Iron Mountain Incorporated — Form 10-Q Summary
Business Context and Reporting Period
Iron Mountain is a global information-management services provider offering records storage, data protection, destruction, hybrid services and related solutions across North America, Europe, Latin America and Asia Pacific. This unaudited Form 10-Q covers the three and six months ended June 30, 2012, compared with the corresponding 2011 periods. The Digital, New Zealand and Italian businesses are presented as discontinued operations.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $752.2 million, down 0.8% | $1.499 billion, down 0.4% |
| Storage rental revenue | $433.4 million, up 3.4% | $858.8 million, up 2.9% |
| Service revenue | $318.7 million, down 6.1% | $639.9 million, down 4.5% |
| Operating income | $158.7 million; 21.1% margin | $300.5 million; 20.1% margin |
| Adjusted OIBDA | $235.6 million; 31.3% margin | $456.1 million; 30.4% margin |
| Income from continuing operations | $41.4 million; diluted EPS $0.24 | $102.5 million; diluted EPS $0.60 |
| Net income attributable to Iron Mountain | $38.1 million; diluted EPS $0.22 | $93.4 million; diluted EPS $0.54 |
| Operating cash flow from continuing operations | Not separately provided for the quarter | $216.9 million |
| Free cash flow before acquisitions and discretionary investments | Not separately provided for the quarter | $114.0 million |
Cash and cash equivalents were $170.2 million at June 30, 2012, compared with $179.8 million at December 31, 2011. Including restricted cash, liquidity totaled $206.8 million. Total long-term debt was $3.493 billion, including the current portion; debt was $3.354 billion at December 31, 2011. Revolver availability was $454.7 million, with $268.0 million outstanding.
The company paid $86.0 million of dividends and repurchased $38.1 million of common stock during the first six months. The declared dividend increased to $0.27 per share for the second quarter from $0.25 in the comparable 2011 quarter.
Material Changes Versus the Prior Comparable Period
- Revenue declined modestly because storage rental growth was offset by weaker service revenue. Storage rental internal growth was 3.5% in the quarter and 3.4% year to date, while total service revenue internal growth was negative 5.2% and negative 3.6%, respectively.
- Complementary service revenue declined primarily because recycled-paper prices fell, reducing revenue by approximately $11.2 million in the quarter and $16.1 million year to date.
- Operating income and Adjusted OIBDA improved despite lower revenue, reflecting lower selling, general and administrative expenses and corporate cost reductions. Adjusted OIBDA margin increased from 30.0% to 31.3% in the quarter and from 29.6% to 30.4% year to date.
- Income from continuing operations fell 38.6% in the quarter and 31.0% year to date. Higher interest expense, foreign-currency losses and higher effective tax rates were major factors.
- Interest expense increased to $58.2 million in the quarter and $117.0 million year to date, primarily due to the 2011 issuance of $400.0 million of senior subordinated notes and increased revolver borrowings.
- Net income was substantially lower than in 2011 because the prior-year periods included a $193.3 million after-tax gain from the Digital Business sale. The 2012 period included a $1.9 million loss on the sale of the Italian Business.
- The company acquired Grupo Store in Brazil for approximately $79.0 million and acquired a controlling interest in Sispace AG in Switzerland for approximately $21.6 million.
- Operating cash flow from continuing operations decreased 10.1% year to date, primarily due to higher incentive-compensation and income-tax payments. Capital expenditures were $107.4 million and acquisition spending was $107.3 million.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2012 consolidated internal revenue growth of approximately negative 1% to 2% and capital expenditures of approximately $235.0 million, including approximately $30.0 million of real-estate purchases.
- The company expects to pursue conversion to a real estate investment trust no earlier than January 1, 2014. It submitted private-letter-ruling requests to the IRS in July 2012; approval was not assured.
- Estimated REIT conversion costs are $325 million to $425 million, including estimated tax liabilities of $225 million to $275 million and incremental operating and capital expenditures of $100 million to $150 million over five years. Estimated 2012 conversion-related costs are $20 million to $30 million.
- The company anticipates an accumulated earnings-and-profits distribution of approximately $1.0 billion to $1.5 billion, with a significant portion potentially distributed in the fourth quarter of 2012. Up to 80% may be paid in common stock and at least 20% in cash.
- Management targets leverage of 3x to 4x EBITDA. At June 30, 2012, revolving-credit and term-loan leverage was 3.5x, bond leverage was 4.1x and fixed-charge coverage was 1.4x, compared with covenant limits of 5.5x, 6.5x and a minimum of 1.2x, respectively.
- Material risks include high leverage and refinancing needs, foreign-currency volatility, weaker discretionary and recycled-paper-related revenue, REIT qualification and IRS ruling uncertainty, potential tax and implementation costs, litigation, government-contract billing matters, and changes in customer demand or technology.
- The company disclosed a material weakness in internal control over financial reporting related to identifying and monitoring price-reduction clauses in U.S. government contracts. Disclosure controls remained ineffective at June 30, 2012. Remediation included hiring a compliance specialist and implementing contract-pricing monitoring procedures.
- The company voluntarily disclosed potential noncompliance with GSA pricing clauses and received a government subpoena covering related matters dating back to 2000. Potential refunds, penalties, treble damages and interest remain uncertain.
- Management estimated that aggregate losses for litigation and other contingencies could exceed amounts accrued by up to $40 million over the next several years. Massachusetts tax assessments totaled approximately $8.2 million, excluding the potential outcome of additional audits.
Most Important Facts for Investors to Verify
- Whether service revenue and complementary-service weakness stabilize, particularly as recycled-paper prices and activity-based volumes fluctuate.
- The sustainability of cash flow after capital expenditures, acquisitions, dividends, share repurchases and REIT-related spending.
- Debt maturities, refinancing capacity, covenant headroom and the effect of additional borrowing or equity issuance.
- The IRS response to the REIT private-letter-ruling requests, final REIT conversion costs and the timing and composition of the potential $1.0 billion to $1.5 billion distribution.
- The final resolution and financial exposure from the GSA pricing matter, government subpoena, Massachusetts tax assessments and Italy fire-related indemnities.
- Whether management remediates the disclosed material weakness and restores effective disclosure controls.