Iron Mountain Incorporated — Q2 2016 Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2016. Iron Mountain provides physical records storage, data protection, secure destruction, document management and related information-management services across North America, Europe, Latin America, Asia Pacific and Africa. The company completed its approximately $2.17 billion acquisition of Recall Holdings Limited on May 2, 2016, materially expanding the reported scale of the business.
Key financial metrics
| Metric | Q2 2015 | Q2 2016 | Six months 2015 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $759.7 million | $883.7 million | $1.509 billion | $1.634 billion |
| Operating income | $129.5 million | $96.6 million | $274.4 million | $226.7 million |
| Operating margin | 17.0% | 10.9% | 18.2% | 13.9% |
| Net income attributable to Iron Mountain | $53.3 million | $(14.0) million | $94.4 million | $48.8 million |
| Diluted EPS | $0.25 | $(0.06) | $0.45 | $0.21 |
| Adjusted OIBDA | $223.2 million | $261.4 million | $454.4 million | $496.6 million |
| Adjusted OIBDA margin | 29.4% | 29.6% | 30.1% | 30.4% |
| Operating cash flow from continuing operations | Not separately provided for the quarter | Not separately provided for the quarter | $179.7 million | $205.6 million |
Q2 revenue growth was 16.3%, while reported revenue growth for the first six months was 8.3%. Internal revenue growth was 0.4% in Q2 and 1.2% year to date; acquisition and divestiture effects, primarily Recall, contributed 18.6% and 10.3% to reported growth, respectively. Recall contributed $120.8 million of Q2 and year-to-date revenue, consisting of $68.7 million of storage rental revenue and $52.1 million of service revenue.
At June 30, 2016, cash and cash equivalents were $237.0 million, compared with $128.4 million at December 31, 2015. Total debt had a carrying amount of $6.216 billion, including $112.5 million classified as current. Revolving-credit borrowings were $1.351 billion, with $341.3 million of remaining availability based on applicable leverage and other conditions. The company’s net total lease-adjusted leverage ratio was 5.8 versus a maximum of 6.5, and its fixed-charge coverage ratio was 2.6 versus a minimum of 1.5.
Six-month investing cash outflows were $402.6 million, including $163.7 million of capital expenditures and $276.6 million of acquisition payments, partially offset by $54.0 million of divestiture proceeds. Six-month financing cash flow was $312.9 million, including $738.8 million of net proceeds from new senior notes and $232.6 million of dividends paid. The declared dividend was $0.5174 per common share for Q2 2016, compared with $0.4752 in Q2 2015.
Material changes versus the prior comparable period
- Revenue increased substantially due mainly to the Recall acquisition, but operating income declined 25.4% in Q2 and 17.4% year to date because operating expenses grew faster than revenue.
- Reported Q2 and year-to-date net income attributable to Iron Mountain declined from $53.3 million to a $14.0 million loss and from $94.4 million to $48.8 million, respectively.
- Recall-related costs were $50.4 million in Q2 and $68.7 million year to date. These costs included transaction, divestiture, integration, severance, facility-upgrade, REIT-conversion and system-upgrade expenditures.
- Depreciation and amortization increased to $115.0 million in Q2 and $202.2 million year to date, reflecting acquired property, equipment and customer-relationship intangibles.
- The company recorded a $9.3 million debt-extinguishment charge in Q2 related to repayment of the $850 million Recall bridge facility. It issued $500 million of 4.375% senior notes due 2021 and $250 million of 5.375% senior notes due 2026 to fund repayment.
- Internal service revenue declined 2.1% in Q2 and 0.3% year to date, reflecting lower retrieval, refile, transportation and data-management activity as stored information becomes more archival. Internal storage-rental growth remained positive at 2.1% in Q2 and 2.2% year to date.
- Adjusted OIBDA increased 17.1% in Q2 and 9.3% year to date, and margins improved modestly despite significant Recall-related charges excluded from this non-GAAP measure.
Guidance, outlook, risks and unusual items
- Management expected 2016 internal revenue growth of approximately 1.5% to 2.5%.
- Expected 2016 capital expenditures were approximately $370 million to $410 million, excluding potential acquisition-related spending and opportunistic real-estate investments; up to $100 million of additional opportunistic real-estate investment was contemplated.
- Total Recall-related operating and capital expenditures were estimated at approximately $380 million, including $80 million of deal-close and divestiture costs, $220 million of integration costs and $80 million of integration capital expenditures. Approximately $117.9 million had been incurred through June 30, 2016.
- Regulatory approvals for Recall required divestitures in the United States, Australia, Canada and the United Kingdom. Assets held for sale totaled $144.0 million and liabilities held for sale totaled $21.6 million at June 30, 2016. Management estimated approximately $140 million of proceeds from remaining divestitures, subject to execution and valuation risk.
- The company remained highly leveraged and stated that its ability to service or refinance debt depends on future operating performance, working capital, capital markets and other factors. Debt covenants may restrict acquisitions, dividends, additional borrowings, investments and asset sales; dividend limits can apply when the net total lease-adjusted leverage ratio exceeds 6.0.
- Key operating risks include declining paper-based storage demand, lower service activity, foreign-currency volatility, integration and synergy execution, regulatory divestitures, privacy and information-protection liabilities, litigation, real-estate costs, inflation, REIT qualification and the ability to offset cost increases.
- Management estimated reasonably possible aggregate litigation losses in excess of accrued amounts of up to $21 million over several years, with some amounts potentially covered by insurance or indemnities. The Italy, Argentina and Recall Brooklyn fire matters were not expected to have a material financial impact.
- In August 2016, the company entered a non-binding agreement in principle to acquire Santa Fe Group’s information-management operations in ten regions for approximately €27 million, or about $30.2 million. Completion was expected by year-end 2016 but was not assured.
Most important facts for investors to verify
- Whether Recall integration costs, divestiture proceeds and expected synergies track management’s estimates, including the remaining approximately $262 million of estimated Recall-related operating and capital expenditures.
- Progress, timing and realized value of the required Australia, Canada, United Kingdom and Seattle/Atlanta divestitures.
- Debt reduction, covenant headroom, revolving-credit availability and the sustainability of dividends given leverage and capital spending requirements.
- Whether internal storage-rental growth remains positive and whether declining service activity stabilizes, particularly in North American Data Management and Western Europe.
- The effect of foreign-exchange movements, acquired intangible amortization, financing costs and other unusual items on GAAP earnings and cash generation.
- Management’s reconciliation of Adjusted OIBDA, Adjusted EPS and FFO to GAAP results, because these measures exclude substantial Recall-related and other nonrecurring items.