 2004 period and
$3.0 million of loss in the 2003 period.
28
LIQUIDITY AND CAPITAL RESOURCES
================================================================================
Overview
Cash flows before financing activities decreased by almost $30 million in the
first nine months of 2004 as compared to the first nine months of 2003. An
increase in cash from improved operating performance in 2004 was more than
offset by the reduction in proceeds from the sale of natural resources business.
The Company does not expect to make further contributions to the U.S. pension
plan or VEBA in 2004.
As discussed in "Value-added taxes and customs duties" above and in note 9 to
the consolidated financial statements, the Company recorded expense of
approximately $1.8 million in the first nine months of 2004 related to unpaid
value-added taxes and customs duties, including related interest and an estimate
of the penalties. At any time, the Company could be assessed penalties
materially in excess of those accrued.
Summary of Cash Flow Information
Nine Months
Ended September 30, $
(In millions) 2004 2003 change
- -------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Continuing operations $ 191.7 196.3 (4.6)
Discontinued operations 0.2 17.3 (17.1)
- -------------------------------------------------------------------------------------------------------------
Operating activities 191.9 213.6 (21.7)
- -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Continuing operations:
Capital expenditures and aircraft heavy maintenance expenditures (171.4) (162.5) (8.9)
Net proceeds from:
Sale of natural gas business - 81.2 (81.2)
Sale of timber business 27.5 - 27.5
Monetization of notes receivable related to sale of coal operations - 26.0 (26.0)
Contribution to VEBA (a) - (82.0) 82.0
Acquisitions (14.8) (8.1) (6.7)
Other 12.3 12.5 (0.2)
Discontinued operations (0.8) (6.4) 5.6
- -------------------------------------------------------------------------------------------------------------
Investing activities (147.2) (139.3) (7.9)
- -------------------------------------------------------------------------------------------------------------
Cash flows before financing activities $ 44.7 74.3 (29.6)
=============================================================================================================
(a) In 2004, the Company began to account for the VEBA as an offset to
postretirement obligations (see note 1 to the consolidated financial
statements). Accordingly, the $50 million contribution in 2004 has been
classified in operating activities. In 2003, the VEBA contribution was
classified within investing activities.
29
Operating Activities
Cash flows from operating activities declined over $20 million in the first nine
months of 2004 from the prior-year period. The Company recorded the $61 million
of contributions to benefit plans made this year as a component of operating
activities; this essentially offset the effects of the improved operating
performance of the Company in 2004. Contributions to the VEBA were classified as
investing activities in 2003. The Company `s discontinued operations generated
less cash in the 2004 period since the natural resource businesses were sold in
2003 and early 2004.
Investing Activities
Cash flows from investing activities were off by $8 million in the 2004 period
versus 2003 as the reduction in proceeds from the disposal of businesses more
than offset the $82 million contribution to the VEBA in 2003.
Capital expenditures and aircraft heavy maintenance expenditures were as
follows:
Nine Months
Ended September 30, $
(In millions) 2004 2003 change
- -------------------------------------------------------------------------------
Capital expenditures:
Brink's $ 49.8 54.2 (4.4)
Brink's Home Security 86.8 71.9 14.9
BAX Global 16.5 18.6 (2.1)
Corporate 0.8 0.1 0.7
- -------------------------------------------------------------------------------
Capital expenditures $ 153.9 144.8 9.1
===============================================================================
Aircraft heavy maintenance expenditures $ 17.5 17.7 (0.2)
===============================================================================
Capital expenditures for the first nine months of 2004 were $9.1 million higher
than for the same period in 2003 primarily due to an increase in subscriber
installations at BHS.
Capital expenditures for the full-year 2004 are currently expected to range from
$205 million to $220 million versus the $203 million spent in 2003. The expected
increase reflects anticipated growth in customer installations at BHS and higher
information technology spending at Brink's and BAX Global. In addition to
increased capital expenditures for growth in new customer installations, BHS's
capital expenditures in 2005 are expected to include approximately $20 million
to purchase facilities, including its headquarters, currently occupied under an
operating lease. In addition, the Company expects to spend between $20 million
and $25 million on aircraft heavy maintenance in 2004.
30
Business Segment Cash Flows
The Company's cash flows before financing activities for each of the operating
segments are presented below:
Nine Months
Ended September 30, $
(In millions) 2004 2003 change
- -------------------------------------------------------------------------------------------------------------
Cash flows before financing activities
Continuing operations:
Business and Security Services:
Brink's $ 92.8 77.3 15.5
BHS 38.9 34.1 4.8
BAX Global 19.1 (16.7) 35.8
- -------------------------------------------------------------------------------------------------------------
Subtotal of Business and Security Services 150.8 94.7 56.1
Corporate and former operations:
Net proceeds from:
Sale of natural gas business - 81.2 (81.2)
Sale of timber business 27.5 - 27.5
Monetization of notes receivable related to sale of coal operations - 26.0 (26.0)
Contributions to VEBA (50.0) (82.0) 32.0
Contributions to U.S. pension plan (11.0) - (11.0)
Other (72.0) (56.5) (15.5)
- -------------------------------------------------------------------------------------------------------------
Subtotal of continuing operations 45.3 63.4 (18.1)
Discontinued operations (0.6) 10.9 (11.5)
- -------------------------------------------------------------------------------------------------------------
Cash flows before financing activities $ 44.7 74.3 (29.6)
=============================================================================================================
Overview
Cash flows before financing activities decreased primarily as a result of higher
cash flows in 2003 from the sale of natural resource businesses. Offsetting
this, cash from the operation of the Business and Security Services segments was
higher in the 2004 period due to improved year-over-year operating performance.
Brink's
Cash flows before financing activities at Brink's increased primarily due to
higher 2004 operating profit, partially offset by a year-over-year increase in
the amount of cash used for acquisitions. Cash used for working capital needs
was higher in the first nine months of 2004 primarily as a result of increased
receivables on a 15% increase in revenue.
BHS
The increase in BHS' cash flows before financing activities is primarily due to
higher cash flows from operations as a result of a larger subscriber base
partially offset by an increase in capital expenditures reflecting the growth in
installations.
BAX Global
Cash flows before financing activities at BAX Global improved significantly
reflecting much better operating results in the first nine months of 2004 versus
2003. Operating cash flows included a decrease in the cash used to cover working
capital needs including the net effects of increasing levels of receivables and
accounts payable in 2004 as a result of higher volumes of business.
Corporate and former operations - Other
The $15.5 million increase in net cash outflows for Other for the first nine
months of 2004 reflected higher corporate expenses. In addition, cash flows in
the first nine months of 2003 benefited from the liquidation of retained net
working capital from the Company's former coal operations.
31
Discontinued operations
Cash flows from discontinued operations, which includes the cash from operations
and capital expenditures of the former natural resources businesses, was lower
in the 2004 period as a result of the sale of the businesses in 2003 and early
2004.
Financing activities
Summary of cash flows from financing activities
Nine Months
Ended September 30,
(In millions) 2004 2003
- ------------------------------------------------------------------------------
Short-term debt $ (7.0) 3.7
U.S. Revolving Facility (9.6) (27.2)
Other (13.4) -
- ------------------------------------------------------------------------------
Net borrowings (repayments) of debt (30.0) (23.5)
Dividends (4.0) (3.9)
Proceeds from the exercise of stock options 12.7 0.2
Other, net 0.2 (0.5)
- ------------------------------------------------------------------------------
Financing activities $ (21.1) (27.7)
==============================================================================
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 nine months of 2004 and 2003, the Company paid three $0.025 per
share regular quarterly dividends on its common stock (annual rate of $0.10 per
share). Dividends paid on common stock totaled $4.0 million in the first nine
months of 2004 ($3.9 million in the first nine months of 2003). Future dividends
are dependent on the earnings, financial condition, cash flow and business
requirements of the Company, as determined by the Board.
Proceeds from the exercise of stock options increased in the 2004 period over
the 2003 period primarily as a result of a higher stock price.
Capitalization
The Company uses a combination of debt, leases, an asset securitization facility
and equity to capitalize its operations.
Net Debt and Net Financings reconciled to GAAP measures
September 30, December 31,
(In millions) 2004 2003
- ----------------------------------------------------------------------------------------------
Short-term debt and current maturities of long-term debt $ 57.6 53.0
Long-term debt 182.5 221.5
- ----------------------------------------------------------------------------------------------
Debt 240.1 274.5
Less cash and cash equivalents (150.1) (128.7)
- ----------------------------------------------------------------------------------------------
Net Debt 90.0 145.8
Amounts sold under accounts receivable securitization facility 70.0 77.0
- ----------------------------------------------------------------------------------------------
Net Financings $ 160.0 222.8
==============================================================================================
32
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 at
September 30, 2004 compared to December 31, 2003 primarily as a result of cash
generated by the operating segments and proceeds from the sale of the timber
business, partially offset by contributions to the VEBA and the primary U.S.
pension plan amounting to $61 million.
Debt
During October 2004, the Company entered into a new unsecured $400 million
revolving bank credit facility with a syndicate of banks to replace the existing
$350 million facility (the "U.S. Revolving Facility") which was due to expire in
2005. The new facility allows the Company to borrow (or otherwise satisfy credit
needs) on a revolving basis over a five-year term ending in October 2009. As of
September 30, 2004, $21.3 million was utilized under the $350 million revolving
credit facility.
The Company has three unsecured multi-currency revolving bank credit facilities
with a total of $105 million in available credit, of which approximately $48
million was available at September 30, 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.
The Company has $95.0 million of Senior Notes outstanding that are scheduled to
be repaid through 2008, including $18.3 million scheduled in January 2005. The
Company has the option to prepay all or a portion of the Senior Notes prior to
maturity with a prepayment penalty. The Senior Notes are unsecured.
The Company's Brink's, BHS, and BAX Global subsidiaries have guaranteed the U.S.
Revolving Facility and the Senior Notes. The U.S. Revolving Facility, the
agreements under which the Senior Notes were issued and the multi-currency
revolving bank credit facilities each contain various financial and other
covenants. The financial covenants, among other things, limit the Company's
total indebtedness, provide for minimum coverage of interest costs, and require
the Company to maintain a minimum level of net worth. If the Company were not to
comply with the terms of its various loan agreements, the repayment terms could
be accelerated. An acceleration of the repayment terms under one agreement could
trigger the acceleration of the repayment terms under the other loan agreements.
The Company was in compliance with all financial covenants at September 30,
2004.
The Company believes it has adequate sources of liquidity to meet its near-term
requirements.
Amounts sold under accounts receivable securitization facility
In December 2000, the Company entered into a five-year agreement to sell a
revolving interest in BAX Global's U.S. domestic accounts receivable through a
commercial paper conduit program. The primary purpose of the agreement was to
obtain access to a lower cost source of funds. The Company intends to replace
this facility with a similar one prior to its December 2005 termination.
Equity
At September 30, 2004, the Company had 100 million shares of common stock
authorized and 56.7 million shares issued and outstanding. At September 30,
2004, of the outstanding shares, 1.8 million shares were held by The Brink's
Company Employee Benefit Trust, and have been accounted for similarly to
treasury stock for earnings per share purposes. The Company has the authority to
issue up to 2.0 million shares of preferred stock, par value $10 per share. The
Company has the authority to purchase up to 1.0 million shares of common stock
with an aggregate purchase price of $19.1 million. No purchases were made under
this authority in 2003 or the first nine months of 2004.
33
Other Contingencies
Litigation
BAX Global is defending a claim related to the apparent diversion by a third
party of goods being transported for a customer. Although BAX Global is
defending this claim vigorously and believes that its defenses have merit, it is
possible that this claim ultimately may be decided in favor of the claimant. If
so, the Company expects that the ultimate amount of reasonably possible
unaccrued losses could range from $0 to $10 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 September 30, 2004, the Company has $190.8 million recorded for
the obligation, reflecting the recorded liability at December 31, 2003 less
payments made in 2004. The Company expects to adjust the liability in the fourth
quarter of 2004 with updated historical data and assumptions.
Withdrawal Liability
The Company participates in the United Mine Workers of America ("UMWA") 1950 and
1974 pension plans, but expects to ultimately withdraw from these plans. Upon
withdrawal from the plans, the Company must pay the plans a portion of any
underfunded liability of the plans, in accordance with the terms of the plans.
The Company's obligation is based on several factors, including the funded
status and benefit levels of the plans. The Company's share is determined based
on the plan year that the Company ultimately is determined to have withdrawn
from the plans.
During the first nine months of 2004, the Company revised its estimate of the
plan year in which it expects to withdraw from the plans. Based on the formula
used to determine withdrawal liabilities, the Company reduced its estimate of
the withdrawal liability by $8.1 million in the first nine months of 2004 to
$43.9 million. In the first nine months of 2003, the Company increased its
estimate of the accrual by $3.0 million to reflect changes in estimates at that
time.
Since the current estimate uses information on the plans' underfunded status at
June 30, 2003, the Company expects the liability will change materially in the
future as revisions to the funded status of the plans and other assumptions are
changed. During the fourth quarter, the Company expects to receive updated
information from the UMWA plan administrator about the plans' underfunded status
and to adjust its liability.
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.
Gain Contingencies
Income Tax
The Company has entered into discussions with a tax authority which, if
concluded favorably, could result in a one-time benefit of up to $30 million.
The benefit, if any, would not result in any current cash receipts but would add
to the Company's tax credit carryforwards.
Federal Black Lung Excise Tax
In 1999, the U.S. District Court of the Eastern District of Virginia entered a
final judgment in favor of certain of the Company's subsidiaries, ruling that
the Federal Black Lung Excise Tax ("FBLET") is unconstitutional as applied to
export coal sales. The Company has received refunds including interest of $27.2
million in prior years ($2.8 million in the nine months ended September 2003),
and continues to pursue the refund of other FBLET payments. Due to uncertainty
as to the ultimate receipt of additional amounts, if any, which could amount to
as much as $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.
34
Market Risks and Hedging and Derivative Activities
The Company has activities in more than 100 countries and a number of different
industries. These operations expose the Company to a variety of market risks,
including the effects of changes in foreign currency exchange rates and interest
rates. In addition, the Company consumes certain commodities in its businesses,
exposing it to the effects of changes in the prices of such commodities. These
financial and commodity exposures are monitored and managed by the Company as an
integral part of its overall risk management program. The diversity of foreign
operations helps to mitigate a portion of the impact that foreign currency rate
fluctuations in any one country may have on the Company's consolidated results.
The Company's risk management program considers this favorable diversification
effect as it measures the Company's exposure to financial markets and as
appropriate, seeks to reduce the potentially adverse effects that the volatility
of certain markets may have on its operating results. The Company has not had
any material change in its market risk exposures in the nine months ended
September 30, 2004, except that it has reduced the levels of jet fuel hedges
outstanding due to historically high fuel prices and the effectiveness of BAX
Global's customer fuel surcharges.
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.
Except for changes put in place to address the failure, described in
"Value-added taxes and customs duties" above and in note 9 to the consolidated
financial statements, to pay certain foreign value-added taxes and customs
duties by a non-U.S. Brink's, Incorporated business unit, there has been no
change in the Company's internal control over financial reporting during the
nine months ended September 30, 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 investigation into the non-payment of customs duties and
value-added tax by a non-U.S. subsidiary of Brink's, Incorporated, including
related accruals and contingencies and the amount of penalties, and the impact
on the financial condition of The Brink's Company, payments under the Health
Benefit Act, the impact of the competitive conditions in Brazil on Brink's, the
expenses associated with BHS' expansion of its commercial security business, the
impact on BHS of the refusal of police departments to respond to alarms without
visual verification, seasonal fluctuations in BHS' disconnect rate, the
expectation that the disconnect rate may not materially improve, the impact on
BAX Global's results of seasonal forces and the relative strength of worldwide
economies, expected costs relating to Section 404 of Sarbanes-Oxley, the
expected earnings on VEBA assets, the impact of the prescription drug reform on
the Company's postretirement benefit obligation, the anticipated decline of
administrative, legal and other expenses, net, related to the former coal
business, the expected replacement of bonds, the possibility that Venezuela may
be considered highly inflationary again, the anticipated effective tax rate, the
impact of the new tax law that incentivizes companies to repatriate cash held by
foreign subsidiaries, the need to record additional valuation allowances, the
timing and impact of withdrawal from coal-related multi-employer pension plans,
capital expenditures in 2004, expected growth in customer installations at BHS
in the fourth quarter of 2004, expenditures for aircraft heavy maintenance in
2004, the expectation that the Company will make no further contributions to the
U.S. pension plan or VEBA in 2004, the cost of letters of credit, the adequacy
of sources of liquidity to meet the Company's near term requirements, the costs
to resolve pending litigation and possible additional tax credits and FBLET
refunds. 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.
35
These risks, uncertainties and contingencies, many of which are beyond the
control of the Company, include, but are not limited to, the timing of the
pass-through of costs by third parties and governmental authorities relating to
the disposal of the coal assets, retirement decisions by mine workers, 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 evaluation of remedial alternatives, guidance received from third parties,
the impact of governmental inquiries, if any, the ongoing nature of the
investigation, the willingness of Brink's customers in Brazil to engage
lower-priced providers and the ability of these providers to provide
satisfactory service, 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 entry of new national competitors to the alarm
business, continued improvements in service to BHS' customers, BHS' ability to
attract and retain customers with good credit, BHS' ability to cost effectively
grow its commercial business organically or through acquisitions, growth of
expedited shipping in the fourth quarter, the ability of competitors to satisfy
demand, the growth of BAX Global's freight forwarding initiative, 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 performance of
investments, including investments in Company stock, held by the VEBA,
determinations regarding the applicability of the Medicare Prescription Drug
Improvement and Modernization Act of 2003 to the Company's coal-related retiree
medical plan, 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,
initiatives to control costs and increase profitability, the financial
performance of the Company, completion of the analysis of the new tax law
regarding repatriation of cash, the funding and benefit levels of multi-employer
plans and pension plans and the point at which withdrawal is deemed to have
occurred, changes in inflation rates and interest rates, extensions of aircraft
leases and the renegotiation of maintenance obligations, changes in the
utilization of aircraft, the Company's tax and free cash position, the Company's
credit rating, the willingness and ability of the Company's lenders to provide
liquidity, positions taken by the IRS with respect to requested tax credits and
refunds, 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.
36
Part II - Other Information
---------------------------
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
- ------- -----------------------------------------------------------
The following table provides information about common stock repurchases by the
Company during the quarter ended September 30, 2004.
(d) Maximum Number
(c) Total Number (or Approximate
of Shares Purchased Dollar Value)of
(a) Total Number as Part of Publicly Shares that May Yet
of Shares (b) Average Price Announced Plans be Purchased Under
Period Purchased (1) Paid per Share or Programs the Plans or Programs
- -----------------------------------------------------------------------------------------------------
July 2004 8,023 $ 33.11 - -
=====================================================================================================
(1) Stock-for-stock exchanges for payments of exercise cost and withholding
taxes upon exercises of stock options.
Item 6. Exhibits
- ------- --------
Exhibit
Number
------
10.1 Amendment No. 5, dated as of September 20, 2004,
to the Amended and Restated Trust Agreement, dated
December 1, 1997, between the Registrant and J.P.
Morgan Chase & Co. (formerly Chase Manhattan Bank)
in connection with the Registrant's Pension
Equalization Plan.
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.
37
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
November 4, 2004 By: /s/ Robert T. Ritter
--------------------
Robert T. Ritter
(Vice President -
Chief Financial Officer)
(principal financial and
accounting officer)
38