Management’s Discussion and Analysis

Results of Operations

Overview of Results

               
  Years Ended December 31,   % change
(In millions)   2004 2003 2002   2004 2003
Income (loss) from:
Continuing operations $ 100.6 18.2 69.4   200+ (74)
Discontinued operations   20.9 11.2 (43.3)   87 NM
Net income $ 121.5 29.4 26.1   200+ 13

The income (loss) items in the above table are reported after tax.

Continuing Operations

2004

Income from continuing operations in 2004 was higher than in 2003 primarily due to a $90.1 million increase in operating profit as a result of improvements in each of the business segments. In addition, $23.6 million of lower expenses related to former coal operations, and the return to a more normal effective tax rate in 2004 contributed to the improved results. The 2003 tax rate was higher due primarily to the recording of valuation allowances related to deferred tax assets for certain state and foreign tax jurisdictions.

Partially offsetting the effect of improved performance in each of the businesses was an $18.1 million increase in corporate expenses primarily due to costs related to the internal controls documentation and testing work mandated by section 404 of the Sarbanes-Oxley Act of 2002. Costs related to incentive compensation were also higher in 2004 than in 2003. In addition, 2003 included a one-time $10.4 million pretax gain on the sale of an equity interest in a natural resource business.

2003

Income from continuing operations in 2003 was lower than 2002 primarily due to the inclusion within continuing operations of $50.3 million of higher expenses related to former coal operations in 2003 (recorded in discontinued operations through 2002) and a higher effective tax rate in 2003 as noted above. In addition, BAX Global’s operating profit declined by $14.6 million from 2002 to 2003.

Business Segments

Brink’s and BHS reported improved operating profit in both 2004 and 2003 over prior-year periods. Although profitable in each of the last three years, BAX Global’s operating profit has been more volatile and more affected by economic cycles as compared to operating profits at Brink’s and BHS.

Brink’s. Revenues and operating profit in both 2004 and 2003 improved from the prior-year periods on higher international earnings as a result of improving economies and higher volumes. The effects of the weaker U.S. dollar also benefited revenues and earnings. Staff reductions in various European countries in late 2002 and the first half of 2003 improved profitability in the last half of 2003 and in 2004. Staffing levels prior to this were higher due to special euro currency processing and transportation work performed in 2001 and early 2002. Operating profit in South America was also stronger in 2004 and 2003 compared to the weak 2002 which resulted from economic and political turmoil in several South American countries and some industry consolidation that occurred in 2004.

BHS. Strong growth in operating profit in 2004 (13%) and 2003 (17%) resulted primarily from the subscriber growth over the last two years and improving efficiency. The average number of subscribers increased 10% in 2004 over 2003 and 8% in 2003 over 2002.

BAX Global. Operating profit in 2004 was much higher than in 2003 as a result of much stronger volume through BAX Global’s lntra-American transportation network. Operating profit in 2003 was below 2002 primarily as a result of lower shipments through the Intra-America transportation network due to soft demand for air freight services in 2002 and in the first nine months of 2003 as a result of slow economic growth.

Former Natural Resource Operations

Expenses related to former coal operations were $23.6 million lower in 2004 compared to 2003 due to the recording of a benefit from enactment of the Medicare reform bill in December 2003, the benefit from the recording of projected investment income from the Company’s Voluntary Employees’ Beneficiary Association (“VEBA”) trust after the assignment of the VEBA to pay certain retiree medical benefit obligations, and a reduction in coal-related administration and other expenses.

With the exit from the coal business in late 2002, the Company in 2004 and 2003 reported coal-related expenses within continuing operations. Coal-related expenses include expenses for employee benefits, administration and other charges related to retained liabilities. These types of costs were recorded within discontinued operations in 2002. These costs will continue to affect results of continuing operations in the future.

In 2002, the Company recorded a $19.2 million pretax charge within continuing operations related to impairment and other charges associated with coal properties which were shut down and prepared for sale. Most of these properties were sold in 2003.

In 2003, the Company recorded a $10.4 million pretax gain on the sale of shares that it held in an Australian gold and nickel exploration and mining company.

Income Taxes

The Company’s effective tax rate was 38% in 2004, 75% in 2003 and 37% in 2002. The effective tax rate varied from statutory rates in these periods primarily due to changes in valuation allowances for deferred tax assets. The Company assesses its ability to realize deferred tax assets for subsidiaries which have a recent history of losses. If the Company concludes that the probability of realizing tax assets for a particular tax jurisdiction does not meet the more-likely-than-not threshold, a valuation allowance is recorded as tax expense. Once an operation is identified for valuation allowances, valuation allowances will continue to be recorded on subsequent year’s tax losses unless the operation returns to sustainable profitability. Valuation allowance adjustments of approximately $10 million were recorded in 2004, primarily related to certain European operations. Valuation allowance adjustments, net, of $28 million were recorded in 2003 for deferred tax assets primarily related to two international operations and certain states.

There could be further valuation allowances required in the future. On the other hand, if operations in affected jurisdictions return to profitability, the Company may reverse all or a portion of the valuation allowances in future years.

The effective tax rate in future periods will not include the potential benefit of any losses for entities that have a valuation allowance unless the Company concludes it is more likely than not these benefits will be realized. The Company currently estimates its effective tax rate for 2005 will approximate 40%. The actual tax rate could be materially different from the Company’s estimate.

Discontinued Operations

The Company sold or otherwise disposed of its natural resource businesses in the last several years, the biggest being its former coal operations. The Company recognized a significant loss on the sale of its coal business, although most of the loss was recognized in 2000, a period not presented in this report. In addition to the loss on sale, the Company has accrued significant liabilities related to benefits for former coal employees. Revisions to estimated amounts related to some of these liabilities, including those related to obligations under the Coal Industry Retiree Health Benefit Ac of 1992 (“the Health Benefit Act”) obligations and multi-employer pension plan withdrawal liabilities, are recorded in discontinued operations and were significant in each of the last three years. In 2002, significant coal operating losses were also included in discontinued operations.

Besides the coal operations, the Company’s income (loss) from discontinued operations includes gains and losses from the sale of the Company’s other former natural resource businesses and their operating results through the date of the sale.

Value-added taxes and customs duties

One of the Company’s non-U.S. Brink’s, Incorporated business units has not paid foreign customs duties and value-added taxes with respect to the importation of certain goods and services. The Company has been advised that there could be civil and criminal penalties asserted for the non-payment of these custom duties and value-added taxes. The business unit has commenced discussions with the appropriate governmental authorities in the affected jurisdiction regarding this matter. To date no penalties have been asserted.

As a result of its investigation, the Company recorded charges in 2004 of $1.1 million to operating profit and $0.7 million to interest expense. A summary of the impact of this situation on earnings is provided below.

     
(In millions) Year Ended
December 31, 2004
Penalties on unpaid value-added taxes $ 0.4
Duties   0.7
Amount charged to operating expenses   1.1
Interest expense on unpaid value-added taxes and customs duties   0.7
  $ 1.8

The Company evaluates many factors to determine whether it should recognize or disclose a loss contingency, including the probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. The Company believes that the range of probable penalties related to unpaid value-added taxes is between $0.4 million and $3 million and that no amount within that range is a better estimate than any other amount within the range. Accordingly, the Company has accrued $0.4 million for these penalties.

The Company has concluded that a loss related to penalties on unpaid customs duties is not probable. The Company believes that the range of reasonably possible losses related to customs duties penalties is between $0 and approximately $35 million. The Company believes that the assertion of these penalties would be excessive and would vigorously defend against any such assertion.

The Company intends to diligently pursue the timely resolution of this matter and, accordingly, the Company’s estimate of the potential losses could change materially in future periods. The assertion of potential penalties may be material to the Company’s financial position and results of operations. These penalties could be asserted at any time. Although the Company has accrued $0.7 million of interest on the unpaid value-added taxes and customs duties, the Company does not expect to be assessed interest charges in connection with any penalties that may be asserted.

The Company has implemented measures designed to prevent similar situations in the future. The Company believes that the circumstances giving rise to this matter are isolated to this particular business unit.