IRON MOUNTAIN INC quarterly report, Q2 FY2014

Iron Mountain Incorporated — Form 10-Q Summary

Reporting period: Three and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods. Financial statements are unaudited and amounts are in thousands except per-share data. Iron Mountain provides records storage, data backup-media storage, information management, destruction, document management and related services across North America, Europe, Latin America and Asia Pacific.

Key Financial Metrics

Metric	Q2 2014	Q2 2013	Six months 2014	Six months 2013
Revenue	$786.9 million	$754.4 million	$1,557.0 million	$1,501.1 million
Operating income	$147.3 million	$131.5 million	$289.4 million	$254.1 million
Operating margin	18.7%	17.4%	18.6%	16.9%
Adjusted OIBDA	$241.8 million	$232.3 million	$470.4 million	$459.5 million
Adjusted OIBDA margin	30.7%	30.8%	30.2%	30.6%
Net income attributable to Iron Mountain	$271.6 million	$26.4 million	$313.3 million	$45.6 million
Diluted EPS from continuing operations	$1.41	$0.14	$1.63	$0.24
Operating cash flow from continuing operations	Not separately provided	Not separately provided	$195.6 million	$212.9 million

Storage rental revenue increased 5.7% in the quarter and 4.7% year to date, while service revenue increased 2.3% in both periods. Internal revenue growth was 0.1% in the quarter and 0.3% year to date; acquisitions contributed 4.5% and 4.3%, respectively.

Net income benefited substantially from a $230.1 million second-quarter and $212.2 million year-to-date net tax benefit related to the REIT conversion. The benefit primarily reflected revaluation of deferred tax assets and liabilities and other REIT-related tax effects. A $36.1 million tax provision for repatriation of foreign earnings partially offset the second-quarter benefit.

Liquidity, Cash Flow and Debt

Cash and cash equivalents were $145.3 million at June 30, 2014, compared with $120.5 million at December 31, 2013. Cash plus restricted cash was $179.2 million.
Six-month operating cash flow from continuing operations was $195.6 million, down from $212.9 million, or 8.1%, primarily because of lower cash earnings and realized foreign-exchange losses.
Six-month investing cash outflows were $234.7 million, including $188.7 million of capital expenditures, $46.4 million for acquisitions and $17.2 million of additions to customer relationship and acquisition costs.
Total long-term debt, including current maturities, was $4.355 billion at June 30, 2014, compared with $4.172 billion at December 31, 2013. Net long-term debt excluding current maturities was $4.298 billion.
The revolving credit facility had $1.103 billion drawn, $6.9 million of letters of credit outstanding and $390.5 million of maximum remaining availability. The average borrowing rate was 2.6%.
Iron Mountain redeemed approximately $247.0 million of 7 1/4% GBP notes in January 2014 using revolver borrowings and cash.
Credit metrics remained within covenant limits: net total lease-adjusted leverage was 5.1 versus a 6.5 maximum, and fixed-charge coverage was 2.6 versus a 1.5 minimum. Management nevertheless described the company as highly leveraged.
Ordinary dividends declared were approximately $104.9 million during the first six months, or $0.5405 per share.

Material Changes Versus the Prior Period

Revenue grew 4.3% in the quarter and 3.7% year to date, but underlying internal growth remained limited because service activity declined.
Operating income grew faster than revenue, helped by lower selling, general and administrative expense, particularly lower REIT-related costs, and a $8.4 million year-to-date gain on disposal of property in the United Kingdom.
Adjusted OIBDA growth was modest, and margins declined 10 basis points in the quarter and 40 basis points year to date.
Service revenue internal growth was negative 1.9% in the quarter and negative 1.3% year to date, reflecting reduced retrieval and refiling activity and related transportation revenue.
North American Data Management revenue declined 1.9% in the quarter and 2.0% year to date; its year-to-date Adjusted OIBDA margin fell to 58.3% from 60.3%.
International revenue increased 13.6% in the quarter and 11.6% year to date, with acquisitions and emerging-market growth contributing significantly. Its year-to-date Adjusted OIBDA margin improved to 25.0% from 24.6%.
Labor and facility costs increased as a percentage of revenue, while SG&A declined to 27.5% of revenue year to date from 29.8%.
The company completed acquisitions in Australia, Turkey and Poland for total consideration of approximately $49.5 million, including $34.2 million of initially recorded goodwill.
The company changed its reportable segments effective January 1, 2014 and restated prior segment information.

Guidance, Outlook, Risks and Unusual Items

Management expects 2014 consolidated internal revenue growth of approximately 0% to 2%.
Capital expenditures, excluding potential acquisitions, are expected to be approximately $310 million to $370 million in 2014.
Management expects a 2014 special distribution of approximately $600 million to $700 million, primarily in common stock, with at least 80% in stock and up to 20% in cash. Additional ordinary cash dividends of approximately $244 million to $264 million were expected through January 2015.
Management expects to operate at a target leverage range of 4x to 5x EBITDAR, but was temporarily above that range because of REIT conversion cash outlays.
Total estimated REIT conversion costs were $375 million to $395 million, including $200 million to $210 million of related tax payments. Additional 2014 conversion operating and capital expenditures were estimated at $175 million to $185 million, excluding approximately $15 million of recurring REIT compliance costs.
The company received favorable IRS private letter rulings on June 25, 2014 and intends to elect REIT status effective January 1, 2014. Risks include failure to qualify or remain qualified as a REIT, required distributions, tax-law changes, restrictions on taxable REIT subsidiaries and potential financing needs for distributions.
The company expects approximately $1.4 million of additional restructuring costs in the remainder of 2014.
A government investigation and sealed qui tam lawsuit concern potential noncompliance with pricing provisions in federal GSA contracts. The government may seek additional price adjustments, refunds, civil penalties, treble damages or interest.
The company believes reasonably possible aggregate litigation losses could exceed accrued amounts by up to approximately $43.9 million, before considering insurance or indemnification.
A single-location billing matter resulted in an immaterial restatement, including a $10.0 million aggregate prior-period revenue overstatement and a $5.3 million reduction to beginning retained earnings as of December 31, 2012, net of tax.
Other risks include declining document retrieval activity, technological substitution, foreign-exchange volatility, international operating risks, acquisition integration, privacy and information-security liabilities, interest costs and substantial leverage.

Investor Verification Checklist

Verify the final amount, form and timing of the 2014 special distribution and the resulting share dilution and leverage.
Reconcile reported earnings with operating performance excluding the significant REIT-related tax benefit and other discrete items.
Monitor internal revenue growth, particularly service activity, North American Data Management performance and the sustainability of international growth.
Track debt refinancing requirements, revolver availability, covenant headroom and progress toward the 4x–5x target leverage range.
Review the government GSA/qui tam matter, other litigation contingencies and the potential financial impact of additional claims.
Confirm continued REIT qualification, required distributions, taxable REIT subsidiary limitations and related tax payments.
Assess whether projected capital expenditures, conversion costs and dividends can be funded from operating cash flow without materially increasing leverage.