Notes to Consolidated Financial StatementsNote 1 - Summary of Significant Accounting PoliciesBasis of PresentationThe Brink’s Company (along with its subsidiaries, the “Company”) has three operating segments within its “Business and Security Services” businesses:
The Company has significant liabilities associated with its former coal operations and expects to have significant ongoing expenses and cash outflows related to former coal operations. At December 31, 2003, the Company had approximately $105 million of assets held by a Voluntary Employees’ Beneficiary Association trust (“VEBA”) available to pay a portion of these liabilities. During 2003 and 2002, the Company sold essentially all of its natural resource businesses and interests, and the results of these operations have been reclassified to discontinued operations. In May 2003, the Company’s shareholders approved a proposal to change the Company’s name to “The Brink’s Company.” The Company’s shares now trade on the New York Stock Exchange under the symbol “BCO.” The Company’s shares previously traded on the New York Stock Exchange under the symbol “PZB.” Principles of ConsolidationThe consolidated financial statements include the accounts of The Brink’s Company and the subsidiaries it controls, including all subsidiaries that are majority owned. The Company’s interest in 20% to 50% owned companies are accounted for using the equity method (“equity affiliates”), unless control exists, in which case consolidation accounting is used. Control is determined based on ownership rights or, when applicable, based on whether the Company is considered the primary beneficiary of a variable interest entity. Undistributed earnings of equity affiliates included in consolidated retained earnings approximated $33 million at December 31, 2003. All material intercompany items and transactions have been eliminated in consolidation. Revenue RecognitionBrink’s – Revenue is recognized when services are performed. Services related to armored car transportation, ATM servicing, cash logistics and coin sorting and wrapping are performed in accordance with the terms of customer contracts, which contract prices are fixed and determinable. Brink’s assesses the customer’s ability to meet the terms of the contract, including payment terms, before entering into contracts. BHS - Monitoring revenues are recognized monthly as services are provided pursuant to the terms of customer contracts, which contract prices are fixed and determinable. BHS assesses the customer’s ability to meet the terms of the contract, including payment terms, before entering into contracts. Amounts collected in advance from customers for monitoring and related services are deferred and recognized as income over the applicable monitoring period, which is generally one year or less. Nonrefundable installation revenues and a portion of the related direct costs of acquiring new subscribers (primarily sales commissions) are deferred and recognized over the estimated term of the subscriber relationship, which is generally 15 years. When an installation is identified for disconnection, any unamortized deferred revenues and deferred costs related to that installation are recognized at that time. BAX Global - Revenues related to transportation services are recognized, together with related variable transportation costs, on the date shipments depart from facilities en route to destination locations. BAX Global and its customer agree to the terms of the shipment, including pricing, prior to shipment. Pricing terms are fixed and determinable, and BAX Global only agrees to shipments when it believes that collectibility is reasonably assured. Cash and Cash EquivalentsCash and cash equivalents include cash on hand, demand deposits and investments with original maturities of three months or less. Trade Accounts ReceivableTrade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical write-off experience by industry and customer specific data. The Company reviews its allowance for doubtful accounts quarterly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company has an accounts receivable securitization program (described in note 14), which is accounted for as a sale under Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” Property and EquipmentProperty and equipment is accounted for at cost. Depreciation is calculated principally on the straight-line method. Amortization of capitalized software is calculated principally on the straight-line method.
Expenditures for routine maintenance and repairs on property and equipment, including aircraft, are charged to expense. Major renewals, betterments and modifications are capitalized and amortized over the lesser of the remaining life of the asset or, if applicable, lease term. Scheduled airframe and periodic engine overhaul costs are capitalized when incurred and amortized over the flying time to the next scheduled maintenance date. BHS retains ownership of most home security systems installed at subscriber locations. Costs for those systems are capitalized and depreciated over the estimated lives of the assets. Costs capitalized as part of home security systems include equipment and materials used in the installation process, direct labor required to install the equipment at customer sites, and other costs associated with the installation process. These other costs include the cost of vehicles used for installation purposes and the portion of telecommunication, facilities and administrative costs incurred primarily at BHS’ branches that are associated with the installation process. In 2003, direct labor and other costs represented approximately 71% of the amounts capitalized, while equipment and materials represented approximately 29% of amounts capitalized. In addition to regular straight-line depreciation expense each period, the Company charges to expense the carrying value of security systems estimated to be permanently disconnected based on each period’s actual disconnects and historical reconnection experience. The costs of computer software developed or obtained for internal use are accounted for in accordance with AICPA Statement of Position (“SOP”) No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” SOP No. 98-1 requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. Costs that are capitalized include external direct costs of materials and services to develop or obtain the software, and internal costs for employees directly associated with a software development project, including compensation and employee benefits. Amortization of capitalized software costs was $20.2 million in 2003, $19.8 million in 2002 and $15.1 million in 2001. GoodwillGoodwill is recognized for the excess of the purchase price over the fair value of tangible and identifiable intangible net assets of businesses acquired. Prior to the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets” in January 2002, goodwill was amortized over the estimated period of benefit on a straight-line basis up to a maximum of 40 years. Since the adoption of SFAS No. 142, amortization of goodwill has been discontinued; goodwill amortization in 2001 was approximately $9.5 million. A reconciliation of net income and net income per share for the year ended December 31, 2001 as reported in the consolidated statements of operations, to net income and net income per share, as adjusted to exclude goodwill amortization expense (net of tax effects), is presented below:
Impairment of Long-Lived AssetsIn 2002, the Company adopted SFAS No. 142 as its accounting policy to review and account for goodwill. In 2002, the Company also adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” as its policy to review and account for the impairment of long-lived assets other than goodwill, including property and equipment and certain other noncurrent assets. Prior to the adoption of SFAS Nos. 142 and 144, long-lived assets were reviewed for impairment under the provisions of SFAS No. 121, “Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of.” Under SFAS No. 142, goodwill acquired in a purchase business combination and determined to have an indefinite useful life is not amortized, but instead is tested for impairment at least annually. The Company completed goodwill impairment tests during 2002 and 2003 with no impairment charges required. The Company based its estimate of fair value during the 2003 annual impairment review of goodwill at BAX Global on discounted projections of BAX Global’s future cash flows. If actual cash flows are significantly lower than projected cash flows, future impairment tests may result in an impairment of a portion or all of BAX Global’s goodwill ($166 million at December 31, 2003). Long-lived assets besides goodwill are reviewed for impairment when circumstances indicate the carrying value of an asset may not be recoverable. For long-lived assets other than goodwill that are to be held and used, an impairment is recognized when the estimated total undiscounted cash flow associated with the asset or group of assets is less than carrying value. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value. Assets held for sale are carried at the lower of carrying value or fair value less cost to sell. Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable. See note 9. Investments Held by VEBA TrustThe Company has a VEBA designed to tax efficiently fund certain retiree medical liabilities, primarily for retired coal miners and their dependents. The Company may not use the VEBA’s assets for other corporate purposes. Through December 31, 2003, the Company accounted for the investments held by its VEBA as marketable securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Investments held by the VEBA were classified as available-for-sale and reported at fair value. Unrealized gains and losses were recognized in other comprehensive income (loss) and realized gains and losses were recognized in earnings. Realized gains and losses were computed based on the average cost method. Subsequent to December 31, 2003, the Company restricted the use of the VEBA’s assets to be available only to pay for coal-related postretirement benefits other than pensions. The Company accounts for these benefits under SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” The Company will begin reflecting the VEBA as a plan asset, as required by SFAS No. 106, in its 2004 consolidated financial statements. Equity-Based CompensationThe Company accounts for its equity-based compensation plans using the intrinsic value method prescribed in Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Accordingly, since options are granted with an exercise price equal to the market price of the stock on the date of grant, the Company has not recognized any compensation expense related to its stock option plans. See note 16. Had compensation costs for the Company’s stock option plans been determined based on the fair value of awards at the grant dates consistent with the optional recognition provision of SFAS No. 123, “Accounting for Stock Based Compensation,” net income and net income per share would have been the pro forma amounts indicated below:
The fair value of each stock option grant is estimated at the time of the grant using the Black-Scholes option-pricing model. Pro forma net income and net income per share disclosures are computed by amortizing the estimated fair value of the grants over vesting periods. The assumptions used and the resulting weighted-average grant-date estimates of fair value for options granted are as follows:
Postretirement Benefits Other Than PensionsPostretirement benefits other than pensions, except for those established pursuant to the Coal Industry Retiree Health Benefit Act of 1992 (the “Health Benefit Act”), are accounted for in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” which requires employers to accrue the cost of retirement benefits during the employees’ service with the Company. Actuarial gains and losses are deferred. The portion of the deferred gains or losses that exceeds 10% of the accumulated postretirement benefit obligation at the beginning of the year is amortized into earnings generally over the average remaining life expectancy for inactive participants. Postretirement benefit obligations established by the Health Benefit Act are recorded as a liability when they are probable and estimable in accordance with Emerging Issues Task Force (“EITF”) No. 92-13, “Accounting for Estimated Payments in Connection with the Coal Industry Retiree Health Benefit Act of 1992.” Income TaxesDeferred tax assets and liabilities are recorded to recognize the expected future tax benefits or costs of events that have been reported in different years for financial statement purposes than tax purposes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which these items are expected to reverse. Foreign Currency TranslationThe Company’s consolidated financial statements are reported in U.S. dollars. A substantial amount of the Company’s business is transacted in other currencies due to the large number of countries in which the Company operates. In addition, the Company’s foreign subsidiaries maintain their records primarily in the currency of the country within which they operate. Accordingly, income, expense and balance sheet values must be translated into U.S. dollars. The value of assets and liabilities of foreign subsidiaries are translated into U.S. dollars using rates of exchange at the balance sheet date and resulting cumulative translation adjustments are recorded as a separate component of accumulated other comprehensive loss. Revenues and expenses are translated at rates of exchange in effect during the year. Transaction gains and losses and translation adjustments relating to subsidiaries in countries with highly inflationary economies are included in net income. Derivative Instruments and Hedging ActivitiesAll derivative instruments are recorded in the consolidated balance sheet at fair value. If the derivative has been designated as a cash flow hedge, changes in the fair value are recognized in other comprehensive income (loss) until the hedged transaction is recognized in earnings. Former Coal OperationsThe following accounting policies of the Company’s former coal operations were in effect through December 2002, at which point the Company completed its exit of the coal business. Revenue RecognitionCoal sales were generally recognized when coal was loaded onto transportation vehicles for shipment to customers. For domestic sales, this generally occurred when coal was loaded onto railcars at mine locations. For export sales, this generally occurred when coal was loaded onto marine vessels at terminal facilities. Coal sales are included as a component of the Company’s income (loss) from discontinued operations. Property, Plant and EquipmentDepletion of bituminous coal lands was provided on the basis of tonnage mined in relation to the estimated total of recoverable tonnage in the ground and are included as a component of the Company's income (loss) from discontinued operations. Mine development costs were capitalized and amortized over the estimated useful life of the mine. These costs included expenses incurred for site preparation and development at the mines during the development stage. A mine was considered under development until management determined that all planned production units were in place and the mine was available for commercial operation and the mining of coal. The amortization is included as a component of the Company's income (loss) from discontinued operations. Reclamation CostsIn 2003, the Company accounted for its remaining reclamation liabilities under SFAS No. 143, “Accounting for Asset Retirement Obligations.” Prior to this, expenditures relating to environmental regulatory requirements and reclamation costs undertaken during mine operations were expensed as incurred. Estimated site restoration and post closure reclamation costs were expensed using the units of production method over the estimated recoverable tonnage at each mine. In each case, these charges were included as a component of the income (loss) from discontinued operations in the Company's consolidated statements of operations. Accrued reclamation costs are subject to review by management on a regular basis and are revised when appropriate for changes in future estimated costs and/or regulatory requirements. Any revisions result in the recording of a charge or benefit. Accrued reclamation costs for mines are included in either current or noncurrent liabilities in the Company’s consolidated balance sheets. InventoriesInventories were stated at cost (determined under the first-in, first-out or average cost method) or market, whichever was lower. Use of EstimatesIn accordance with accounting principles generally accepted in the U.S., management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements. Actual results could differ materially from those estimates. The most significant estimates used by management are related to goodwill and long-lived assets, heavy maintenance expense, pension and other postretirement benefit obligations, withdrawal liability from United Mine Workers of America pension plans, and deferred tax assets. ReclassificationsCertain prior year amounts have been reclassified to conform to the current year’s financial statement presentation. Recent Accounting PronouncementsIn January 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003, “FIN 46R”), “Consolidation of Variable Interest Entities”, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through a means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, “Consolidation of Variable Interest Entities”, which was issued in January 2003. The Company will be required to apply FIN 46R to variable interests in variable interest entities (“VIEs”) after December 31, 2003. The Company is evaluating the impact of applying FIN 46R to existing VIEs in which it has variable interests and has not yet completed this analysis. As the Company continues to evaluate the impact of applying FIN 46R, additional entities may be identified that would need to be consolidated by the Company. The implementation of this new standard is not expected to have a material effect on the Company’s results of operations or financial position. In December 2003, the FASB issued SFAS No. 132R, “Employers’ Disclosure about Pensions and Other Postretirement Benefits.” SFAS No. 132R requires additional disclosures about defined benefit pension plans and other postretirement benefit plans; it does not change the way liabilities are valued and expenses are calculated for those plans. The standard requires, among other things, additional disclosures about the assets held in employer sponsored pension plans, disclosures relating to plan asset investment policy and practices, disclosure of expected contributions to be made to the plans and expected benefit payments to be made by the plans. Disclosures applicable to the Company’s U.S. pension and retirement plans are required to be made in the Company’s consolidated financial statements for the year ended December 31, 2003. Disclosures relating to the Company’s non-U.S. plans will be required for the year ending December 31, 2004. See note 4 to the consolidated financial statements for the required disclosures. |
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