Brinks Co: Form 10-Q for the period ended Sep 30, 2019

The Brink’s Company offers transportation and logistics management services for cash and valuables throughout the world. These services include:

• Cash-in-transit (“CIT”) services – armored vehicle transportation of valuables
• ATM services – replenishing and maintaining customers’ automated teller machines; providing network infrastructure services
• Global services – secure international transportation of valuables
• Cash management services
• Currency and coin counting and sorting; deposit preparation and reconciliations; other cash management services
• Safe and safe control device installation and servicing (including our patented CompuSafe® service)
• Vaulting services
• Check imaging services
• Payment services – bill payment and processing services on behalf of utility companies and other billers at any of our Brink’s or Brink’s-operated payment locations in Brazil, Colombia, Panama, and Mexico and Brink’s Money™ general purpose reloadable prepaid cards and payroll cards in the U.S.
• Commercial security systems services – design and installation of security systems in designated markets in Europe
• Guarding services – protection of airports, offices, and certain other locations in Europe and Brazil with or without electronic surveillance, access control, fire prevention and highly trained patrolling personnel

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 an operating profit or loss measure, excluding income and expenses not allocated to segments.

We have three operating segments:

• North America
• South America
• Rest of World.

RESULTS OF OPERATIONS

Consolidated Review

GAAP and Non-GAAP Financial Measures

We provide an analysis of our operations below on both a generally accepted accounting principles (“GAAP”) and non-GAAP basis. The purpose of the non-GAAP information is to report our operating profit, income from continuing operations and earnings per share without certain income and expense items that do not reflect the regular earnings of our operations. The non-GAAP financial measures are intended to provide investors with a supplemental comparison of our operating results and trends for the periods presented. Our management believes these measures are also useful to investors as they allow investors to evaluate our performance using the same metrics that our management uses to evaluate past performance and prospects for future performance. We do not consider these items to be reflective of our core operating performance due to the variability of these items from period-to-period in terms of size, nature and significance. The non-GAAP adjustments used to reconcile our GAAP results are described on pages 43–45 and are reconciled to comparable GAAP measures on pages 49–51.

Definition of Organic Growth

Organic growth represents the change in revenues or operating profit between the current and prior period, excluding the effect of acquisitions and dispositions and changes in currency exchange rates. See definitions on page 41.

(In millions, except for per share amounts)

(a) Amounts reported in this table are attributable to the shareholders of Brink’s and exclude earnings related to noncontrolling interests.

(b) Non-GAAP results are reconciled to the applicable GAAP results on pages 49–51.

Deconsolidation of Venezuela

Due to political and economic conditions in Venezuela, in the second quarter of 2018, we determined that we no longer met the accounting criteria for control over our Venezuelan operations. We expect these conditions to continue for the foreseeable future. Consequently, we began reporting the results of our investment in our Venezuelan subsidiaries using the cost method of accounting. We determined the fair value of our cost method 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. As a result, we deconsolidated our Venezuela subsidiaries and recognized a pretax loss of $126.7 million in the second quarter of 2018. This loss was excluded from our non-GAAP results.

GAAP Basis

Analysis of Consolidated Results: Third Quarter 2019 versus Third Quarter 2018

Consolidated Revenues Revenues increased $76.0 million as the favorable impact of acquisitions ($63.0 million) and organic growth in South America ($39.4 million), North America ($16.2 million) and Rest of World ($2.7 million) were partially offset by the unfavorable impact of currency exchange rates ($49.3 million). The unfavorable currency impact was driven by the Argentine peso and the euro. Revenues increased 7% on an organic basis due mainly to higher average selling prices in Argentina (including the effects of inflation) and organic revenue growth in Mexico due to price increases and volume growth. See above for our definition of “organic.”

Consolidated Costs and Expenses Cost of revenues increased 9% to $714.4 million primarily due to the impact of acquisitions, including integration costs, and inflation-based organic increases in labor and other operational costs, partially offset by changes in currency exchange rates. Selling, general and administrative costs increased 24% to $155.0 million due to the impact of acquisitions, including integration costs, higher corporate expenses, and charges related to an internal loss in the U.S. global services operations, partially offset by changes in currency exchange rates.

Consolidated Operating Profit We believe our current operating profit margin in our North America segment is lower than our competitors as our vehicle and labor expenses are too high. We are working to increase our operating profit margin by implementing productivity improvements aimed at reducing vehicle and labor expenses and by selling higher valued services. We expect our North America segment operating profit margin will continue to be comparable to our Rest of World segment in the future, but will not achieve the same level as our South America segment, where profit margins are higher for us and our competitors due to market conditions.

Operating profit decreased $14.5 million due mainly to:

• unfavorable changes in currency exchange rates ($15.0 million) driven by the Argentine peso
• higher costs related to business acquisitions and dispositions ($13.8 million) included in “Other items not allocated to segments”, primarily from the impact of intangible asset amortization and acquisition-related charges in the third quarter of 2019, and
• higher corporate expenses ($11.7 million on an organic basis),
• net charges incurred, primarily bad debt and third party costs, related to an internal loss in the U.S. global services operations ($11.3 million) included in “Other items not allocated to segments”,

partially offset by:

• organic increases in South America ($25.0 million), North America ($3.9 million) and Rest of World ($1.7 million), and
• the favorable operating impact of business acquisitions and dispositions ($5.4 million), excluding intangible asset amortization and acquisition-related charges.

Consolidated Income from Continuing Operations Attributable to Brink’s and Related Per Share Amounts Income from continuing operations attributable to Brink’s shareholders decreased $11.7 million to $5.8 million primarily due to the operating profit decrease mentioned above and higher interest expense ($5.9 million), partially offset by lower income tax expense ($8.3 million). Earnings per share from continuing operations was $0.11, down from $0.34 in the third quarter of 2018.

Analysis of Consolidated Results: Nine Months 2019 versus Nine Months 2018

Consolidated Revenues Revenues increased $166.2 million as the favorable impact of acquisitions ($263.3 million) and organic growth in South America ($107.2 million), North America ($55.0 million), and Rest of World ($8.2 million) were partially offset by the unfavorable impact of currency exchange rates ($220.1 million) and the deconsolidation of Venezuela operations ($51.4 million) in the second quarter of 2018. The unfavorable currency impact was driven by the Argentine peso, Brazilian real and the euro. Revenues increased 5% on an organic basis due mainly to higher average selling prices in Argentina (including the effects of inflation) and organic revenue growth in Mexico due to price increases and volume growth. See above for our definition of “organic.”

Consolidated Costs and Expenses Cost of revenues increased 6% to $2,125.6 million primarily due to the impact of acquisitions, including integration costs, and inflation-based organic increases in labor and other operational costs, partially offset by changes in currency exchange rates and the deconsolidation of Venezuela operations in the second quarter of 2018. Selling, general and administrative costs increased 23% to $451.3 million due primarily to the impact of acquisitions, including integration costs, corporate expenses, charges related to an internal loss in the U.S. global services operations, and inflation-based organic increases in labor and other administrative costs, partially offset by changes in currency exchange rates.

Consolidated Operating Profit We believe our current operating profit margin in our North America segment is lower than our competitors as our vehicle and labor expenses are too high. We are working to increase our operating profit margin by implementing productivity improvements aimed at reducing vehicle and labor expenses and by selling higher valued services. We expect our North America segment operating profit margin will continue to be comparable to our Rest of World segment in the future, but will not achieve the same level as our South America segment, where profit margins are higher for us and our competitors due to market conditions.

Operating profit decreased $30.0 million due mainly to:

• unfavorable changes in currency exchange rates ($47.9 million) driven by the Argentine peso and Brazilian real, slightly offset by the effect of Venezuela devaluations prior to deconsolidation,
• higher costs related to business acquisitions and dispositions ($41.5 million) included in “Other items not allocated to segments”, primarily from the impact of intangible asset amortization and acquisition-related charges in the first half of 2019,
• higher corporate expenses ($16.9 million on an organic basis),
• net charges incurred, primarily bad debt and third party costs, related to an internal loss in the U.S. global services operations ($13.9 million) included in “Other items not allocated to segments”,
• deconsolidation of Venezuela in the second quarter of 2018 ($12.5 million), and
• higher costs related to reorganization and restructuring ($5.0 million) included in “Other items not allocated to segments”,

partially offset by:

• organic increases in South America ($45.2 million) and North America ($33.0 million), and
• the favorable operating impact of business acquisitions and dispositions ($28.7 million), excluding intangible asset amortization and acquisition-related charges.

Consolidated Income from Continuing Operations Attributable to Brink’s and Related Per Share Amounts Income from continuing operations attributable to Brink’s shareholders increased $100.3 million to $32.1 million primarily due to the second quarter of 2018 loss on deconsolidation of Venezuela operations ($126.7 million), lower interest and other expense ($7.2 million), lower income tax expense ($15.9 million), and lower income attributable to noncontrolling interests ($1.3 million), partially offset by the operating profit decrease mentioned above and higher interest expense ($20.8 million). Earnings per share from continuing operations was $0.63, up from negative $1.34 in 2018.

Non-GAAP Basis

Analysis of Consolidated Results: Third Quarter 2019 versus Third Quarter 2018

Non-GAAP Consolidated Revenues Non-GAAP Revenues increased $72.2 million as the favorable impact of acquisitions ($63.2 million) and organic growth in South America ($39.4 million), North America ($16.2 million) and Rest of World ($2.7 million) were partially offset by the unfavorable impact of currency exchange rates ($49.3 million). The unfavorable currency impact was driven by the Argentine peso and the euro. Non-GAAP revenues increased 7% on an organic basis due mainly to higher average selling prices in Argentina (including the effects of inflation) and organic revenue growth in Mexico due to price increases and volume growth. See above for our definition of “organic.”

Non-GAAP Consolidated Operating Profit Non-GAAP operating profit increased $7.1 million due mainly to:

• organic increases in South America ($25.0 million), North America ($3.9 million) and Rest of World ($1.7 million), and
• the favorable operating impact of business acquisitions and dispositions ($5.4 million),

partially offset by:

• unfavorable changes in currency exchange rates ($17.2 million) driven by the Argentine peso, and
• higher corporate expenses ($11.7 million on an organic basis).

Non-GAAP Consolidated Income from Continuing Operations Attributable to Brink’s and Related Per Share Amounts Non-GAAP income from continuing operations attributable to Brink’s shareholders increased $3.9 million to $53.5 million due to the operating profit increase mentioned above and lower income tax expense ($1.6 million), partially offset by higher interest expense ($4.5 million) and higher interest and other expense ($1.0 million). Earnings per share from continuing operations was $1.05, up from $0.95 in the third quarter of 2018.

Analysis of Consolidated Results: Nine Months 2019 versus Nine Months 2018

Non-GAAP Consolidated Revenues Non-GAAP revenues increased $214.1 million as the favorable impact of acquisitions ($263.8 million) and organic growth in South America ($107.2 million), North America ($55.0 million), and Rest of World ($8.2 million) were partially offset by the unfavorable impact of currency exchange rates ($220.1 million). The unfavorable currency impact was driven by the Argentine peso, Brazilian real and the euro. Non-GAAP revenues increased 7% on an organic basis due mainly to higher average selling prices in Argentina (including the effects of inflation) and organic revenue growth in Mexico from price increases and volume growth. See above for our definition of “organic.”

Non-GAAP Consolidated Operating Profit Non-GAAP operating profit increased $33.0 million due mainly to:

• organic increases in South America ($45.2 million) and North America ($33.0 million), and
• the favorable operating impact of business acquisitions and dispositions ($28.7 million),

partially offset by:

• unfavorable changes in currency exchange rates ($58.2 million) driven by the Argentine peso and Brazilian real, and
• higher corporate expenses ($16.9 million on an organic basis).

Non-GAAP Consolidated Income from Continuing Operations Attributable to Brink’s and Related Per Share Amounts Non-GAAP income from continuing operations attributable to Brink’s shareholders increased $12.9 million to $138.3 million due to the operating profit increase mentioned above, lower income tax expense ($3.0 million) and lower income attributable to noncontrolling interests ($2.3 million), partially offset by higher interest expense ($16.9 million) and higher interest and other expense ($8.5 million). Earnings per share from continuing operations was $2.71, up from $2.41 in 2018.

Revenues and Operating Profit by Segment: Third Quarter 2019 versus Third Quarter 2018

(In millions)

Amounts may not add due to rounding.

(a) Non-GAAP amounts include the impact of prior year comparable period results for acquired and disposed businesses. GAAP results also include the impact of acquisition-related intangible amortization, restructuring and other charges, and disposition-related gains/losses.

(b) The amounts in the “Currency” column consist of the effects of Venezuela devaluations prior to deconsolidation, the effects of Argentina devaluations under highly inflationary accounting and the sum of monthly currency changes. Monthly currency changes represent the accumulation throughout the year of the impact on current period results of changes in foreign currency rates from the prior year period.

(c) Corporate expenses are not allocated to segment results. Corporate expenses include salaries and other costs to manage the global business and to perform activities required by public companies.

(d) See pages 43–45 for more information.

(e) Segment revenues equal our total reported non-GAAP revenues.

Analysis of Segment Results: Third Quarter 2019 versus Third Quarter 2018

North America

Revenues increased 17% ($63.3 million) primarily due to the favorable impact of acquisitions ($50.2 million), including the August 2018 Dunbar acquisition, and 4% organic growth ($16.2 million) driven by price increases and volume growth in Mexico. Operating profit increased $5.1 million primarily due to organic growth in Mexico and the favorable impact of acquisitions ($1.7 million), primarily from the Dunbar acquisition. Organic profit growth in Mexico was driven by higher volumes and labor-related productivity improvements.

South America

Revenues increased 6% ($13.5 million) primarily due to 18% organic growth ($39.4 million) and the favorable impact of acquisitions and dispositions ($12.7 million), primarily from the January 2019 Rodoban acquisition, partially offset by the unfavorable impact of currency exchange rates ($38.6 million) mostly from the Argentine peso. The organic growth was driven by inflation-based price increases and volume growth in Argentina. Operating profit increased 28% ($13.1 million) due to organic growth ($25.0 million) and the favorable impact of acquisitions and dispositions ($3.4 million), primarily from the Rodoban acquisition, partially offset by unfavorable currency ($15.3 million) driven by the Argentine peso. The organic profit increase was driven by growth in Argentina and Brazil. The growth in Argentina was driven by inflation-based price increases and higher volumes. The growth in Brazil was driven by a lower social tax rate, recovery of a social tax overpayment and productivity improvements.

Rest of World

Revenues decreased 2% ($4.6 million) due to the unfavorable impact of currency exchange rates ($7.6 million), partially offset by 1% organic growth ($2.7 million). The organic increase was primarily in Israel. Operating profit increased 5% ($1.4 million) due to organic growth ($1.7 million) partially offset by unfavorable currency ($0.6 million). The organic increase was primarily related to productivity initiatives in France.

Revenues and Operating Profit by Segment: Nine Months 2019 versus Nine Months 2018

(In millions)

Amounts may not add due to rounding.

See page 41 for footnote explanations.

Analysis of Segment Results: Nine Months 2019 versus Nine Months 2018

North America

Revenues increased 29% ($296.2 million) primarily due to the favorable impact of the acquisitions ($248.7 million), primarily from the Dunbar acquisition, and 5% organic growth ($55.0 million), slightly offset by the unfavorable impact of currency exchange rates ($7.5 million) from the Mexican peso and the Canadian dollar. Organic revenue growth increased from price and volume growth in Mexico and price increases in the U.S. Operating profit increased $48.8 million primarily due to organic growth in Mexico and the U.S. and the favorable impact of acquisitions ($16.4 million), primarily from the Dunbar acquisition. Organic profit growth in Mexico was driven by higher volumes, price increases, and labor-related productivity improvements. Organic profit growth in the U.S. was driven by price increases and lower labor costs and other productivity improvements, related to breakthrough initiatives and Dunbar acquisition synergies.

South America

Revenues decreased 3% ($19.1 million) primarily due to the unfavorable impact of currency exchange rates ($176.2 million) mostly from the Argentine peso and Brazilian real, partially offset by 15% organic growth ($107.2 million) and the favorable impact of acquisitions and dispositions ($49.9 million), primarily from the Rodoban acquisition. The organic growth was driven by inflation-based price increases and volume growth in Argentina and price increases in Brazil. Operating profit was flat due to unfavorable currency ($56.8 million) driven by the Argentine peso and Brazilian real, offset by organic growth ($45.2 million) and the favorable impact of acquisitions and dispositions ($11.0 million), primarily from the Rodoban acquisition. The organic profit increase was driven by growth in Argentina and Brazil. The growth in Brazil was driven by a lower social tax rate, recovery of a social tax overpayment and productivity improvements.

Rest of World

Revenues decreased 8% ($63.0 million) due to the unfavorable impact of acquisitions and dispositions ($34.8 million), primarily related to the disposition of the French airport security services company in the second quarter of 2018, and the unfavorable impact of currency exchange rates ($36.4 million), partially offset by an organic increase ($8.2 million). The organic increase was primarily in Israel. Operating profit was flat due to unfavorable currency ($2.9 million), partially offset by organic growth ($1.2 million) and the favorable impact of acquisitions and dispositions ($1.3 million). The organic increase was primarily related to France, Israel, and the United Kingdom, partially offset by a decrease in Asia Pacific.

Income and Expense Not Allocated to Segments

Corporate Expenses

(In millions)

Corporate expenses for the first nine months of 2019 increased $14.8 million versus the prior year period primarily driven by higher costs related to the next phase of our growth strategy, Strategy 2.0, increased share-based compensation expense and higher bad debt expense in the current year period, partially offset by a reduction in incentive compensation expense. The increased costs in the third quarter of 2019 were primarily driven by the same factors. Corporate expenses include former non-segment and regional management costs, currency transaction gains and losses, costs related to global initiatives and adjustments to reconcile segment accounting policies to U.S. GAAP.

Other Items Not Allocated to Segments

(In millions)

The impact of other items not allocated to segments was a loss of $49.9 million in the third quarter of 2019 versus the prior year period loss of $28.3 million. The change was primarily due to higher acquisition-related charges and net charges related to internal loss in the U.S. global services operations recognized in the current year period. These costs were partially offset by a reduction in reporting compliance costs, lower reorganization and restructuring expenses and a decrease in the impact of highly inflationary accounting in Argentina.

The impact of other items not allocated to segments was a loss of $112.5 million in the first nine months of 2019 versus the prior year period loss of $49.5 million. The change was primarily due to higher acquisition-related charges, net charges related to internal loss in the U.S. global services operations recognized in the current year period, increased reorganization and restructuring expenses, the impact of highly inflationary accounting in Argentina and profits from our Venezuela operations in the prior year period. These increased costs were partially offset by a reduction in reporting compliance costs.

Venezuela operations Prior to the deconsolidation of our Venezuelan subsidiaries effective June 30, 2018, we excluded from our segment results all of our Venezuela operating results due to the Venezuelan government's restrictions that prevented us from repatriating funds. In light of these unique circumstances, our operations in Venezuela have been largely independent of the rest of our global operations. As a result, the Chief Executive Officer, the Company's Chief Operating Decision maker ("CODM"), assessed segment performance and made resource decisions by segment excluding Venezuela operating results. Additionally, management believed excluding Venezuela from segment results made it possible to more effectively evaluate the company’s performance between periods. These amounts were also excluded from non-GAAP results. Prior to deconsolidation,Venezuela operating results included remeasurement gains and losses on monetary assets and liabilities related to currency devaluations. We recognized remeasurement gains of $2.2 million in the first nine months of 2018.

Factors considered by management in excluding Venezuela results included:

• Continued inability to repatriate cash to redeploy to other operations or dividend to shareholders,
• Highly inflationary environment,
• Previous fixed exchange rate policy,
• Continued currency devaluations, and
• Difficulty raising prices and controlling costs.

Reorganization and Restructuring

2016 Restructuring

In the fourth quarter of 2016, management implemented restructuring actions across our global business operations and our corporate functions. As a result of these actions, we recognized $18.1 million in 2016 costs and an additional $17.3 million in 2017 costs under this restructuring for severance, asset-related adjustments, a benefit program termination and lease terminations. We recognized additional charges of $11.3 million in the first nine months of 2018 under this restructuring for severance costs and asset-related adjustments. The actions under this program were substantially completed in 2018.

Other Restructurings

Management periodically implements restructuring actions in targeted sections of our business. As a result of these actions, we recognized charges of $4.2 million in the first nine months of 2018 and $20.5 million in the first nine months of 2019, primarily severance costs and charges related to the modification of share-based compensation awards. When completed, the current restructuring actions will reduce our workforce by 200 to 300 positions and result in approximately $10 million in annualized cost savings. For the current restructuring actions, we expect to incur additional costs between $1 million and $3 million in future periods. These estimates will be updated as management targets additional sections of our business.

Due to the unique circumstances around these charges, they have not been allocated to segment results and are excluded from non-GAAP results. Charges related to the employees, assets, leases and contracts impacted by these restructuring actions were excluded from the segments and corporate expenses as shown in the table below.

(In millions)

Acquisitions and dispositions Certain acquisition and disposition items that are not considered part of the ongoing activities of the business and are special in nature are consistently excluded from segment and non-GAAP results. These items are described below:

2019 Acquisitions and Dispositions

• We incurred $27.8 million in integration costs related to Dunbar in the first nine months of 2019.
• Amortization expense for acquisition-related intangible assets was $20.7 million in the first nine months of 2019.
• Restructuring costs related to our Dunbar and Rodoban acquisitions were $5.7 million in the first nine months of 2019.
• Transaction costs related to business acquisitions were $5.6 million in the first nine months of 2019.
• Compensation expense related to the retention of key Dunbar employees was $1.6 million in the first nine months of 2019.
• In the first nine months of 2019, we recognized $2.1 million in net charges, primarily asset impairment and severance costs, related to the exit from our top-up prepaid mobile phone business in Brazil.

2018 Acquisitions and Dispositions

• Amortization expense for acquisition-related intangible assets was $11.7 million in the first nine months of 2018.
• Severance costs related to our 2017 acquisitions in Argentina, France and Brazil were $3.7 million in the first nine months of 2018.
• Transaction costs related to business acquisitions were $5.9 million in the first nine months of 2018.
• Compensation expense related to the retention of key Dunbar employees was $1.3 million in the third quarter of 2018.

Argentina highly inflationary impact Beginning in the third quarter of 2018, we designated Argentina's economy as highly inflationary for accounting purposes. As a result, Argentine peso-denominated monetary assets and liabilities are now remeasured at each balance sheet date to the currency exchange rate then in effect, with currency remeasurement gains and losses recognized in earnings. In addition, nonmonetary assets retain a higher historical basis when the currency is devalued. The higher historical basis results in incremental expense being recognized when the nonmonetary assets are consumed. Currency remeasurement losses were $8.1 million and incremental expense related to nonmonetary assets was $0.2 million in the third quarter of 2018. In the first nine months of 2019, we recognized $12.3 million in pretax charges related to highly inflationary accounting, including currency remeasurement losses of $10.4 million. These amounts are excluded from segment and non-GAAP results.

Internal loss A former non-management employee in our U.S. global services operations embezzled funds from Brink's in prior years. Except for a small deductible amount, the amount of the internal loss related to the embezzlement was covered by our insurance. In an effort to cover up the embezzlement, the former employee intentionally misstated the underlying accounts receivable subledger data. In the first nine months of 2019, we incurred $3.9 million in costs (primarily third party expenses) to reconstruct the accounts receivables subledger. In the third quarter of 2019, we were able to identify $4.0 million of revenues billed and collected in prior periods which had never been recorded in the general ledger. We also identified and recorded $0.3 million in bank fees, which had been incurred in prior periods. The rebuild of the subledger was completed during the third quarter of 2019. Based on the reconstructed subledger, we were able to analyze and quantify the uncollected receivables from prior periods. Although we plan to attempt to collect these receivables, we have estimated an increase to bad debt expense of $13.7 million, which we recorded in the third quarter of 2019. Out of the $13.7 million in bad debt expense, $12.6 million represents an allowance on $25.3 million of accounts receivable generated prior to 2018. The estimate of the allowance for doubtful accounts will be adjusted in future periods, if needed, as assumptions related to the collectability of these accounts receivable change. Due to the unusual nature of this internal loss and the related errors in the subledger data, along with the fact that management has excluded these amounts when evaluating internal performance, we have excluded these net charges from segment and non-GAAP results.

Reporting compliance Certain compliance costs (primarily third party expenses) are excluded from the first nine months of 2019 segment and non-GAAP results. These costs relate to the implementation and January 1, 2019 adoption of the new lease accounting standard ($1.7 million), and the mitigation of material weaknesses ($0.3 million).

Foreign Operations

We currently serve customers in more than 100 countries, including 41 countries where we operate subsidiaries.

We are subject to risks customarily associated with doing business in foreign countries, including labor and economic conditions, the imposition of international sanctions, including by the U.S. government, political instability, controls on repatriation of earnings and capital, nationalization, expropriation and other forms of restrictive action by local governments. Changes in the political or economic environments in the countries in which we operate could have a material adverse effect on our business, financial condition and results of operations. The future effects, if any, of these risks are unknown. In April 2019, the U.S. government sanctioned the Venezuela central bank and, as a result, the Company has ceased support of the Venezuela business.

Our international operations conduct a majority of their business in local currencies. Because our financial results are reported in U.S. dollars, they are affected by changes in the value of various local currencies in relation to the U.S. dollar. The recent strengthening of the U.S. dollar has reduced our reported U.S. dollar revenues and operating profit and may continue for the remainder of 2019.

Changes in exchange rates may also affect transactions that are denominated in currencies other than the functional currency. From time to time, we use short term foreign currency forward and swap contracts to hedge transactional risks associated with foreign currencies. At September 30, 2019, the notional value of our short term outstanding foreign currency forward and swap contracts was $119 million with average contract maturities of approximately two months. These short term foreign currency forward and swap contracts primarily offset exposures in the euro and the Brazilian real. Additionally, these short term contracts are not designated as hedges for accounting purposes, and accordingly, changes in their fair value are recorded immediately in earnings. At September 30, 2019, the fair value of our short term foreign currency contracts was a net asset of approximately $1.4 million, of which $1.5 million was included in prepaid expenses and $0.1 million was included in accrued liabilities on the condensed balance sheet. We recognized gains of $8.3 million on our short term foreign currency contracts in the first nine months of 2019 and gains of $5.2 million in the first nine months of 2018.

We also have a long term cross currency swap contract to hedge exposure in Brazilian real, which is designated as a cash flow hedge for accounting purposes. At September 30, 2019, the notional value of this long term contract was $133 million with a weighted-average maturity of approximately 2.4 years. We recognized net gains of $6.3 million on this contract, of which gains of $10.3 million were included in other operating income (expense) to offset transaction losses of $10.3 million and expenses of $4.0 million were included in interest expense in the first nine months of 2019. At September 30, 2019, the fair value of the long term cross currency swap contract was a $7.0 million net asset, of which an $8.9 million asset is included in other assets and a $1.9 million liability is included in accrued liabilities on the condensed consolidated balance sheet.

See Note 1 to the condensed consolidated financial statements for a description of the deconsolidation of our Venezuelan subsidiaries effective June 30, 2018 under the heading, "Venezuela". See Note 1 to the condensed consolidated financial statements for a description of how we account for currency remeasurement for Argentine subsidiaries, beginning July 1, 2018 under the heading, "Argentina".

Other Operating Income (Expense)

Other operating income (expense) includes amounts included in segment results as well as income and expense not allocated to segments.

(In millions)

Other operating income (expense) was $6.5 million of expense in the third quarter of 2019 versus $7.4 million of expense in the prior year period. Other operating income (expense) was $7.0 million of expense in the first nine months of 2019 versus $6.3 million of expense in the prior year period.

Nonoperating Income and Expense

Interest expense

(In millions)

Interest expense was higher in the third quarter and first nine months of 2019 compared to the prior year periods primarily due to higher borrowing levels due to business acquisitions.

Loss on deconsolidation of Venezuela operations

(In millions)

See Note 1 to the condensed consolidated financial statements for more information about the loss on deconsolidation of our Venezuelan operations.

Interest and other nonoperating income (expense)

(In millions)

(a) Prior to the July 1, 2018 highly inflationary designation for accounting purposes, currency transaction losses incurred by Brink's Argentina related to its U.S. dollar-denominated payables to the sellers of Maco Transporatadora and Maco Litoral.

(b) Certain of our Latin American subsidiaries incur non-income taxes related to the billing of intercompany charges. These intercompany charges do not impact South American segment results and are eliminated in our consolidation.

(c) Charges incurred for providing financial support to Brink's Venezuelan subsidiaries after the June 30, 2018 deconsolidation. We do not expect any future funding of the Venezuela business, as long as current U.S. sanctions remain in effect.

(d) Gain on termination of a mining lease obligation related to former coal operations. We have no remaining mining leases.

(e) Gain on the sale of our former French airport security services subsidiary in the second quarter of 2018. The estimate of the gain was revised in the third quarter of 2018.

Income Taxes

Effective Tax Rate

Our effective tax rate may fluctuate materially from these estimates due to changes in permanent book-tax differences, changes in the expected amount and geographical mix of earnings, changes in current or deferred taxes due to legislative changes, changes in valuation allowances or accruals for contingencies, changes in distributions of share-based payments, changes in guidance and additional legislative changes related to the Tax Reform Act, and other factors.

Noncontrolling Interests

(In millions)

The net income of $1.3 million attributable to noncontrolling interests in the third quarter of 2019 is consistent with $1.4 million of net income attributable to noncontrolling interests in the third quarter of 2018.

The change from $4.9 million net income attributable to noncontrolling interests in the first nine months of 2018 to $3.6 million of net income attributable to noncontrolling interests in the first nine months of 2019 was primarily due to the deconsolidation of our Venezuelan subsidiaries effective June 30, 2018, and the acquisition of the Colombian noncontrolling interests in the fourth quarter of 2018.

See Note 1 to the condensed consolidated financial statements for more information about the deconsolidation of our Venezuelan subsidiaries.

Non-GAAP Results Reconciled to GAAP

Non-GAAP results described in this filing are financial measures that are not required by or presented in accordance with GAAP. The purpose of the non-GAAP results is to report financial information from the primary operations of our business by excluding the effects of certain income and expenses that do not reflect the ordinary earnings of our operations. The specific items excluded have not been allocated to segments, are described in detail on pages 43–45, and are reconciled to comparable GAAP measures below.

Non-GAAP results adjust the quarterly non-GAAP tax rates so that the non-GAAP tax rate in each of the quarters is equal to the full-year estimated non-GAAP tax rate. The full-year non-GAAP tax rate in both years excludes certain pretax and income tax amounts. Amounts reported for prior periods have been updated in this report to present information consistently for all periods presented.

The Non-GAAP financial measures are intended to provide investors with a supplemental comparison of our operating results and trends for the periods presented. Our management believes these measures are also useful to investors as they allow investors to evaluate our performance using the same metrics that our management uses to evaluate past performance and prospects for future performance. We do not consider these items to be reflective of our core operating performance due to the variability of such items from period-to-period in terms of size, nature and significance. Additionally, non-GAAP results are utilized as performance measures in certain management incentive compensation plans.

Non-GAAP results should not be considered as an alternative to revenue, income or earnings per share amounts determined in accordance with GAAP and should be read in conjunction with their GAAP counterparts.

(In millions, except for percentages)

Amounts may not add due to rounding.

(a) From continuing operations.

(b) See “Other Items Not Allocated To Segments” on pages 43–45 for details. We do not consider these items to be reflective of our core operating performance due to the variability of such items from period-to-period in terms of size, nature and significance.

(c) Non-GAAP income from continuing operations and non-GAAP EPS have been adjusted to reflect an effective income tax rate in each interim period equal to the full-year non-GAAP effective income tax rate. The full-year non-GAAP effective tax rate is estimated at 31.5% for 2019 and was 34.2% for 2018.

(d) Our U.S. retirement plans are frozen and costs related to these plans are excluded from non-GAAP results. Certain non-U.S. operations also have retirement plans. Settlement charges related to these non-U.S. plans are also excluded from non-GAAP results.

(e) The non-GAAP tax rate excludes the 2018 foreign tax benefit that resulted from the transaction that accelerated U.S. tax in 2015.

(f) Effective June 30, 2018, we deconsolidated our investment in Venezuelan subsidiaries and recognized a pretax charge of $126.7 million. Post-deconsolidation funding of ongoing costs related to our Venezuelan operations was $0.9 million in the first nine months of 2019 and was expensed as incurred and reported in interest and other nonoperating income (expense). We do not expect any future funding of the Venezuela business, as long as current U.S. sanctions remain in effect.

(g) Gain on settlement of a mining lease obligation related to former coal operations. We have no remaining mining leases.

(h) Because we reported a loss from continuing operations on a GAAP basis in the first nine months of 2018, GAAP EPS was calculated using basic shares. However, as we reported income from continuing operations on a non-GAAP basis in the first nine months of 2018, non-GAAP EPS was calculated using diluted shares.

Non-GAAP Results Reconciled to GAAP

(In millions, except for percentages and per share amounts)

Amounts may not add due to rounding.

See page 49 for footnote explanations.

(In millions, except for percentages and per share amounts)

Amounts may not add due to rounding.

See page 49 for footnote explanations.

LIQUIDITY AND CAPITAL RESOURCES

Overview

Cash flows from operating activities increased by $3.2 million in the first nine months of 2019 as compared to the first nine months of 2018. Cash used for investing activities decreased by $321.8 million in the first nine months of 2019 compared to the first nine months of 2018. We financed our liquidity needs in the first nine months of 2019 with cash flows from long term debt.

Operating Activities

(In millions)

(a) To adjust for the change in the balance of customer obligations related to cash received and processed in certain of our secure cash management services operations. The title to this cash transfers to us for a short period of time. The cash is generally credited to customers’ accounts the following day and we do not consider it as available for general corporate purposes in the management of our liquidity and capital resources.

Non-GAAP cash flows from operating activities is a supplemental financial measure that is not required by, or presented in accordance with, GAAP. The purpose of this non-GAAP measure is to report financial information excluding cash flows from Venezuela operations prior to the deconsolidation, restricted cash held for customers and the impact of cash received and processed in certain of our secure cash management services operations. We believe this measure is helpful in assessing cash flows from operations, enables period-to-period comparability and is useful in predicting future operating cash flows. This non-GAAP measure should not be considered as an alternative to cash flows from operating activities determined in accordance with GAAP and should be read in conjunction with our condensed consolidated statements of cash flows.

GAAP

Cash flows from operating activities increased by $3.2 million in the first nine months of 2019 compared to the same period in 2018. The increase was attributed to lower amounts paid for taxes and the changes in customer obligations related to certain of our secure cash management services operations (cash held for customers increased by $15.4 million in 2019 compared to a decrease of $4.9 million in 2018), partially offset by the $41.1 million decrease in restricted cash held for customers and higher amounts paid for interest.

Non-GAAP

Non-GAAP cash flows from operating activities increased by $24.4 million in the first nine months of 2019 as compared to the same period in 2018. The increase was primarily due to lower amounts paid for taxes, partially offset by higher amounts paid for interest.

Investing Activities

(In millions)

Cash used by investing activities decreased by $321.8 million in the first nine months of 2019 versus the first nine months of 2018. The decrease was due to lower amounts paid for acquisitions during the first nine months of 2019.

Capital expenditures and depreciation and amortization were as follows:

(In millions)

(a) Capital expenditures as well as depreciation and amortization related to Venezuela have been excluded from South America. In addition, incremental depreciation related to highly inflationary accounting in Argentina, accelerated depreciation related to restructuring activities and amortization of acquisition-related intangible assets have also been excluded from non-GAAP amounts.

(b) Represents the amount of property and equipment acquired using financing leases. Because the assets are acquired without using cash, the acquisitions are not reflected in the condensed consolidated cash flow statement. Amounts are provided here to assist in the comparison of assets acquired in the current year versus prior years.

Non-GAAP capital expenditures and non-GAAP depreciation and amortization are supplemental financial measures that are not required by, or presented in accordance with GAAP. The purpose of these non-GAAP measures is to report financial information excluding capital expenditures and depreciation and amortization from our Venezuela operations prior to the deconsolidation, incremental depreciation related to highly inflationary accounting in Argentina, accelerated depreciation from restructuring and acquisition-related integration activities, and amortization of acquisition-related intangible assets. We believe these measures are helpful in assessing capital expenditures and depreciation and amortization, enable period-to-period comparability and are useful in predicting future investing cash flows. These non-GAAP measures should not be considered as alternatives to capital expenditures and depreciation and amortization determined in accordance with GAAP and should be read in conjunction with our condensed consolidated statements of cash flows.

Our reinvestment ratio, which we define as the annual amount of property and equipment acquired during the period divided by the annual amount of depreciation, was 1.5 for the twelve months ending September 30, 2019 compared to 1.6 for the twelve months ending September 30, 2018.

Capital expenditures in the first nine months of 2019 were primarily for machinery and equipment, information technology and armored vehicles.

Financing Activities

(In millions)

Debt borrowings and repayments

Cash flows from financing activities decreased by $71.6 million in the first nine months of 2019 compared to the first nine months of 2018 as net borrowings decreased compared to the prior year period, partially offset by less cash used to purchase Brink's common stock.

Dividends

We paid dividends to Brink’s shareholders of $0.45 per share or $22.4 million in the first nine months of 2019 compared to $0.45 per share or $22.9 million in the first nine months of 2018. Future dividends are dependent on our earnings, financial condition, shareholders’ equity levels, our cash flow and business requirements, as determined by the Board of Directors.

Reconciliation of Net Debt to U.S. GAAP Measures

(In millions)

(a) Restricted cash borrowings are 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.

(b) Title to cash received and processed in certain of our secure Cash Management Services operations transfers to us for a short period of time. The cash is generally credited to customers’ accounts the following day and we do not consider it as available for general corporate purposes in the management of our liquidity and capital resources and in our computation of Net Debt.

(c) Included within Net Debt at September 30, 2019 is net cash of $23.2 million from our Argentina operations (see Note 1 to the condensed consolidated financial statements for a discussion of currency controls in Argentina).

Net Debt is a supplemental non-GAAP financial measure that is not required by, or presented in accordance with GAAP. We use Net Debt as a measure of our financial leverage. We believe that investors also may find Net Debt to be helpful in evaluating our financial leverage. Net Debt should not be considered as an alternative to Debt determined in accordance with GAAP and should be reviewed in conjunction with our condensed consolidated balance sheets. Set forth above is a reconciliation of Net Debt, a non-GAAP financial measure, to Debt, which is the most directly comparable financial measure calculated and reported in accordance with GAAP, as of September 30, 2019, and December 31, 2018.

Net Debt increased by $218 million primarily to fund business acquisitions and other working capital needs including insurance and bonus payments.

Liquidity Needs

Our liquidity needs include not only the working capital requirements of our operations but also investments in our operations, business development activities, payments on outstanding debt, dividend payments and share repurchases.

Our liquidity needs are typically financed by cash from operations, short-term debt and the available borrowing capacity under our Revolving Credit Facility (our debt facilities are described in more detail in Note 9 to the condensed consolidated financial statements, including certain limitations and considerations related to the cash and borrowing capacity). As of September 30, 2019, $782 million was available under the Revolving Credit Facility. Based on our current cash on hand and amounts available under our credit facilities, we believe that we will be able to meet our liquidity needs for the foreseeable future.

Limitations on dividends from foreign subsidiaries. A significant portion of our operations are outside the U.S. which may make it difficult or costly to repatriate cash for use in the U.S. See “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2018, for more information on the risks associated with having businesses outside the U.S.

Equity

In May 2017, our board of directors authorized a $200 million share repurchase program, which will expire on December 31, 2019. We are not obligated to repurchase any specific dollar amount or number of shares, and, at September 30, 2019, approximately $106 million remains available under this program. The timing and volume of share repurchases may be executed at the discretion of management on an opportunistic basis, or pursuant to trading plans or other arrangements. Share repurchases under this program may be made in the open market, in privately negotiated transactions, or otherwise.

In December 2018, we entered into an accelerated share repurchase arrangement ("ASR") with a financial institution. In exchange for a $50 million up-front payment at the beginning of the purchase period, the financial institution delivered to us 700,000 shares of our common stock for an average repurchase price of $71.43 per share. The shares received were retired in the period they were delivered to us, and the up-front payment was accounted for as a reduction to shareholders' equity in the condensed consolidated balance sheet. For purposes of calculating earnings per share, we reported the ASR as a repurchase of our common stock in December 2018 and as a forward contract indexed to our common stock. The ASR met all of the applicable criteria for equity classification, and, as a result, was not accounted for as a derivative instrument.

The ASR purchase period subsequently ended in February 2019 and we received and retired an additional 37,387 shares under the ASR, resulting in an overall average repurchase price of $67.81 per share.

During the nine months ended September 30, 2019, no additional shares were repurchased.

U.S. Retirement Liabilities

2019 Annuity Contract Buy-out

On October 8, 2019, we purchased a single premium group annuity contract from an insurance company to provide for the payment of pension benefits to 2,634 primary U.S. pension plan participants. We purchased the contract with $53 million of plan assets. The insurance company will take over the payments of these benefits starting January 1, 2020, at which date the beneficiaries will cease to be participants in the primary U.S. pension plan and the plan will have no further obligation to these participants. This transaction settles $54 million of our primary U.S. pension plan obligation. As a result, we expect to recognize a settlement charge of approximately $20 million in the fourth quarter of 2019. The actual amount of the charge will depend upon various actuarial assumptions, including discount rate, at the remeasurement date. After the settlement, there are expected to be approximately 11,400 beneficiaries remaining in the primary U.S. pension plan.

Assumptions for U.S. Retirement Obligations

The amounts in the tables below are based on a variety of estimates, including actuarial assumptions as of the most recent measurement date. The assumptions used to estimate our U.S. retirement obligations can be found in our Annual Report on Form 10-K for the year ended December 31, 2018. The estimated amounts will change in the future to reflect payments made, investment returns, actuarial revaluations, and other changes in estimates (including the impacts of the 2019 Annuity Contract Buy-out on our primary U.S. pension plan). Actual amounts could differ materially from the estimated amounts and will be updated at December 31, 2019.

Our most significant actuarial assumptions include:

• Discount rates and other assumptions in effect at measurement dates (normally December 31)
• Investment returns of plan assets
• Mortality rates
• Change in laws

Funded Status of U.S. Retirement Plans

(In millions)

(a) Excludes amounts reclassified from accumulated other comprehensive income (loss).

Primary U.S. Pension Plan

Pension benefits provided to eligible U.S. employees were frozen on December 31, 2005, and are not provided to employees hired after 2005 or to those covered by a collective bargaining agreement. We did not make cash contributions to the primary U.S. pension plan in 2018 or the first nine months of 2019.

We do not expect to make contributions until 2022.

UMWA Plans

Retirement benefits related to former coal operations include medical benefits provided by the Pittston Coal Group Companies Employee Benefit Plan for UMWA Represented Employees. There were approximately 3,200 beneficiaries in the UMWA plans as of December 31, 2018. The company does not expect to make additional contributions to these plans until 2025 based on actuarial assumptions.

Black Lung

Under the Federal Black Lung Benefits Act of 1972, Brink’s is responsible for paying lifetime black lung benefits to miners and their dependents for claims filed and approved after June 30, 1973. There were approximately 800 black lung beneficiaries as of December 31, 2018.

Summary of Expenses Related to All U.S. Retirement Liabilities through 2023

This table summarizes actual and projected expense related to U.S. retirement liabilities.

(In millions)

Summary of Payments from Brink’s to U.S. Plans and Payments from U.S. Plans to Participants through 2023

This table summarizes actual and projected payments:

• from Brink’s to U.S. retirement plans, and
• from the plans to participants.

(In millions)

Contingent Matters

See Note 14 to the condensed consolidated financial statements for information about contingent matters at September 30, 2019.

We serve customers in more than 100 countries, including 41 countries where we operate subsidiaries. These operations expose us to a variety of market risks, including the effects of changes in interest rates and foreign currency exchange rates. In addition, we consume various commodities in the normal course of business, exposing us to the effects of changes in the prices of such commodities. These financial and commodity exposures are monitored and managed by us as an integral part of our overall risk management program. Our risk management program seeks to reduce the potentially adverse effects that the volatility of certain markets may have on our operating results. We have not had any material change in our market risk exposures in the nine months ended September 30, 2019.

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”), who is our principal executive officer, and our Executive Vice President and Chief Financial Officer (“CFO”), who is our principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, as of the end of the period covered by this report, our CEO and CFO concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting.

There has been no change in our internal control over financial reporting during the quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Forward-looking information

This document contains both historical and forward-looking information. Words such as “anticipates,” “assumes,” “estimates,” “expects,” “projects,” “predicts,” “intends,” “plans,” “potential,” “believes,” “could,” “may,” “should” and similar expressions may identify forward-looking information. Forward-looking information in this document includes, but is not limited to, statements concerning: segment operating profit margin outlook; difficulty in repatriating cash; continued strengthening of the U.S. dollar; effects of currency rate changes; anticipated costs of our Reorganization and Restructuring activities; collection of receivables related to the internal loss in the U.S. global services operations; support for the Company's Venezuela business, expected impact of acquisitions; our effective tax rate; costs related to and continued limitation in our ability to make and execute operational decisions with respect to our Venezuela operations; the ability to meet liquidity needs; settlement charge related to the annuity contract buy-out for our U.S. pension liability; expenses and payouts for the U.S. retirement plans and the funded status of the primary pension plan; expected liability for and future contributions to the UMWA plans; liability for black lung obligations; and the effect of pending legal matters. Forward-looking information in this document is subject to known and unknown risks, uncertainties, and contingencies, which are difficult to quantify and which could cause actual results, performance or achievements to differ materially from those that are anticipated.

These risks, uncertainties and contingencies, many of which are beyond our control, include, but are not limited to:

• our ability to improve profitability and execute further cost and operational improvements and efficiencies in our core businesses;
• our ability to improve service levels and quality in our core businesses;
• market volatility and commodity price fluctuations;
• seasonality, pricing and other competitive industry factors;
• investment in information technology and its impact on revenue and profit growth;
• our ability to maintain an effective IT infrastructure and safeguard confidential information;
• our ability to effectively develop and implement solutions for our customers;
• risks associated with operating in foreign countries, including changing political, labor and economic conditions, regulatory issues (including the imposition of international sanctions, including by the U.S. government), currency restrictions and devaluations, restrictions on and cost of repatriating earnings and capital, impact on the Company's financial results as a result of jurisdictions determined to be highly inflationary, and restrictive government actions, including nationalization;
• labor issues, including negotiations with organized labor and work stoppages;
• the strength of the U.S. dollar relative to foreign currencies and foreign currency exchange rates;
• our ability to identify, evaluate and complete acquisitions and other strategic transactions and to successfully integrate acquired companies;
• costs related to dispositions and product or market exits;
• our ability to obtain appropriate insurance coverage, positions taken by insurers relative to claims and the financial condition of insurers;
• safety and security performance and loss experience;
• employee, environmental and other liabilities in connection with former coal operations, including black lung claims;
• the impact of the Patient Protection and Affordable Care Act on legacy liabilities and ongoing operations;
• funding requirements, accounting treatment, and investment performance of our pension plans, the VEBA and other employee benefits;
• changes to estimated liabilities and assets in actuarial assumptions;
• the nature of hedging relationships and counterparty risk;
• access to the capital and credit markets;
• our ability to realize deferred tax assets;
• the outcome of pending and future claims, litigation, and administrative proceedings;
• public perception of our business, reputation and brand;
• changes in estimates and assumptions underlying our critical accounting policies; and
• the promulgation and adoption of new accounting standards, new government regulations and interpretation of existing standards and regulations.

This list of risks, uncertainties and contingencies is not intended to be exhaustive. Additional factors that could cause our results to differ materially from those described in the forward-looking statements can be found under “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the period ended December 31, 2018 and in our other public filings with the Securities and Exchange Commission. The forward looking information included in this document is representative only as of the date of this document, and The Brink’s Company undertakes no obligation to update any information contained in this document.