IRON MOUNTAIN INC quarterly report, Q2 FY2023

Iron Mountain Incorporated — 2023 Q2 Form 10-Q Summary

Business context and reporting period

Iron Mountain is a global information management, records management, data center, information destruction and asset lifecycle management company operating primarily through its Global RIM Business and Global Data Center Business segments. The filing covers the unaudited three and six months ended June 30, 2023, compared with the corresponding 2022 periods. The company continues to operate as a U.S. real estate investment trust.

Financial performance and key metrics

Metric	Three months ended June 30	Six months ended June 30
Total revenue	$1.358 billion, up 5.3%	$2.672 billion, up 5.3%
Storage rental revenue	$831 million, up 10.3%	$1.641 billion, up 9.1%
Service revenue	$527 million, down 1.7%	$1.031 billion, down 0.2%
Operating income	$213 million, down 27.7%	$453 million, down 12.2%
Net income	$1 million, versus $202 million	$67 million, versus $244 million
Net income attributable to Iron Mountain	$0.1 million; diluted EPS $0.00	$65 million; diluted EPS $0.22
Adjusted EBITDA	$476 million, up 4.6%; 35.0% margin	$936 million, up 5.7%; 35.0% margin
FFO (Normalized)	$208 million, versus $216 million	$417 million, versus $412 million

Six-month operating margin was approximately 17.0%, compared with 20.3% in the prior-year period. Net income margin was approximately 2.5%, compared with 9.6%. Adjusted EBITDA margin improved modestly from 34.9% to 35.0% for the six-month period, but declined from 35.3% to 35.0% in the second quarter.

Global RIM revenue increased 7.9% for the first six months, while segment Adjusted EBITDA increased 6.4% to $977 million. Segment margin declined to 42.7% from 43.3%, primarily due to higher compensation and employee-related costs.
Global Data Center revenue increased 16.9% and segment Adjusted EBITDA increased 23.9% to $104 million. Segment margin improved to 45.3% from 42.8%.
Corporate and Other revenue declined 29.7% to $156 million, and its Adjusted EBITDA loss widened to $145 million, reflecting lower asset lifecycle management service revenue, principally due to component price declines.

Cash flow, capital investment, debt and liquidity

Operating cash flow was $446 million for the six months, up from $346 million, primarily due to working-capital timing and accounts receivable collections.
Investing cash flow was a use of $645 million, including $601 million of capital expenditures and $21 million of cash paid for acquisitions.
Cash and cash equivalents totaled $149 million at June 30, 2023, compared with $142 million at December 31, 2022.
Total debt had a carrying amount of $11.247 billion, including $102.6 million classified as current. Long-term debt, net of current portion, was $11.144 billion, compared with $10.481 billion at year-end 2022.
The company issued $1.0 billion of 7% senior notes due 2029 in May 2023 and used approximately $990 million of net proceeds to repay revolving credit borrowings.
The revolving credit facility had $1.566 billion of remaining availability, representing maximum availability as of June 30, 2023. The accounts receivable securitization program had $343 million outstanding against increased capacity of $360 million.
Weighted average interest rate, including letter-of-credit fees, was 5.4% at June 30, 2023, versus 4.6% at June 30, 2022. Six-month net interest expense increased 22.6% to $281 million.
The company paid $367 million in common stock dividends during the first six months. A quarterly dividend of $0.65 per share was declared on August 3, 2023, payable October 5, 2023.
At June 30, the company reported a net total lease-adjusted leverage ratio of 5.1 versus a maximum of 7.0 and a fixed-charge coverage ratio of 2.3 versus a minimum of 1.5. Management stated that all debt covenants were satisfied.

Material changes versus the prior comparable period

Revenue growth was driven primarily by storage rental revenue, revenue management, data center growth and higher service activity in the Global RIM Business. Reported revenue growth was reduced by foreign currency movements.
Service revenue was broadly flat year over year because increased Global RIM activity was offset by lower asset lifecycle management service revenue and component price declines.
Operating expenses increased faster than revenue, including higher labor, facility, depreciation and amortization, and sales and marketing costs.
Project Matterhorn generated $82.5 million of restructuring and transformation costs in the first six months, versus none in the prior-year period. These costs materially reduced GAAP operating income and net income.
Interest expense increased by $51.8 million for the six-month period due to higher average debt and interest rates.
Other expense, net, increased to $84.2 million from $14.7 million. The 2023 amount included a $38 million loss from remeasuring the company’s previously held Clutter JV interest and foreign currency transaction losses; the 2022 period included a significant loss related to the OSG deconsolidation and a gain from the Clutter transaction.
The company acquired Clutter on June 29, 2023 for total consideration of approximately $59 million and expects to offer up to a 15% equity interest to certain former Clutter JV stakeholders in the third quarter.
Capital spending increased substantially to $601 million from $330 million, driven primarily by data center growth investment.

Guidance, outlook, commentary, risks and unusual items

Management expects continued total revenue and Adjusted EBITDA growth in 2023, supported by new offerings, innovation, customer solutions, market expansion, revenue management and Project Matterhorn.
Management expects storage rental revenue growth to benefit from revenue management, with global volume relatively stable in the near term. Organic service revenue is expected to benefit from digital offerings and traditional services.
Project Matterhorn is expected to cost approximately $150 million annually from 2023 through 2025. Costs since inception through June 30, 2023 totaled approximately $124 million.
Total 2023 capital expenditures are expected to be approximately $1.2 billion, excluding capital expenditures associated with potential future acquisitions, including approximately $1.055 billion of growth investment and approximately $145 million of recurring capital expenditures.
On July 7, 2023, Iron Mountain made its final contractual investment in the Web Werks JV. Its interest increased to 63.39%, and the company assumed board control; the venture is expected to be consolidated for reporting periods beginning after that date.
Key risks include high leverage and refinancing needs, rising interest costs, the ability to fund substantial capital expenditures and dividends, debt covenant compliance, execution of Project Matterhorn, acquisition integration, foreign currency exposure, cybersecurity and data privacy, data center service interruptions and power costs, changing customer demand, REIT qualification, regulatory compliance, litigation, climate and geopolitical events, and competition from alternative technologies.
The company estimated reasonably possible additional aggregate litigation losses of up to $18 million over the next several years, with some amounts potentially covered by insurance or indemnification.
Management concluded that disclosure controls were effective as of June 30, 2023 and reported no material changes in internal control over financial reporting during the quarter.

Most important facts for investors to verify

Reconcile GAAP net income and EPS with Adjusted EBITDA, Adjusted EPS, FFO and FFO (Normalized), particularly the effect of Project Matterhorn, the Clutter remeasurement loss, foreign currency losses and other excluded items.
Assess whether operating cash flow can support approximately $1.2 billion of annual capital spending, dividends, interest expense and acquisition requirements without increasing leverage.
Review debt maturities, floating-rate exposure, refinancing assumptions, covenant definitions and the effect of the 7% 2029 notes on future interest expense.
Monitor execution and returns from the data center expansion program, the Clutter acquisition and the post-July 2023 consolidation of Web Werks.
Evaluate whether service revenue weakness in asset lifecycle management is temporary or reflects continuing component-price and demand pressure.
Track Project Matterhorn spending, expected savings or growth benefits, and whether annual costs remain near the stated $150 million estimate through 2025.
Verify the sustainability of the dividend in light of GAAP earnings, normalized FFO, capital requirements, leverage and debt covenant restrictions.