2005 Financial Review

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

RESULTS OF OPERATIONS

Brink’s Home Security

Executive Overview

BHS has reported strong growth in revenues and earnings for several years due to its ability to attract and retain customers through brand reputation and quality service while operating as efficiently as possible consistent with the desired level of service.

In order to achieve higher efficiency and effectiveness, BHS focuses on controlling initial marketing and installation costs by matching sales representative staffing levels with the number of sales opportunities and the size of the technician workforce with available installation volume. BHS then strives to keep customer service and monitoring costs as low as possible without detracting from its high-quality service levels.

The Company believes customer retention is driven by customer selection and high customer service levels. In order to obtain customers who are less likely to disconnect, the Company seeks to attract customers with solid credit scores and the willingness to pay reasonable up-front fees. Once there is agreement to install an alarm system, the Company provides a high-quality installation followed up with continuing high-quality customer service and alarm monitoring. BHS believes its disconnect rate benefits from consistently following this strategy.

The Company believes that the performance of the U.S. economy may affect the performance of BHS. However, the Company believes this effect is not as significant as it is for industries with close ties to economic performance. In addition, there is some seasonality in performance as disconnect expenses can impact operating earnings. Since more household moves take place during the second and third quarters of each year, the disconnect rate and related expenses are typically higher in those quarters than in the first and fourth quarters.

Summary of Brink’s Home Security’s Results


	Years Ended December 31,				% change
(In millions)		2005	2004	2003	2005	2004
Revenues	$	392.1	345.6	310.4	13	11
Operating Profit
Recurring services (a)		167.5	147.8	125.9	13	17
Investment in new subscribers (b)		(80.1)	(67.0)	(54.7)	(20)	(22)
	$	87.4	80.8	71.2	8	13
Monthly recurring revenues (c)	$	29.1	26.1	23.3	11	12
Cash Flow Information
Depreciation and amortization (d)	$	58.1	51.5	47.9	13	8
Impairment charges from subscriber disconnects		45.2	38.4	34.3	18	12
Amortization of deferred revenue (e)		(29.5)	(26.1)	(25.0)	13	4
Deferred subscriber acquisition costs (current year payments)		(22.9)	(19.5)	(18.4)	17	6
Deferred revenue from new subscribers (current year receipts)		40.7	34.6	28.2	18	23
Capital expenditures (f)		162.2	117.6	98.0	38	20

(a): Reflects operating profit generated from the existing subscriber base including the amortization of deferred revenues.
(b): Primarily marketing and selling expenses, net of the deferral of direct selling expenses (primarily a portion of sales commissions), incurred in the acquisition of new subscribers.
(c): This measure is reconciled below under the caption “Reconciliation of Non-GAAP Measures.”
(d): Includes amortization of deferred subscriber acquisition costs.
(e): Includes amortization of deferred revenue related to active subscriber accounts as well as acceleration of amortization of deferred revenue related to subscriber disconnects.
(f): Capital expenditures in 2005 include $10.2 million for the purchase of BHS’s headquarters in Irving, Texas, which was formerly leased, and $7.4 million for the construction of a second monitoring center in Knoxville, Tennessee. The Knoxville facility became operational on February 28, 2006.

Overview

Operating profit comprises recurring services minus the cost of the investment in new subscribers. Recurring services reflect the monthly monitoring and service earnings generated from the existing subscriber base, including the amortization of deferred revenues. Impairment charges from subscriber disconnects and depreciation and amortization expenses, including the amortization of deferred direct costs from installations, are also charged to recurring services. Operating profits from recurring services are affected by the size of the subscriber base, the amount of operational costs including depreciation, the level of subscriber disconnect activity and changes in the average monthly monitoring fee per subscriber.

Investment in new subscribers is the net expense (primarily marketing and selling expenses) incurred to add to the subscriber base every year. The amount of the investment in new subscribers charged to income may be influenced by several factors, including the growth rate of new subscriber installations and the level of costs incurred to attract new subscribers. As a result, increases in the rate of investment (the addition of new subscribers) may have a negative effect on current operating profit but a positive impact on long-term operating profit, cash flow and economic value.

Capital expenditures are primarily for the equipment, labor and related overhead costs associated with system installations for new subscribers.

Subscriber Activity


	Years Ended December 31,			% change
(Subscriber data in thousands)	2005	2004	2003	2005	2004
Number of subscribers:
Beginning of period	921.4	833.5	766.7
Installations (a)	167.3	146.0	121.9	15	20
Disconnects (a)	(69.9)	(58.1)	(55.1)	20	5
End of period	1,018.8	921.4	833.5	11	11
Average number of subscribers	972.8	875.5	797.5	11	10
Disconnect rate (b)	7.2%	6.6%	6.9%

(a): Customers who move from one location and then initiate a new service agreement at a new location are not included in either installations or disconnects. Dealer accounts cancelled and charged back to the dealer during the specified contract term are also excluded from installations and disconnects. Inactive sites that are returned to service reduce disconnects. 2005 disconnects include 4,700 disconnects as a result of Hurricane Katrina.
(b): The disconnect rate is a ratio, the numerator of which is the number of customer cancellations during the period and the denominator of which is the average number of customers during the period. The gross number of customer cancellations is reduced for customers who move from one location and then initiate a new service agreement at a new location, accounts charged back to the dealers because the customers cancelled service during the specified contractual term and inactive sites that are returned to active service during the period.

Installations increased 15% for 2005 and 20% for 2004 as compared to the prior-year periods due primarily to growth in traditional installation volume and, to a lesser extent, from installations through the growing dealer network and home builder activity. The annualized disconnect rate for 2005 increased to 7.2% compared to 6.6% for 2004. Excluding the effects of Hurricane Katrina, the annualized disconnect rate would have been 6.7% for 2005. BHS has maintained a low disconnect rate in recent years by improving subscriber selection and retention processes. The disconnect rate may not materially improve in the future since some disconnects cannot be prevented because of factors beyond the Company’s control, including customers moving and cancelling service.

2005

The 13% increase in BHS’ revenues in 2005 over 2004 was primarily due to the larger subscriber base and slightly higher average monitoring rates. These factors also contributed to an 11% increase in monthly recurring revenues for 2005 as compared to 2004. The Company intends to selectively raise monitoring prices in the future.

Operating profit increased $6.6 million in 2005 compared to 2004 as higher profit from recurring services was partially offset by increased investment in new subscribers. Higher profit from recurring services in 2005 was primarily due to incremental revenues and cost efficiencies generated from the larger subscriber base. Higher investment in new subscribers was primarily due to increased volume and higher costs of installation activity. As a result of a sharp increase in home technology installations for major homebuilders, costs were higher in 2005 compared to 2004, although future revenue should benefit when a portion of these pre-wired sites are activated by new subscribers. Additionally, reductions in the estimate for allowance for doubtful accounts resulted in an increase to operating profit of $3.3 million in 2005. However this increase was partially offset by increased costs associated with subscriber disconnects, as discussed below.

As of December 31, 2005, approximately 3,700 disconnects were caused by Hurricane Katrina and the Company accrued an additional 1,000 subscriber disconnects. Accordingly, 4,700 subscriber disconnects (0.5% of subscriber base) have been included in 2005 disconnects and are a component of the disconnect rate in 2005. BHS anticipates filing insurance claims related to Hurricane Katrina for property damage insurance coverage for losses sustained in 2005 and claims under its business interruption policy for lost revenues. BHS believes claims will range from approximately $3 million to $5 million. The Company expects $2.2 million of property losses to be fully covered by insurance and has recognized insurance recoveries to the extent of recorded property losses. Because the Company’s insurance coverage provides for replacement value, it may record proceeds in excess of realized losses when its claim is ultimately settled. Insurance proceeds for business interruption insurance will be recognized as a gain when claims are settled.

In 2006, BHS expects double-digit growth rates in subscribers, revenues and operating profit, however, BHS expects the operating profit margin to be somewhat lower in the first half of 2006 than the 22% achieved in 2005 and the 23% achieved in 2004. The expected lower operating profit margin is due to higher anticipated investment in new subscribers primarily for installation activity at major home builders and a projected increase in selling, general and administrative expenses due to the opening of a new monitoring center in Knoxville, Tennessee, as discussed below.

BHS continues to increase its presence in commercial alarm installation and monitoring business, and to increase the volume of its installation business in new homes by expanding relationships with major home builders. As a result, the cost of investment in new subscribers continues to grow faster than monitored activations. The construction of a second monitoring center in Knoxville, Tennessee, is substantially complete and the facility began operations on February 28, 2006. The Knoxville monitoring center will provide additional service capacity for the existing subscriber base, increase capacity to sustain BHS’ continued growth, and provide enhanced security and disaster recovery capabilities. Operating the new facility will result in additional administrative expense. These initiatives are expected to have a positive impact on future growth and productivity.

As previously discussed, BHS’s expenses in 2006 related to retirement plans are expected to be between $3 million and $4 million lower primarily as a result of the Company’s decision to freeze U.S. defined benefit pension plan benefits at December 31, 2005.

2004

Revenues increased 11% in 2004 primarily due to a 10% larger average subscriber base, higher average monitoring rates, higher revenues from home builders and higher service revenues. The slight increase in average monitoring rates was primarily due to new customers initiating service at higher average monitoring rates than the average rates being paid by existing customers. These factors also contributed to a 12% increase in monthly recurring revenues as measured at year-end.

Operating profit for 2004 increased 13% as higher profit from recurring services was partially offset by an increased investment in new subscribers. Higher profit from recurring services was primarily due to increased monitoring and service revenues resulting from a larger average subscriber base and, to a lesser extent, from improved service margins. These increases were partially offset by increased depreciation and other costs associated with the larger subscriber base. Investment in new subscribers increased 22% on 20% higher installations during 2004, reflecting an investment in additional sales and branch infrastructure to support expansion of installation services offered across most lines of business, partially offset by more cost-effective marketing efforts.

Other

Police departments in several U.S. cities are not required to respond to calls from alarm companies unless an emergency has been visually verified. If more police departments refuse to automatically respond to calls from alarm companies without visual verification, future results of operations for BHS could be adversely affected. In cities that have stopped providing police response to burglar alarms, BHS has offered customers the option of receiving private guard response from guard companies who, in most cases, have contracted with BHS.

Reconciliation of Non-GAAP Measures - Monthly Recurring Revenues

The purpose of this table is to reconcile monthly recurring revenues, a non-GAAP measure, to its closest GAAP counterpart, BHS’ revenues.


	Years Ended December 31,
(In millions)		2005	2004	2003
Monthly recurring revenues (“MRR”) (a)	$	29.1	26.1	23.3
Amounts excluded from MRR:
Amortization of deferred revenue		3.3	2.1	2.0
Other revenues (b)		2.5	1.8	2.4
Revenues on a GAAP basis:
December		34.9	30.0	27.7
January – November		357.2	315.6	282.7
January – December	$	392.1	345.6	310.4

(a): MRR is calculated based on the number of subscribers at period end multiplied by the average fee per subscriber received in the last month of the period for contracted monitoring and maintenance services.
(b): Revenues that are not pursuant to monthly contractual billings.

The Company uses MRR to evaluate BHS’ performance, and believes the presentation of MRR is useful to investors because the measure is widely used in the industry to assess the amount of recurring revenues from subscriber fees that a home security business produces. This supplemental non-GAAP information should be viewed in conjunction with the Company’s consolidated statements of operations.