Note 7 - Accumulated Other Comprehensive Income (Loss)
Note 8 - Fair Value of Financial Instruments
Note 9 - Debt
Note 10 - Leases
Note 11 - Share-Based Compensation Plans
Note 12 - Capital Stock
Note 13 - Supplemental Cash Flow Information
Note 14 - Contingent Matters
Note 15 - Reorganization and Restructuring
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6. Exhibits
Exhibits
EX-31.1
ex311q12019.htm
EX-31.2
ex312q12019.htm
EX-32.1
ex321q12019.htm
EX-32.2
ex322q12019.htm
Brinks Earnings 2019-03-31
BCO 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 bco0331201910-q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
¨ 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 001-09148
THE BRINK’S COMPANY
(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
(Address of principal executive offices) (Zip Code)
(804) 289-9600
(Registrant's telephone number, including area code)
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one): Large Accelerated Filer ý Accelerated Filer ¨ Non-Accelerated Filer ¨ Smaller Reporting Company ¨ Emerging Growth Company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No ý
As of April 22, 2019, 49,868,974 shares of $1 par value common stock were outstanding.
1
Part I - Financial Information
Item 1. Financial Statements
THE BRINK’S COMPANY
and subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(In millions, except for per share amounts)
March 31, 2019
December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents
$
283.2
343.4
Restricted cash
97.1
136.1
Accounts receivable, net
641.0
599.5
Prepaid expenses and other
133.0
127.5
Total current assets
1,154.3
1,206.5
Right-of-use assets, net
292.2
—
Property and equipment, net
698.1
699.4
Goodwill
751.7
678.6
Other intangibles
266.6
228.9
Deferred income taxes
235.6
236.5
Other
203.5
186.1
Total assets
$
3,602.0
3,236.0
LIABILITIES AND EQUITY
Current liabilities:
Short-term borrowings
$
23.4
28.9
Current maturities of long-term debt
69.5
53.5
Accounts payable
147.0
174.6
Accrued liabilities
553.6
502.1
Restricted cash held for customers
51.9
90.3
Total current liabilities
845.4
849.4
Long-term debt
1,596.5
1,471.6
Accrued pension costs
191.9
196.9
Retirement benefits other than pensions
365.7
366.1
Lease liabilities
237.6
—
Deferred income taxes
16.5
16.7
Other
169.1
168.7
Total liabilities
3,422.7
3,069.4
Commitments and contingent liabilities (notes 4, 8 and 14)
Equity:
The Brink's Company ("Brink's") shareholders:
Common stock, par value $1 per share:
Shares authorized: 100.0
Shares issued and outstanding: 2019 - 49.9; 2018 - 49.7
49.9
49.7
Capital in excess of par value
630.9
628.2
Retained earnings
464.7
429.1
Accumulated other comprehensive loss
(980.2
)
(953.3
)
Brink’s shareholders
165.3
153.7
Noncontrolling interests
14.0
12.9
Total equity
179.3
166.6
Total liabilities and equity
$
3,602.0
3,236.0
See accompanying notes to condensed consolidated financial statements.
2
THE BRINK’S COMPANY
and subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31,
(In millions, except for per share amounts)
2019
2018
Revenues
$
905.0
879.1
Costs and expenses:
Cost of revenues
702.7
693.6
Selling, general and administrative expenses
141.7
123.1
Total costs and expenses
844.4
816.7
Other operating income (expense)
(2.2
)
2.4
Operating profit
58.4
64.8
Interest expense
(23.0
)
(15.0
)
Interest and other nonoperating income (expense)
(11.2
)
(13.1
)
Income from continuing operations before tax
24.2
36.7
Provision for income taxes
9.7
11.4
Income from continuing operations
14.5
25.3
Income from discontinued operations, net of tax
—
0.2
Net income
14.5
25.5
Less net income attributable to noncontrolling interests
0.8
3.2
Net income attributable to Brink’s
13.7
22.3
Amounts attributable to Brink’s
Continuing operations
13.7
22.1
Discontinued operations
—
0.2
Net income attributable to Brink’s
$
13.7
22.3
Income per share attributable to Brink’s common shareholders(a):
Basic:
Continuing operations
$
0.27
0.43
Discontinued operations
—
—
Net income
$
0.27
0.44
Diluted:
Continuing operations
$
0.27
0.42
Discontinued operations
—
—
Net income
$
0.27
0.43
Weighted-average shares
Basic
50.0
50.9
Diluted
50.9
52.1
Cash dividends paid per common share
$
0.15
0.15
(a) Amounts may not add due to rounding.
See accompanying notes to condensed consolidated financial statements.
3
THE BRINK’S COMPANY
and subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
Three Months Ended March 31,
(In millions)
2019
2018
Net income
$
14.5
25.5
Benefit plan adjustments:
Benefit plan actuarial gains
11.3
14.8
Benefit plan prior service costs
(1.3
)
(0.8
)
Total benefit plan adjustments
10.0
14.0
Foreign currency translation adjustments
0.6
1.0
Gains (losses) on cash flow hedges
(7.9
)
0.4
Other comprehensive income before tax
2.7
15.4
Provision for income taxes
0.5
3.2
Other comprehensive income
2.2
12.2
Comprehensive income
16.7
37.7
Less comprehensive income attributable to noncontrolling interests
1.1
4.3
Comprehensive income attributable to Brink's
$
15.6
33.4
See accompanying notes to condensed consolidated financial statements.
4
THE BRINK’S COMPANY
and subsidiaries
Condensed Consolidated Statements of Equity
(Unaudited)
Three-Months ended March 31, 2019
(In millions)
Shares
Common
Stock
Capital in Excess of Par Value
Retained
Earnings
AOCI*
Noncontrolling
Interests
Total
Balance as of December 31, 2018
49.7
$
49.7
628.2
429.1
(953.3
)
12.9
166.6
Cumulative effect of change in accounting principle(a)
—
—
—
28.8
(28.8
)
—
—
Net income
—
—
—
13.7
—
0.8
14.5
Other comprehensive income
—
—
—
—
1.9
0.3
2.2
Shares repurchased
—
—
(0.5
)
0.5
—
—
—
Dividends to:
Brink’s common shareholders ($0.15 per share)
—
—
—
(7.4
)
—
—
(7.4
)
Share-based compensation:
Stock awards and options:
Compensation expense
—
—
9.4
—
—
—
9.4
Other share-based benefit transactions
0.2
0.2
(6.2
)
—
—
—
(6.0
)
Balance as of March 31, 2019
49.9
$
49.9
630.9
464.7
(980.2
)
14.0
179.3
Three-Months ended March 31, 2018
(In millions)
Shares
Common
Stock
Capital in Excess of Par Value
Retained
Earnings
AOCI*
Noncontrolling
Interests
Total
Balance as of December 31, 2017
50.5
$
50.5
628.6
564.9
(926.6
)
20.8
338.2
Cumulative effect of change in accounting principle(b)
—
—
—
3.3
(1.1
)
—
2.2
Net income
—
—
—
22.3
—
3.2
25.5
Other comprehensive income
—
—
—
—
11.1
1.1
12.2
Dividends to:
Brink’s common shareholders ($0.15 per share)
—
—
—
(7.6
)
—
—
(7.6
)
Noncontrolling interests
—
—
—
—
—
(0.7
)
(0.7
)
Share-based compensation:
Stock awards and options:
Compensation expense
—
—
6.8
—
—
—
6.8
Other share-based benefit transactions
0.4
0.4
(10.5
)
—
—
—
(10.1
)
Balance as of March 31, 2018
50.9
$
50.9
624.9
582.9
(916.6
)
24.4
366.5
(a)
Effective January 1, 2019, we adopted the provisions of ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. We recognized a cumulative effect adjustment to January 1, 2019 retained earnings as a result of adopting this standard. See Note 1 for further details.
(b)
Effective January 1, 2018, we adopted the provisions of ASU 2014-09, Revenue From Contracts with Customers, ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, and ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory. We recognized a cumulative effect adjustment to January 1, 2018 retained earnings as a result of adopting each of these standards. See Note 1 for further details of the impact of each standard.
* Accumulated other comprehensive income (loss)
See accompanying notes to condensed consolidated financial statements.
5
THE BRINK’S COMPANY
and subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
(In millions)
2019
2018
Cash flows from operating activities:
Net income
$
14.5
25.5
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations, net of tax
—
(0.2
)
Depreciation and amortization
47.8
38.8
Share-based compensation expense
9.4
6.8
Deferred income taxes
1.1
(4.1
)
Gains on sale of property, equipment and marketable securities
(0.2
)
(0.5
)
Impairment losses
1.2
1.8
Retirement benefit funding (more) less than expense:
Pension
0.3
2.8
Other than pension
4.5
5.2
Remeasurement losses (gains) due to Argentina and Venezuela currency devaluations
3.9
(2.8
)
Other operating
3.2
3.1
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable and income taxes receivable
(36.8
)
(32.7
)
Accounts payable, income taxes payable and accrued liabilities
(47.9
)
(13.6
)
Restricted cash held for customers
(36.8
)
44.0
Customer obligations
11.3
(0.5
)
Prepaid and other current assets
(10.2
)
(15.7
)
Other
(3.3
)
(1.1
)
Net cash (used) provided by operating activities
(38.0
)
56.8
Cash flows from investing activities:
Capital expenditures
(35.2
)
(36.7
)
Acquisitions, net of cash acquired
(129.9
)
—
Marketable securities:
Purchases
(1.1
)
(13.5
)
Sales
0.4
0.5
Cash proceeds from sale of property and equipment
1.6
1.1
Net cash used by investing activities
(164.2
)
(48.6
)
Cash flows from financing activities:
Borrowings (repayments) of debt:
Short-term borrowings
(5.5
)
16.1
Cash supply chain customer debt
—
0.9
Long-term revolving credit facilities:
Borrowings
310.2
—
Repayments
(502.9
)
—
Other long-term debt:
Borrowings
333.2
1.6
Repayments
(8.0
)
(13.3
)
Payment of acquisition-related obligation
(1.5
)
(0.1
)
Debt financing costs
(3.9
)
—
Dividends to:
Shareholders of Brink’s
(7.4
)
(7.6
)
Noncontrolling interests in subsidiaries
—
(0.7
)
Tax withholdings associated with share-based compensation
(7.3
)
(11.2
)
Other
(0.3
)
0.5
Net cash provided (used) by financing activities
106.6
(13.8
)
Effect of exchange rate changes on cash
(3.6
)
0.3
Cash, cash equivalents and restricted cash:
Increase (decrease)
(99.2
)
(5.3
)
Balance at beginning of period
479.5
726.9
Balance at end of period
$
380.3
721.6
See accompanying notes to condensed consolidated financial statements.
6
THE BRINK’S COMPANY
and subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of presentation
The Brink’s Company (along with its subsidiaries, “Brink’s” or “we”) has three operating segments:
•
North America
•
South America
•
Rest of World
Our unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and applicable quarterly reporting regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, the unaudited condensed consolidated financial statements 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 adjustments) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes in our Annual Report on Form 10-K for the year ended December 31, 2018.
We have made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these condensed consolidated financial statements. Actual results could differ materially from these estimates. The most significant estimates are related to goodwill and other long-lived assets, pension and other retirement benefit obligations, legal contingencies and deferred tax assets.
Consolidation
The condensed consolidated financial statements include our controlled subsidiaries. Control is determined based on ownership rights or, when applicable, based on whether we are considered to be the primary beneficiary of a variable interest entity. See "Venezuela" section below for further information. For controlled subsidiaries that are not wholly-owned, the noncontrolling interests are included in net income and in total equity.
Investments in businesses that we do not control, but for which we have the ability to exercise significant influence over operating and financial policies, are accounted for under the equity method and our proportionate share of income or loss is recorded in other operating income (expense). Investments in businesses for which we do not have the ability to exercise significant influence over operating and financial policies are accounted for at fair value, if readily determinable, with changes in fair value recognized in net income. For equity investments that do not have a readily determinable fair value, we measure these investments at cost minus impairment, if any, plus or minus changes from observable price changes. All intercompany accounts and transactions have been eliminated in consolidation.
Foreign Currency Translation
Our condensed consolidated financial statements are reported in U.S. dollars. Our foreign subsidiaries maintain their records primarily in the currency of the country in which they operate. The method of translating local currency financial information into U.S. dollars depends on whether the economy in which our foreign subsidiary operates has been designated as highly inflationary or not. Economies with a three-year cumulative inflation rate of more than 100% are considered highly inflationary.
Assets and liabilities of foreign subsidiaries in non-highly inflationary economies are translated into U.S. dollars using rates of exchange at the balance sheet date. Translation adjustments are recorded in other comprehensive income (loss). Revenues and expenses are translated at rates of exchange in effect during the year. Transaction gains and losses are recorded in net income.
Foreign subsidiaries that operate in highly inflationary countries use the U.S. dollar as their functional currency. Local currency monetary assets and liabilities are remeasured into U.S. dollars using rates of exchange as of each balance sheet date, with remeasurement adjustments and other transaction gains and losses recognized in earnings. Other than nonmonetary equity securities, nonmonetary assets and liabilities do not fluctuate with changes in local currency exchange rates to the dollar. For nonmonetary equity securities traded in highly inflationary economies, the fair market value of the equity securities are remeasured at the current exchange rates to determine gain or loss to be recorded in net income. Revenues and expenses are translated at rates of exchange in effect during the year.
Argentina
We operate in Argentina through wholly owned subsidiaries and a smaller controlled subsidiary (together "Brink's Argentina"). Revenues from Brink's Argentina represented approximately 6% of our consolidated revenues for the first three months of 2019 and 8% of our consolidated revenues for the first three months of 2018. The operating environment in Argentina continues to present business challenges, including ongoing devaluation of the Argentine peso and significant inflation. In the first three months of 2019 and 2018, the Argentine peso declined approximately 13% (from 37.6 to 43.3 pesos to the U.S. dollar) and approximately 8% (from 18.6 to 20.2 pesos to the U.S. dollar),
7
respectively. For the year ended December 31, 2018, the Argentine peso declined approximately 50% (from 18.6 to 37.6 pesos to the U.S. dollar).
Beginning July 1, 2018, we designated Argentina's economy as highly inflationary for accounting purposes. As a result, we consolidated Brink's Argentina using our accounting policy for subsidiaries operating in highly inflationary economies beginning with the third quarter of 2018. Argentine peso-denominated monetary assets and liabilities are remeasured at each balance sheet date using the currency exchange rate then in effect, with currency remeasurement gains and losses recognized in earnings. In the second half of 2018, we recognized a $6.2 million pretax remeasurement loss. In the first three months of 2019, we recognized a $3.9 million pretax remeasurement loss. At March 31, 2019, Argentina's economy remains highly inflationary for accounting purposes.
At March 31, 2019, we had net monetary assets denominated in Argentine pesos of $28.4 million (including cash of $17.2 million). At March 31, 2019, we had net nonmonetary assets of $149.7 million (including $99.8 million of goodwill). At March 31, 2019, we had no equity securities denominated in Argentine pesos.
Venezuela
Deconsolidation. Our Venezuelan operations offer transportation and route-based logistics management services for cash and valuables throughout Venezuela. Political and economic conditions in Venezuela, the impact of local laws on our business as well as the currency exchange control regulations and continued reductions in access to U.S. dollars through official currency exchange mechanisms, resulted in an other-than-temporary lack of exchangeability between the Venezuelan bolivar and the U.S. dollar. These conditions restricted the ability of our Venezuelan operations to pay dividends and royalties. It also restricted the ability for our Venezuela business to settle other operating liabilities which significantly increased the risk that this business will no longer be self-sustaining.
The currency exchange regulations, combined with other government regulations, such as price controls and strict labor laws, significantly limited our ability to make and execute operational decisions at our Venezuelan subsidiaries. With the May 2018 re-election of the President in Venezuela for an additional six-year term, we expect these conditions to continue for the foreseeable future.
As a result of the conditions described above, we concluded that, effective June 30, 2018, we did not meet the accounting criteria for control over our Venezuelan operations and, as a result, we began reporting the results of our investment in our Venezuelan subsidiaries using the cost method of accounting. This change resulted in a pretax charge of $127 million in the second quarter of 2018. The pretax charge included $106 million of foreign currency translation losses and benefit plan adjustments previously included in accumulated other comprehensive loss. It also included the derecognition of the carrying amounts of our Venezuelan operations’ assets and liabilities, including $32 million of assets and $11 million of liabilities, that were no longer reported in our condensed consolidated balance sheet as of June 30, 2018. We determined the fair value of our investment in, and receivables from, our Venezuelan subsidiaries to be insignificant based on our expectations of dividend payments and settlements of such receivables in future periods. For reporting periods beginning after June 30, 2018, we have not included the operating results of our Venezuela operations. In 2019 and 2018, we provided immaterial amounts of financial support to our Venezuela operations. We may incur losses resulting from our Venezuelan business to the extent that we provide U.S. dollars or make future investments in our Venezuelan subsidiaries, including any additional investments made directly in our Venezuelan subsidiaries or additional costs incurred by us to address compliance with recent sanctions and other regulatory requirements imposed by the U.S. government that restrict our ability to conduct business in Venezuela.
We continue to monitor the situation in Venezuela, including the imposition of sanctions by the U.S. government targeting Venezuela.
Highly Inflationary Accounting. The economy in Venezuela has had significant inflation in the last several years. Prior to deconsolidation as of June 30, 2018, we reported our Venezuelan results using our accounting policy for subsidiaries operating in highly inflationary economies. Results from our Venezuelan operations prior to the June 30, 2018 deconsolidation are included in items not allocated to segments and are excluded from the operating segments.
Remeasurement rates during 2018. Prior to deconsolidation as of June 30, 2018, in the first six months of 2018, the rate declined approximately 97%. We received only minimal U.S. dollars through this exchange mechanism. In the first three months of 2018, we recognized a $2.8 million pretax remeasurement gain. The after-tax effect of this gain attributable to noncontrolling interest was $2.0 million.
New Accounting Standards
In May 2014, the FASB issued ASU 2014-09, Revenue From Contracts with Customers. Under this standard, an entity recognizes an amount of revenue to which it expects to be entitled when the transfer of goods or services to customers occurs. The standard requires expanded disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We adopted this standard effective January 1, 2018 using the modified retrospective method and recognized a cumulative-effect adjustment increasing retained earnings by $1.5 million.
The FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, in January 2016. This new guidance changes the accounting related to the classification and measurement of certain equity investments. Equity investments with readily determinable fair values must be measured at fair value. All changes in fair value will be recognized in net income as opposed to other comprehensive income. We adopted ASU 2016-01 effective January 1, 2018 and recognized a cumulative-effect adjustment increasing retained earnings by $1.1 million.
8
In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which changes the timing of when certain intercompany transactions are recognized within the provision for income taxes. We adopted ASU 2016-16 effective January 1, 2018 using the modified retrospective method and we recognized a cumulative-effect adjustment increasing retained earnings by $0.7 million.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of right-of-use assets and lease liabilities by lessees for certain leases classified as operating leases and also requires expanded disclosures regarding leasing activities. The accounting for capital leases remains substantially unchanged. We have adopted the standard effective January 1, 2019 and have elected to adopt the new standard at the adoption date through a cumulative-effect adjustment to the opening balance of retained earnings. Under this approach, we will continue to report comparative periods under ASC 840.
We have elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carry forward the historical lease classification. We also made an accounting policy election to exclude leases with an initial term of 12 months or less from the condensed consolidated balance sheet. We will recognize those lease payments in the condensed consolidated statements of operations on a straight-line basis over the lease term. As part of this adoption, we have implemented internal controls and key system functionality to enable the preparation of financial information.
The adoption of the standard resulted in recording right-of-use assets of $310.1 million and lease liabilities of $320.3 million as of January 1, 2019. The right-of-use assets are lower than the lease liabilities as existing deferred rent and lease incentive liabilities were recorded against the right-of-use assets at adoption in accordance with the standard. The standard did not affect our condensed consolidated statements of operations or our condensed consolidated statements of cash flows. The standard had no impact on our debt-covenant compliance under our current agreements.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment, which eliminates the requirement that an entity perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. We early adopted this ASU effective January 1, 2019. The early adoption did not have any impact on our condensed consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, which amends and simplifies the application of hedge accounting guidance to better portray the economic results of risk management activities in the financial statements. The guidance expands the ability to hedge nonfinancial and financial risk components, reduces complexity in fair value hedges of interest rate risk, eliminates the requirement to separately measure and report hedge ineffectiveness, and eases certain hedge effectiveness assessment requirements. We adopted the standard effective January 1, 2019 with no significant impact on our condensed consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (“Tax Reform Act”). We adopted ASU 2018-02 effective January 1, 2019 and elected to recognize a cumulative-effect adjustment increasing retained earnings by $28.8 million related to the change in the U.S. federal corporate tax rate.
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which changes the fair value measurement disclosure requirements. The guidance is effective January 1, 2020 with early adoption permitted. We are currently evaluating the potential impact of the standard on financial reporting and the timing of adoption.
9
Note 2 - Revenue from Contracts with Customers
Performance Obligations
We provide various services to meet the needs of our customers and we group these service offerings into three broad categories: Core Services, High-Value Services and Other Security Services.
Core Services
Cash-in-transit ("CIT") and ATM services are core services we provide to customers throughout the world. We charge customers per service performed or based on the value of goods transported. CIT services generally involve the secure transportation of cash, securities and other valuables between businesses, financial institutions and central banks. ATM services are generally composed of management services, including cash replenishment and forecasting, remote monitoring, transaction processing, installation and maintenance.
High-Value Services
Our high-value services leverage our brand, global infrastructure and core services and include cash management services, global services and payment services. We offer a variety of cash management services such as currency and coin counting and sorting, deposit preparation and reconciliation, and safe device installation and servicing (including our CompuSafe® service). Our global services business provides secure ground, sea and air transportation and storage of highly-valued commodities including diamonds, jewelry, precious metals and other valuables. We also provide payment services which include bill payment and processing services on behalf of utility companies and other billers plus general purpose reloadable prepaid cards and payroll cards.
Other Security Services
Our other security services feature the protection of airports, offices, warehouses, stores, and public venues in Europe and Brazil.
For performance obligations related to the services described above, we generally satisfy our obligations as each action to provide the service to the customer occurs. Because the customers simultaneously receive and consume the benefits from our services, these performance obligations are deemed to be satisfied over time. We use an output method, units of service provided, to recognize revenue because that is the best method to represent the transfer of our services to the customer at the agreed upon rate for each action.
Although not as significant as our service offerings, we also sell goods to customers from time to time, such as safe devices. In those transactions, we satisfy our performance obligation at a point in time. We recognize revenue when the goods are delivered to the customer as that is the point in time that best represents when control has transferred to the customer.
Our contracts with customers describe the services we can provide along with the fees for each action to provide the service. We typically send invoices to customers for all of the services we have provided within a monthly period and payments are generally due within 30 to 60 days of the invoice date.
Although our customer contracts specify the fees for each action to provide service, the majority of the services stated in our contracts do not have a defined quantity over the contract term. Accordingly, the transaction price is considered variable as there is an unknown volume of services that will be rendered over the course of the contract. We recognize revenue for these services in the period in which they are provided to the customer based on the contractual rate at which we have the right to invoice the customer for each action.
Some of our contracts with customers contain clauses that define the level of service that the customer will receive. The service level agreements (“SLA”) within those contracts contain specific calculations to determine whether the appropriate level of service has been met within a specific period, which is typically a month. We estimate SLA penalties and recognize the amounts as a reduction to revenue.
Taxes collected from customers and remitted to governmental authorities are not included in revenues in the condensed consolidated statements of operations.
10
Revenue Disaggregated by Reportable Segment and Type of Service
(In millions)
Core Services
High-Value Services
Other Security Services
Total
Three months ended March 31, 2019
Reportable Segments:
North America
$
277.2
157.3
—
434.5
South America
119.2
108.1
3.0
230.3
Rest of World
88.0
119.3
32.9
240.2
Total
$
484.4
384.7
35.9
905.0
Three months ended March 31, 2018
Reportable Segments:
North America
$
190.0
130.1
—
320.1
South America
125.4
126.5
2.9
254.8
Rest of World
93.6
130.4
54.4
278.4
Total reportable segments
409.0
387.0
57.3
853.3
Not Allocated to Segments:
Venezuela
10.7
15.1
—
25.8
Total
$
419.7
402.1
57.3
879.1
The majority of our revenues from contracts with customers are earned by providing services and these performance obligations are satisfied over time. Smaller amounts of revenues are earned from selling goods, such as safes, to customers where the performance obligations are satisfied at a point in time.
Certain of our high-value services involve the leasing of assets, such as safes, to our customers along with the regular servicing of those safe devices. Revenues related to the leasing of these assets are recognized in accordance with applicable lease guidance (ASC 842 beginning in 2019 and ASC 840 prior to 2019), but are included in the above table as the amounts are a small percentage of overall revenues.
Contract Balances
Contract Asset
Although payment terms and conditions can vary, for the majority of our customer contracts, we invoice for all of the services provided to the customer within a monthly period. For certain customer contracts, the timing of our performance may precede our right to invoice the customer for the total transaction price. For example, Brink's affiliates in certain countries, primarily in South America, negotiate annual price adjustments with certain customers and, once the price increases are finalized, the pricing changes are made retroactive to services provided in earlier periods. These retroactive pricing adjustments are estimated and recognized as revenue with a corresponding contract asset in the same period in which the related services are performed. As the estimate of the ultimate transaction price changes, we recognize a cumulative catch-up adjustment for the change in estimate.
Contract Liability
For other customer contracts, we may obtain the right to payment or receive customer payments prior to performing the related services under the contract. When the right to customer payments or receipt of payments precedes our performance, we recognize a contract liability.
The opening and closing balances of receivables, contract assets and contract liabilities related to contracts with customers are as follows:
(In millions)
Receivables
Contract Asset
Contract Liability
Opening (January 1, 2019)
$
599.5
1.8
2.5
Closing (March 31, 2019)
641.0
1.2
5.4
Increase (decrease)
$
41.5
(0.6
)
2.9
The amount of revenue recognized in the three months ended March 31, 2019 that was included in the January 1, 2019 contract liability balance was $1.9 million. This revenue consists of services provided to customers who had prepaid for those services prior to the current year.
We also recognized revenue of $0.4 million in the three months ended March 31, 2019 from performance obligations satisfied in the prior year. This amount is a result of changes in the transaction price of our contracts with customers.
11
Contract Costs
Sales commissions directly related to obtaining new contracts with customers qualify for capitalization. These capitalized costs are amortized to expense ratably over the term of the contracts. At March 31, 2019, the net capitalized costs to obtain contracts was $1.9 million, which is included in other assets on the condensed consolidated balance sheet. Amortization expense was not significant and there were no impairment losses recognized related to these contract costs in the first three months of 2019.
Practical Expedients
For the majority of our contracts with customers, we invoice a fixed amount for each unit of service we have provided. These contracts provide us with the right to invoice for an amount or rate that corresponds to the value we have delivered to our customers. The volume of services that will be provided to customers over the term is not known at inception of these contracts. Therefore, while the rate per unit of service is known, the transaction price itself is variable. For this reason, we recognize revenue from these contracts equal to the amount for which we have the contractual right to invoice the customers. Because we are not required to estimate variable consideration related to the transaction price in order to recognize revenue, we are also not required to estimate the variable consideration to provide certain disclosures. As a result, we have elected to use the optional exemption related to the disclosure of transaction prices, amounts allocated to remaining performance obligations and the future periods in which revenue will be recognized, sometimes referred to as backlog.
We have also elected to use the practical expedient for financing components related to our contract liabilities. We do not recognize interest expense on contracts for which the period between our receipt of customer payments and our service to the customer is one year or less.
12
Note 3 - Segment information
We identify our operating segments based on how our chief operating decision maker (“CODM”) allocates resources, assesses performance and makes decisions. Our CODM is our President and Chief Executive Officer. Our CODM evaluates performance and allocates resources to each operating segment based on a profit or loss measure which, at the reportable segment level, excludes the following:
•
Corporate expenses - former non-segment and regional management costs, currency transaction gains and losses, adjustments to reconcile segment accounting policies to U.S. GAAP, and costs related to global initiatives are excluded from segment results.
•
Other items not allocated to segments - certain significant items such as reorganization and restructuring actions that are evaluated on an individual basis by management and are not considered part of the ongoing activities of the business are excluded from segment results. Prior to deconsolidation (see Note 1), results from Venezuela operations were also excluded from our segment results due to the Venezuelan government's restrictions that have prevented us from repatriating funds. We also exclude certain costs, gains and losses related to acquisitions and dispositions of assets and of businesses. Beginning in the third quarter of 2018, we began to consolidate Brink's Argentina using our accounting policy for subsidiaries operating in highly inflationary economies. We have excluded from our segment results the impact of highly inflationary accounting in Argentina, including currency remeasurement losses. Incremental third party costs incurred related to the mitigation of material weaknesses and the implementation and adoption of ASU 2016-02, the new lease accounting standard effective for us January 1, 2019, are also excluded from segment results.
The following table summarizes our revenues and segment profit for each of our reportable segments and reconciles these amounts to consolidated revenues and operating profit:
Revenues
Operating Profit
Three Months Ended March 31,
Three Months Ended March 31,
(In millions)
2019
2018
2019
2018
Reportable Segments:
North America
$
434.5
320.1
$
44.0
20.6
South America
230.3
254.8
43.0
55.6
Rest of World
240.2
278.4
23.8
25.6
Total reportable segments
905.0
853.3
110.8
101.8
Reconciling Items:
Corporate expenses:
General, administrative and other expenses
—
—
(27.1
)
(31.1
)
Foreign currency transaction gains (losses)
—
—
0.9
(0.5
)
Reconciliation of segment policies to GAAP
—
—
0.2
1.3
Other items not allocated to segments:
Venezuela operations
—
25.8
—
3.5
Reorganization and Restructuring
—
—
(3.5
)
(3.7
)
Acquisitions and dispositions
—
—
(17.2
)
(6.5
)
Argentina highly inflationary impact
—
—
(4.3
)
—
Reporting compliance(a)
—
—
(1.4
)
—
Total
$
905.0
879.1
$
58.4
64.8
(a)
Costs related to accounting standard implementation and material weakness mitigation. Additional information provided at page 37.
13
Note 4 - Retirement benefits
Pension plans
We have various defined-benefit pension plans covering eligible current and former employees. Benefits under most plans are based on salary and years of service.
The components of net periodic pension cost for our pension plans were as follows:
U.S. Plans
Non-U.S. Plans
Total
(In millions)
2019
2018
2019
2018
2019
2018
Three months ended March 31,
Service cost
$
—
—
2.5
3.0
2.5
3.0
Interest cost on projected benefit obligation
8.5
8.0
2.6
4.0
11.1
12.0
Return on assets – expected
(12.7
)
(13.4
)
(2.6
)
(2.9
)
(15.3
)
(16.3
)
Amortization of losses
5.0
7.1
1.0
1.3
6.0
8.4
Amortization of prior service cost
—
—
—
0.2
—
0.2
Settlement loss
—
—
0.3
0.5
0.3
0.5
Net periodic pension cost
$
0.8
1.7
3.8
6.1
4.6
7.8
We did not make cash contributions to the primary U.S. pension plan in 2018 or the first three months of 2019. Based on assumptions described in our Annual Report on Form 10-K for the year ended December 31, 2018, we do not expect to make any additional contributions to the primary U.S. pension plan until 2022.
Retirement benefits other than pensions
We provide retirement healthcare benefits for eligible current and former U.S., Canadian, and Brazilian employees. Retirement benefits related to our former U.S. coal operations include medical benefits provided by the Pittston Coal Group Companies Employee Benefit Plan for United Mine Workers of America Represented Employees (the “UMWA plans”) as well as costs related to Black Lung obligations.
The components of net periodic postretirement cost related to retirement benefits other than pensions were as follows:
UMWA Plans
Black Lung and Other Plans
Total
(In millions)
2019
2018
2019
2018
2019
2018
Three months ended March 31,
Interest cost on accumulated postretirement benefit obligations
$
5.0
4.5
0.9
0.7
5.9
5.2
Return on assets – expected
(3.3
)
(4.2
)
—
—
(3.3
)
(4.2
)
Amortization of losses
5.1
5.5
1.1
1.2
6.2
6.7
Amortization of prior service (credit) cost
(1.1
)
(1.1
)
(0.1
)
0.3
(1.2
)
(0.8
)
Net periodic postretirement cost
$
5.7
4.7
1.9
2.2
7.6
6.9
The components of net periodic pension cost and net periodic postretirement cost other than the service cost component are included in interest and other nonoperating income (expense) in the condensed consolidated statements of operations.
14
Note 5 - Income taxes
Three Months Ended March 31,
2019
2018
Continuing operations
Provision for income taxes (in millions)
$
9.7
11.4
Effective tax rate
40.1
%
31.1
%
Tax Reform
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Reform Act”) was enacted into law. The Tax Reform Act includes a reduction in the federal tax rate for corporations from 35% to 21% as of January 1, 2018, a one-time transition tax on the cumulative undistributed earnings of foreign subsidiaries as of December 31, 2017, a repeal of the corporate alternative minimum tax, and more extensive limitations on deductibility of performance-based compensation for named executive officers. Other provisions effective as of January 1, 2018, which could materially impact the Company in the near-term, include the creation of a new U.S. minimum tax on foreign earnings called the Global Intangible Low-Taxed Income (“GILTI”) and limitations on the deductibility of interest expense.
Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Reform Act, the Company recorded provisional amounts as of December 31, 2017, in accordance with Staff Accounting Bulletin No. 118 ("SAB 118"). We recorded a provisional one-time non-cash charge of $92 million in the fourth quarter of 2017 to remeasure the deferred tax assets for the new rate and for other legislative changes. In the fourth quarter of 2018, we recorded a benefit of $2.3 million to reverse a component of the provisional one-time non-cash charge as a result of guidance issued by the U.S. authorities.
We filed our 2017 U.S. federal income tax return in October 2018, which did not reflect a U.S. federal current tax liability for the transition tax due to our high-tax foreign income, but we recorded an incremental $1.3 million of foreign tax credits, offset with a full valuation allowance in the fourth quarter of 2018 which was in addition to the provisional $31.1 million foreign tax credit offset with a full valuation allowance related to the transition tax recorded in the fourth quarter of 2017. We did not record a current state tax liability related to the transition tax in accordance with the interpretation of existing state laws and the provisional estimates in the fourth quarter of 2017, but we recorded the state impact of the transition tax of $0.2 million when we filed our tax returns in the fourth quarter of 2018.
We adopted an accounting policy related to the provision of deferred taxes related to GILTI and determined that we would not record deferred taxes with respect to GILTI, but would instead treat GILTI as a current period cost. We did not change our assertion on the determination of which subsidiaries that we consider to be permanently invested and for which we do not expect to repatriate to the U.S. as a result of the Tax Reform Act. The accounting for the Tax Reform Act was completed in the fourth quarter of 2018 in accordance with SAB 118.
2019 Compared to U.S. Statutory Rate
The effective income tax rate on continuing operations in the first three months of 2019 was greater than the 21% U.S. statutory tax rate primarily due to the geographical mix of earnings, the seasonality of book losses for which no tax benefit can be recorded, nondeductible expenses in Mexico, taxes on cross border payments and the characterization of a French business tax as an income tax, partially offset by the tax benefits related to the distribution of share-based payments.
2018 Compared to U.S. Statutory Rate
The effective income tax rate on continuing operations in the first three months of 2018 was greater than the 21% U.S. statutory tax rate primarily due to the geographical mix of earnings, the seasonality of book losses for which no tax benefit can be recorded, nondeductible
expenses in Mexico, taxes on cross border payments and the characterization of a French business tax as an income tax, partially offset by the
significant tax benefits related to the distribution of share-based payments and a French income tax credit.
15
Note 6 - Acquisitions and Dispositions
Acquisitions
We account for business combinations using the acquisition method. Under the acquisition method of accounting, assets acquired and liabilities assumed from these operations are recorded at fair value on the date of acquisition. The condensed consolidated statements of operations include the results of operations for each acquired entity from the date of acquisition.
Rodoban Transportes Aereos e Terrestres Ltda., Rodoban Servicos e Sistemas de Seguranca Ltda., and Rodoban Seguranca e Transporte de Valores Ltda ("Rodoban")
On January 4, 2019, we acquired 100% of the capital stock of Rodoban in Brazil for $131 million. Rodoban provides cash-in-transit, money processing and ATM services and generates annual revenues of approximately $80 million. The Rodoban business is expected to expand our operations in southeastern Brazil and will be integrated with our existing Brink's Brazil operations. Rodoban has approximately 2,900 employees, 13 branches and about 190 armored vehicles across its operations.
We have provisionally estimated fair values for the assets purchased, liabilities assumed and purchase consideration as of the date of the acquisition in the following table. The determination of estimated fair value required management to make significant estimates and assumptions. The amounts reported are considered provisional as we are completing the valuations that are required to allocate the purchase price. As a result, the allocation of the provisional purchase price will change in the future.
(In millions)
Estimated Fair Value at Acquisition Date
Fair value of purchase consideration
Cash paid through March 31, 2019
$
133.1
Indemnification asset
(1.9
)
Fair value of purchase consideration
$
131.2
Fair value of net assets acquired(a)
Cash
$
1.4
Accounts receivable
8.2
Other current assets
0.4
Property and equipment, net
3.7
Intangible assets(b)
47.9
Goodwill(c)
80.4
Other noncurrent assets
5.1
Current liabilities
(9.6
)
Noncurrent liabilities
(6.3
)
Fair value of net assets acquired
$
131.2
(a)
Final allocation will be determined once the valuation is complete.
(b)
Intangible assets are composed of customer relationships ($46 million fair value and 11 year amortization period), trade name ($1 million fair value and 1 year amortization period), and non-compete agreement ($1 million fair value and 5 year amortization period).
(c)
Consists of intangible assets that do not qualify for separate recognition, combined with synergies expected from integrating Rodoban’s operations with our existing Brink’s Brazil operations. All of the goodwill has been assigned to the Brazil reporting unit and is expected to be deductible for tax purposes.
16
Dunbar Armored, Inc. ("Dunbar")
U.S. Cash Management business
On August 13, 2018, we acquired 100% of the shares of Dunbar for approximately $547 million, subject to a working capital adjustment. The Dunbar business is being integrated with our existing Brink's U.S. operations. This acquisition is expected to expand our customer base in the U.S. as a result of Dunbar's focus on small-to-medium sized retailers and financial institutions. Dunbar has approximately 5,400 employees, 78 branches and over 1,600 armored vehicles across its operations.
We have provisionally estimated fair values for the assets purchased, liabilities assumed and purchase consideration as of the date of the acquisition in the following table. The determination of estimated fair value required management to make significant estimates and assumptions. The amounts reported are considered provisional as we are completing the valuations that are required to allocate the purchase price. As a result, the allocation of the provisional purchase price will change in the future. In the fourth quarter of 2018, our fair value estimates of acquisition date intangible assets decreased approximately $20 million, acquisition date goodwill increased approximately $24 million, acquisition date other noncurrent assets increased approximately $11 million and acquisition date noncurrent liabilities increased approximately $13 million as compared to our initial estimates in the period of acquisition. There have been no other significant changes to our fair value estimates of the net assets acquired for the Dunbar acquisition.
(In millions)
Estimated Fair Value at Acquisition Date
Fair value of purchase consideration
Cash paid through March 31, 2019
$
546.8
Fair value of purchase consideration
$
546.8
Fair value of net assets acquired(a)
Cash
$
25.8
Accounts receivable
31.9
Other current assets
11.7
Property and equipment, net
57.0
Intangible assets(b)
162.0
Goodwill(c)
307.1
Other noncurrent assets
21.1
Current liabilities
(29.7
)
Noncurrent liabilities
(40.1
)
Fair value of net assets acquired
$
546.8
(a)
Final allocation will be determined once the valuation is complete.
(b)
Intangible assets are composed of customer relationships ($148 million fair value and 15 year amortization period) and rights related to the trade name ($14 million fair value and 8 year amortization period).
(c)
Consists of intangible assets that do not qualify for separate recognition, combined with synergies expected from integrating Dunbar’s operations with our existing Brink’s U.S. operations. All of the goodwill has been assigned to the U.S. reporting unit and is expected to be deductible for tax purposes.
17
Pro forma disclosures
The pro forma consolidated results of Brink’s presented below reflect a hypothetical ownership as of January 1, 2017 for the businesses we acquired during 2018 and a hypothetical ownership as of January 1, 2018 for the business we acquired in the first three months of 2019.
(In millions)
Revenue
Net income (loss) attributable to Brink's
Actual results included in Brink's consolidated results for businesses acquired in 2018 and 2019 from the date of acquisition
Three months ended March 31, 2019
Rodoban
$
18.6
0.6
Dunbar
93.6
2.9
Total
$
112.2
3.5
Three months ended March 31, 2018
Rodoban
$
—
—
Dunbar
—
—
Total
$
—
—
(In millions)
Revenue
Net income (loss) attributable to Brink's
Pro forma results of Brink's for the three months ended March 31
2019
Brink's as reported
$
905.0
13.7
Rodoban(a)
0.6
—
Dunbar(a)
—
—
Total
$
905.6
13.7
2018
Brink's as reported
$
879.1
22.3
Rodoban(a)
20.6
(0.7
)
Dunbar(a)
99.7
2.2
Total
$
999.4
23.8
(a)
Represents amounts prior to acquisition by Brink's.
Acquisition costs
We have incurred $0.4 million in transaction costs related to business acquisitions in the first three months of 2019 ($0.5 million in the first three months of 2018). These costs are classified in the condensed consolidated statements of operations as selling, general and administrative expenses.
18
Note 7 - Accumulated other comprehensive income (loss)
Other comprehensive income (loss), including the amounts reclassified from accumulated other comprehensive loss into earnings, was as follows:
Amounts Arising During
the Current Period
Amounts Reclassified to
Net Income (Loss)
(In millions)
Pretax
Income
Tax
Pretax
Income
Tax
Total Other
Comprehensive
Income (Loss)
Three months ended March 31, 2019
Amounts attributable to Brink's:
Benefit plan adjustments
$
(1.3
)
0.2
11.3
(2.7
)
7.5
Foreign currency translation adjustments
0.3
—
—
—
0.3
Gains (losses) on cash flow hedges
(5.3
)
1.1
(2.6
)
0.9
(5.9
)
(6.3
)
1.3
8.7
(1.8
)
1.9
Amounts attributable to noncontrolling interests:
Foreign currency translation adjustments
0.3
—
—
—
0.3
0.3
—
—
—
0.3
Total
Benefit plan adjustments(a)
(1.3
)
0.2
11.3
(2.7
)
7.5
Foreign currency translation adjustments
0.6
—
—
—
0.6
Gains (losses) on cash flow hedges(b)
(5.3
)
1.1
(2.6
)
0.9
(5.9
)
$
(6.0
)
1.3
8.7
(1.8
)
2.2
Three months ended March 31, 2018
Amounts attributable to Brink's:
Benefit plan adjustments
$
(1.0
)
0.3
14.8
(3.4
)
10.7
Foreign currency translation adjustments
0.1
—
—
—
0.1
Gains (losses) on cash flow hedges
0.4
(0.1
)
—
—
0.3
(0.5
)
0.2
14.8
(3.4
)
11.1
Amounts attributable to noncontrolling interests:
Benefit plan adjustments
—
—
0.2
—
0.2
Foreign currency translation adjustments
0.9
—
—
—
0.9
0.9
—
0.2
—
1.1
Total
Benefit plan adjustments(a)
(1.0
)
0.3
15.0
(3.4
)
10.9
Foreign currency translation adjustments
1.0
—
—
—
1.0
Gains (losses) on cash flow hedges(b)
0.4
(0.1
)
—
—
0.3
$
0.4
0.2
15.0
(3.4
)
12.2
(a)
The amortization of actuarial losses and prior service cost is part of total net periodic retirement benefit cost when reclassified to net income. Net periodic retirement benefit cost also includes service cost, interest cost, expected return on assets, and settlement losses. Total service cost is allocated between cost of revenues and selling, general and administrative expenses on a plan-by-plan basis and the remaining net periodic retirement benefit cost items are allocated to interest and other nonoperating income (expense):
Three Months Ended March 31,
(In millions)
2019
2018
Total net periodic retirement benefit cost included in:
Cost of revenues
$
1.9
2.4
Selling, general and administrative expenses
0.6
0.6
Interest and other nonoperating income (expense)
9.7
11.7
(b)
Pretax gains and losses on cash flow hedges are classified in the condensed consolidated statements of operations as:
•
other operating income (expense) ($3.8 million gain in the three months ended March 31, 2019 and no gains or losses in the three months ended March 31, 2018)
•
interest expense ($1.2 million of expense in the three months ended March 31, 2019).
19
The changes in accumulated other comprehensive loss attributable to Brink’s are as follows:
(In millions)
Benefit Plan Adjustments
Foreign Currency Translation Adjustments
Gains (Losses) on Cash Flow Hedges
Total
Balance as of December 31, 2018
$
(572.1
)
(382.0
)
0.8
(953.3
)
Other comprehensive income (loss) before reclassifications
(1.1
)
0.3
(4.2
)
(5.0
)
Amounts reclassified from accumulated other comprehensive loss to net income (loss)
8.6
—
(1.7
)
6.9
Other comprehensive income (loss) attributable to Brink's
7.5
0.3
(5.9
)
1.9
Cumulative effect of change in accounting principle(a)
(28.8
)
—
—
(28.8
)
Balance as of March 31, 2019
$
(593.4
)
(381.7
)
(5.1
)
(980.2
)
(a)
We adopted ASU 2018-02 (see Note 1) effective January 1, 2019 and recognized a cumulative-effect adjustment to retained earnings.
Note 8 - Fair value of financial instruments
Investments in Mutual Funds
We have investments in mutual funds that are carried at fair value in the financial statements. For these investments, fair value was based on quoted market prices, which we have categorized as a Level 1 valuation.
Fixed-Rate Debt
The fair value and carrying value of our fixed-rate debt are as follows:
(In millions)
March 31, 2019
December 31, 2018
Senior unsecured notes
Carrying value
$
600.0
600.0
Fair value
574.7
519.9
The fair value estimate of our senior unsecured notes was based on the present value of future cash flows, discounted at rates for similar instruments at the measurement date, which we have categorized as a Level 3 valuation.
Forward and Swap Contracts
We have outstanding foreign currency forward and swap contracts to hedge transactional risks associated with foreign currencies. At March 31, 2019, the notional value of our shorter term outstanding foreign currency forward and swap contracts was $146 million, with average maturities of approximately one month. These shorter term foreign currency forward and swap contracts primarily offset exposures in the euro and the British pound and are not designated as hedges for accounting purposes and, accordingly, changes in their fair value are recorded immediately in earnings. At March 31, 2019, the fair value of these shorter term foreign currency contracts was not significant.
In the first quarter of 2019, we entered into a longer term cross currency swap contract to hedge exposure in Brazilian real, which is designated as a cash flow hedge for accounting purposes. At March 31, 2019, the notional value of this longer term contract was $143 million with a weighted-average maturity of 2.7 years. We recognized net gains of $2.4 million on this contract, of which gains of $3.8 million were included in other operating income (expense) to offset transaction losses of $3.8 million and expenses of $1.4 million were included in interest expense in the first three months of 2019. At March 31, 2019, the fair value of the longer term cross currency swap contract was a $1.9 million net asset, of which a $6.1 million asset is included in other assets and a $4.2 million liability is included in accrued liabilities on the condensed consolidated balance sheet.
In the first quarter of 2016, we entered into two interest rate swaps that hedge cash flow risk associated with changes in variable interest rates and that are designated as cash flow hedges for accounting purposes. At March 31, 2019, the notional value of these contracts was $40 million with a remaining weighted-average maturity of 1.0 years. At March 31, 2019, the fair value of these interest rates swaps was a net asset of $0.8 million, of which $0.5 million was included in prepaid expenses and other and $0.3 million was included in other assets on the condensed consolidated balance sheet. The effect of these swaps are included in interest expense and were not significant in the first three months of 2019.
In the first quarter of 2019, we entered into ten interest rate swaps that hedge cash flow risk associated with changes in variable interest rates and that are designated as cash flow hedges for accounting purposes. At March 31, 2019, the notional value of these contracts was $400 million with a remaining weighted-average maturity of 2.5 years. At March 31, 2019, the fair value of these interest rate swaps was a net liability of $6.7 million, of which $0.5 million was included in accrued liabilities and $6.2 million was included in other liabilities on the condensed consolidated balance sheet. The effect of these swaps are included in interest expense and were not significant in the first three months of 2019.
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The fair values of these forward and swap contracts are based on the present value of net future cash payments and receipts, which we have categorized as a Level 2 valuation.
Contingent Consideration
The estimated fair value of our liabilities for contingent consideration represents the fair value of the potential amounts payable for our acquisition of Maco Transportadora. The remaining contingent amount is expected to be paid in a scheduled second installment in the fourth quarter of 2019, with the final amount paid based partially on the retention of customer revenue versus a target revenue amount. The remaining contingent consideration arrangement requires us to pay potential undiscounted amounts between $0 to $15.1 million based on retaining the revenue levels of existing customers at the acquisition dates. If there is a shortfall in revenues, a multiple of 2.5 is applied to the revenue shortfall and the contingent consideration to be paid to the former owners is reduced.
We used a probability-weighted approach to estimate the fair value of these contingent consideration payments. The fair value of the contingent consideration is the full $15.1 million potentially payable as of March 31, 2019 as we believe it is unlikely that the contingent consideration payments will be reduced for a revenue shortfall.
At March 31, 2019, this $15.1 million was included in accrued liabilities on the condensed consolidated balance sheet. The fair value of this liability was estimated using a discounted cash flow technique with significant inputs that are not observable in the market and thus represents a Level 3 valuation. The significant inputs in the Level 3 valuation not supported by market activity included our probability assessments of expected future cash flows related to our acquisition of this entity during the period from acquisition to the estimated settlement date of the remaining payment.
The contingent consideration payments may differ from the amounts that are ultimately paid, with any changes in the liabilities recorded in interest and other nonoperating expense in our condensed consolidated statements of operations until the liabilities are settled.
Other Financial Instruments
Other financial instruments include cash and cash equivalents, accounts receivable, floating rate debt, accounts payable and accrued liabilities. The financial statement carrying amounts of these items approximate the fair value.
There were no transfers in or out of any of the levels of the valuation hierarchy in the first three months of 2019.
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Note 9 - Debt
March 31,
December 31,
(In millions)
2019
2018
Debt:
Short-term borrowings
Restricted cash borrowings(a)
$
10.3
10.5
Other
13.1
18.4
Total short-term borrowings
$
23.4
28.9
Long-term debt
Bank credit facilities:
Term loan A(b)
$
796.5
466.9
Senior unsecured notes(c)
592.2
592.0
Revolving Credit Facility
147.3
340.0
Other
6.7
5.7
Financing leases
123.3
120.5
Total long-term debt
$
1,666.0
1,525.1
Total debt
$
1,689.4
1,554.0
Included in:
Current liabilities
$
92.9
82.4
Noncurrent liabilities
1,596.5
1,471.6
Total debt
$
1,689.4
1,554.0
(a)
These amounts are for short-term borrowings related to cash borrowed under lending arrangements used in the process of managing customer cash supply chains, which is currently classified as restricted cash and not available for general corporate purposes. See Note 12 for more details.
(b)
Amounts outstanding are net of unamortized debt costs of $3.5 million as of March 31, 2019 and $1.8 million as of December 31, 2018.
(c)
Amounts outstanding are net of unamortized debt costs of $7.8 million as of March 31, 2019 and $8.0 million as of December 31, 2018.
Long-Term Debt
Senior Secured Credit Facility
In February 2019, we amended our senior secured credit facility (the “Senior Secured Credit Facility”) with Wells Fargo Bank, National Association, as administrative agent. After the amendment, the Senior Credit Facility consists of a $1 billion revolving credit facility (the "Revolving Credit Facility") and an $800 million term loan facility (the "Term Loan Facility"). Prior to the amendment, the Term Loan Facility had an outstanding balance of approximately $469 million. The proceeds from the amendment were used to repay outstanding principal under the Revolving Credit Facility as well as certain fees related to the closing of the transaction.
Loans under the Revolving Credit Facility mature five years after the amendment date (February 8, 2024). Principal payments are due quarterly for the amended Term Loan Facility equal to 1.25% of the initial loan amount with a final payment due on February 8, 2024. Interest rates for the Senior Secured Credit Facility are based on LIBOR plus a margin or an alternate base rate plus a margin. The Revolving Credit Facility allows us to borrow money or issue letters of credit (or otherwise satisfy credit needs) on a revolving basis over the term of the facility. As of March 31, 2019, $853 million was available under the Revolving Credit Facility. The obligations under the Senior Secured Credit Facility are secured by a first-priority lien on all or substantially all of the assets of the Company and certain of its domestic subsidiaries, including a first-priority lien on equity interests of certain of the Company’s direct and indirect subsidiaries. The Company and certain of its domestic subsidiaries also guarantee the obligations under the Senior Secured Credit Facility.
The margin on both LIBOR and alternate base rate borrowings under the Senior Secured Credit Facility is based on the Company’s consolidated net leverage ratio. The margin on LIBOR borrowings, which can range from 1.25% to 2.00%, was 1.75% at March 31, 2019. The margin on alternate base rate borrowings, which can range from 0.25% to 1.00%, was 0.75% as of March 31, 2019. We also pay an annual commitment fee on the unused portion the Revolving Credit Facility based on the Company’s consolidated net leverage ratio. The commitment fee, which can range from 0.15% to 0.30%, was 0.25% as of March 31, 2019.
Senior Unsecured Notes
In October 2017, we issued at par ten-year senior unsecured notes (the "Senior Notes") in the aggregate principal amount of $600 million. The Senior Notes will mature on October 15, 2027 and bear an annual interest rate of 4.625%. The Senior Notes are general unsecured obligations guaranteed by certain of the Company’s existing and future U.S. subsidiaries, which are also guarantors under the Senior Secured Credit Facility.
The Senior Notes have not been and will not be registered under the Securities Act of 1933 (the “Securities Act”) or the securities laws of any other jurisdiction and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The notes were offered in the United States only to persons reasonably believed to be qualified institutional buyers in reliance
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on the exception from registration set forth in Rule 144A under the Securities Act and outside the United States to non-U.S. persons pursuant to Regulation S under the Securities Act.
Letter of Credit Facilities and Bank Guarantee Facilities
We have two committed letter of credit facilities totaling $64 million, of which approximately $30 million was available at March 31, 2019. At March 31, 2019, we had undrawn letters of credit and guarantees of $34 million issued under these facilities. A $10 million facility expires in April 2022 and a $54 million facility expires in December 2019.
We have three uncommitted letter of credit facilities totaling $97 million, of which approximately $55 million was available at March 31, 2019. At March 31, 2019, we had undrawn letters of credit of $42 million issued under these facilities. A $17 million facility expires in August 2019, a $40 million facility expires in September 2019 and another $40 million facility expires in January 2020.
The Senior Secured Credit Facility is also available for issuance of letters of credit and bank guarantees.
The Senior Secured Credit Facility, Senior Unsecured Notes, the Letter of Credit Facilities and Bank Guarantee Facilities contain various financial and other covenants. The financial covenants, among other things, limit our ability to provide liens, restrict fundamental changes, limit transactions with affiliates and unrestricted subsidiaries, restrict changes to our fiscal year and to organizational documents, limit asset dispositions, limit the use of proceeds from asset sales, limit sale and leaseback transactions, limit investments, limit the ability to incur debt, restrict certain payments to shareholders, limit negative pledges, limit the ability to change the nature of our business, provide for a maximum consolidated net leverage ratio and provide for minimum coverage of interest costs. If we were not to comply with the terms of our various financing agreements, the repayment terms could be accelerated and the commitments could be withdrawn. An acceleration of the repayment terms under one agreement could trigger the acceleration of the repayment terms under the other financing agreements. We were in compliance with all financial covenants at March 31, 2019.
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Note 10 - Leases
We lease facilities, vehicles, CompuSafe® units, computers and other equipment under long-term operating and financing leases with varying terms. Most of the operating leases contain renewal and/or purchase options at our sole discretion. The renewal periods differ by asset class and by country and are included in our determination of lease term if we determine we are reasonably certain to exercise the option.
We have taken the component election for all material asset categories, except CompuSafe units and armored vehicles. This election allows us to account for lease components (e.g., fixed payments or variable payments that depend on a rate that can be determined at commencement, including rent for the right to use the asset) together with nonlease components (e.g., other fixed payments that deliver a good or service including common-area maintenance costs) in the calculation of the right-of-use asset and corresponding liability. Variable costs, such as inflation adjusted payments for facilities, or nonlease components that vary periodically (included as part of the component election), are expensed as incurred.
Our leases do not contain any material residual value guarantees or material restrictive covenants.
The components of lease assets and liabilities were as follows:
(In millions)
Balance sheet classification
March 31, 2019
Assets:
Operating lease assets
Right-of-use assets, net
$
292.2
Finance lease assets
Property and equipment, net
130.9
Total leased assets
$
423.1
Liabilities:
Current:
Operating
Accrued liabilities
$
65.1
Financing
Current maturities of long-term debt
25.6
Noncurrent:
Operating
Lease liabilities
237.6
Financing
Long-term debt
97.7
Total lease liabilities
$
426.0
The components of lease expense were as follows:
(In millions)
2019
Three Months Ended March 31,
Operating lease cost(a)
$
24.8
Short-term lease cost
3.5
Financial lease cost:
Amortization of right-of-use assets
7.7
Interest on lease liabilities
1.7
Total lease cost
$
37.7
(a)
Includes variable lease costs, which are immaterial.
Net rent expense and amortization expense and interest on financing leases included in continuing operations was $36.6 million for the three months ended March 31, 2018.
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Other information related to leases was as follows:
(In millions, except for lease term and discount rate)
2019
Three Months Ended March 31,
Supplemental Cash Flows Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
22.4
Operating cash flows from finance leases
1.7
Financing cash flows from finance leases
6.9
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
27.1
Finance leases
12.1
Weighted Average Remaining Lease Term
Operating leases
7.5 years
Finance leases
5.2 years
Weighted Average Discount Rate
Operating leases
6.8
%
Finance leases
5.7
%
As of December 31, 2018, future minimum lease payments under noncancellable operating leases with initial or remaining lease terms in excess of one year were as follows: