Iron Mountain Incorporated — Q2 2019 Form 10-Q Summary
Business context and reporting period
Iron Mountain provides physical records storage, information management, data backup, information destruction, and enterprise data-center services across North America, Europe, Latin America, Asia, and Africa. The filing covers the quarter and six months ended June 30, 2019; financial statements are unaudited and amounts are generally in thousands unless noted.
Iron Mountain operates as a U.S. real estate investment trust and reports six segments, including North American records and information management, North American data management, international businesses, global data centers, and Corporate and Other.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $1,066.9 million | $1,060.8 million | $2,120.8 million | $2,103.3 million |
| Storage rental revenue | $669.3 million | $655.4 million | $1,332.3 million | $1,306.6 million |
| Service revenue | $397.6 million | $405.4 million | $788.5 million | $796.7 million |
| Operating income | $193.1 million | $201.5 million | $351.8 million | $358.6 million |
| Income from continuing operations | $92.3 million | $92.3 million | $122.8 million | $131.7 million |
| Net income attributable to Iron Mountain | $92.4 million | $91.8 million | $122.0 million | $130.2 million |
| Diluted EPS | $0.32 | $0.32 | $0.42 | $0.45 |
| Adjusted EBITDA | $350.9 million | $367.6 million | $675.4 million | $703.1 million |
| Adjusted EBITDA margin | 32.9% | 34.6% | 31.8% | 33.4% |
Q2 continuing-operations margin was 8.7% of revenue in both periods. The six-month continuing-operations margin declined to 5.8% from 6.3%. Effective tax rates were 10.3% in Q2 and 14.7% for the six-month period, compared with 22.0% and 16.5%, respectively, in the comparable periods.
- Cash provided by operating activities was $429.7 million for the six months, up from $393.3 million including discontinued operations, or $393.8 million from continuing operations, in the prior-year period.
- Cash capital expenditures were $367.1 million, compared with $217.6 million. Growth investment spending was $305.3 million, including $235.2 million for data centers; recurring capital expenditures were $43.4 million.
- Cash and cash equivalents were $162.0 million at June 30, 2019, compared with $165.5 million at December 31, 2018.
- Total debt had a carrying amount of $8.51 billion, including $8.39 billion excluding the current portion, compared with $8.14 billion at December 31, 2018. The revolving credit facility had $1.18 billion outstanding and $533.4 million of remaining availability, subject to approximately $35.3 million of letters of credit.
- Operating lease liabilities totaled $1.87 billion on a present-value basis, following adoption of the new lease standard. Total recognized operating and financing lease liabilities were approximately $2.25 billion.
- Parent cash dividends paid during the six months totaled $353.4 million. The quarterly dividend declared was $0.6110 per share.
Material changes versus the prior comparable period
- Revenue increased 0.6% in Q2 and 0.8% for the six months. Six-month organic revenue growth was 1.3%, while foreign currency translation reduced reported growth by approximately 3.0%.
- Storage rental revenue increased 2.1% in Q2 and 2.0% for the six months; six-month organic storage rental growth was 2.2%. Service revenue declined 1.9% in Q2 and 1.0% for the six months, with six-month organic service revenue down 0.2%.
- Adjusted EBITDA declined 4.5% in Q2 and 3.9% for the six months. Management attributed the decline primarily to higher labor costs in secure shredding, information-security and technology investments, and higher overhead supporting data-center growth.
- Operating expenses rose faster than revenue. Six-month cost of sales increased to 43.7% of revenue from 42.8%, driven primarily by facilities and transportation costs. SG&A improved to 24.7% of revenue from 25.2%, partly because acquisition costs declined substantially.
- North American data management revenue declined 3.4% for the six months, reflecting lower storage volume and declining activity as the business becomes more archival. Global data-center revenue increased 22.0%, largely from acquisitions, but its Adjusted EBITDA margin declined to 43.3% from 45.0%.
- Operating cash flow increased, but higher capital expenditures and dividends resulted in a $3.5 million decrease in cash during the six months, versus a $737.5 million decrease in the prior-year period, which included substantially higher acquisition spending.
Guidance, outlook, risks and unusual items
- Management expects 2019 organic storage rental revenue growth of approximately 2.2% to 2.8% and organic total revenue growth of approximately 1.3% to 2.0%.
- Expected 2019 capital expenditures, excluding potential acquisitions, opportunistic real estate investments, and Recall and IODC integration spending, are approximately $175 million for growth real estate and innovation, $145 million to $155 million for recurring and non-real-estate growth spending, and $300 million for data centers.
- Management states that the company is operating above its long-term targeted leverage ratio and expects to reduce leverage over time through business growth and capital allocation.
- Debt covenant ratios remained within stated limits but leverage increased: net total lease-adjusted leverage was 5.8 versus a 6.5 maximum; bond leverage was 6.1 versus a 6.5 to 7.0 maximum; and fixed-charge coverage was 2.2 versus a 1.5 minimum. Failure to comply could materially affect liquidity.
- In Q2, Iron Mountain recorded an approximately $24 million impairment charge on assets associated with selected Iron Cloud offerings while reporting a net gain on disposal and write-down of property and equipment of approximately $8.4 million. Six-month net gains were approximately $7.8 million, including approximately $36 million of gains on U.K. facility sales.
- The company adopted the lease standard on January 1, 2019 using a modified retrospective method, recognizing substantial right-of-use assets and lease liabilities. The prior-year balance sheet was not restated for adoption.
- In March 2019, Iron Mountain contributed its U.S. and Canadian consumer-storage assets and approximately $20 million of cash to a joint venture, receiving an approximately 34% interest. It recorded a gain of approximately $4.2 million and recognized $7.4 million of related Q2 storage and service revenue.
- The company recorded an immaterial restatement related to a Netherlands VAT assessment. The assessment was approximately €16.8 million; the company recorded a reserve and restated prior-period balances, reducing 2018 six-month net income by approximately $7.9 million and December 31, 2018 equity by approximately $23.1 million.
- Aggregate reasonably possible losses for disclosed contingencies could exceed accrued amounts by up to approximately $17 million over the next several years, with some amounts potentially covered by insurance or indemnities.
- Key risks include declining retrieval and service activity, recycled-paper price volatility, foreign exchange exposure, data-security and privacy obligations, data-center service interruptions and power costs, acquisition integration, REIT qualification, refinancing and interest-rate risk, and the ability to sustain dividends while reducing leverage.
Important facts for investors to verify
- Reconcile reported revenue growth with organic growth, acquisitions, divestitures, and foreign-currency effects, particularly in the data-center segment.
- Assess whether declining service activity and North American storage volumes are offset by pricing, international growth, and data-center expansion.
- Review Adjusted EBITDA and Adjusted EPS reconciliations, including the effects of the Iron Cloud impairment, property-sale gains, acquisition costs, foreign-currency gains, and tax items.
- Evaluate leverage, fixed-charge coverage, interest expense, debt maturities, revolving-credit availability, and the company’s stated plan to reduce leverage.
- Monitor capital spending requirements, especially the planned approximately $300 million of 2019 data-center capital expenditures, relative to operating cash flow and dividends.
- Follow the Netherlands VAT matter, related reserve and potential recoveries, as well as the remaining disclosed contingency exposure.
- Confirm the effects of the lease-standard adoption and the comparability of 2018 balance-sheet and lease metrics.
- Verify future dividend declarations, REIT qualification, and the company’s ability to fund dividends and investments without materially increasing debt.