Iron Mountain Incorporated 10-Q Summary
Business context and reporting period
Iron Mountain stores paper records and data backup media and provides information-management services across North America, Europe, Latin America and Asia Pacific. The unaudited filing covers the quarter and six months ended June 30, 2013, with comparisons to the same 2012 periods. Results include storage rental and service revenues; the Digital Business and Italian operations are reported as discontinued operations.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $754.7 million, up 0.3% | $1.502 billion, up 0.2% |
| Storage rental revenue | $441.6 million, up 1.9% | $884.0 million, up 2.9% |
| Service revenue | $313.2 million, down 1.8% | $617.7 million, down 3.5% |
| Operating income | $131.9 million; 17.5% margin | $254.7 million; 17.0% margin |
| Adjusted OIBDA | $232.7 million; 30.8% margin | $460.1 million; 30.6% margin |
| Income from continuing operations | $27.5 million; 3.6% margin | $45.9 million; 3.1% margin |
| Net income attributable to Iron Mountain | $26.6 million; diluted EPS $0.14 | $46.0 million; diluted EPS $0.24 |
| Operating cash flow from continuing operations | Not separately presented | $212.9 million |
All dollar amounts are in U.S. dollars; financial statement amounts are presented in thousands in the filing. Interest expense was $63.0 million for the quarter and $126.2 million year to date. Effective tax rates were 48.6% and 58.5%, respectively.
- At June 30, 2013, cash and cash equivalents were $258.9 million and restricted cash was $33.6 million.
- Total long-term debt was $3.939 billion, including $324.7 million classified as current. Debt, net of the current portion, was $3.614 billion.
- Revolving credit borrowings were $187.7 million, with approximately $535.0 million of remaining availability. Letters of credit totaled $2.3 million.
- The revolving credit and term-loan leverage ratio was 4.06 versus a 5.50 maximum; the bond leverage ratio was 4.92 versus a 6.50 maximum. Fixed-charge coverage was 1.37 versus a 1.00 minimum.
- Capital expenditures were $158.2 million, acquisition spending was $52.8 million and additions to customer relationship and acquisition costs were $8.3 million during the first six months.
- Dividends declared were $0.27 per common share for the second quarter; $103.3 million of parent cash dividends were paid during the first six months.
Material changes versus the prior comparable period
- Revenue growth was essentially flat because storage rental growth was offset by declining service revenue. Core service revenue fell 3.3% in the quarter and 4.6% year to date, reflecting lower retrieval, refiling and transportation activity and lower international shredding revenue.
- Operating expenses increased 4.9% in the quarter and 4.1% year to date, exceeding revenue growth. Selling, general and administrative expense increased 10.3% in the quarter and 8.2% year to date.
- Operating income declined 16.9% in the quarter and 15.2% year to date. Adjusted OIBDA declined 2.6% in the quarter and 0.3% year to date, with margins down from 31.8% to 30.8% and from 30.8% to 30.6%, respectively.
- Income from continuing operations declined 33.5% in the quarter and 55.2% year to date. The principal pressures included higher REIT-related costs, interest expense, foreign-currency losses and tax expense.
- REIT Costs were $23.5 million in the quarter and $48.5 million year to date, compared with $3.3 million and $5.4 million in the prior-year periods.
- Interest expense increased primarily because of the $1.0 billion of 5.75% senior subordinated notes issued in August 2012, partially offset by the retirement of other notes.
- North American revenue declined 0.5% in the quarter and 1.1% year to date, while International revenue increased 2.7% and 4.0%, respectively. International Adjusted OIBDA margin improved to 25.7% in the quarter and 24.6% year to date.
- Operating cash flow from continuing operations was broadly stable at $212.9 million versus $216.9 million in the prior-year six-month period, while capital expenditures increased from $107.4 million to $158.2 million.
- Two 2013 acquisitions, in Brazil and the United States, had aggregate preliminary consideration of approximately $52.9 million and generated approximately $27.6 million of preliminary goodwill.
Guidance, outlook, commentary and risks
- Management expected 2013 consolidated internal revenue growth of approximately 0% to 2%.
- Excluding potential acquisitions and REIT-related capital expenditures, 2013 capital expenditures were expected to be approximately $290.0 million, including approximately $80.0 million of real estate. Incremental REIT-related capital expenditures were estimated at $30.0 million to $45.0 million.
- Management expected to operate within a target leverage range of 3x to 4x EBITDA, although leverage could temporarily exceed the upper end because of REIT conversion cash requirements.
- The proposed REIT conversion remained subject to favorable IRS private letter rulings, including whether the company’s racking structures qualify as real estate. The IRS had formed a working group and had initially characterized the racking-structure ruling request as “tentatively adverse,” creating timing and execution uncertainty.
- Management continued to target a possible REIT election effective January 1, 2014, but stated that conversion might be delayed or might not occur.
- Estimated total REIT conversion support costs were approximately $375 million to $475 million, including $225 million to $275 million of related tax payments. Incremental operating and capital expenditures through 2014 were estimated at $150 million to $200 million, and future annual REIT compliance costs were estimated at $10 million to $15 million.
- Key risks include high leverage and refinancing requirements, restrictive debt covenants, foreign-currency volatility, declining activity-based service demand, technology substitution, customer privacy and information-security liabilities, acquisitions and integration, tax audits, REIT qualification and IRS ruling uncertainty.
- Potential contingencies include aggregate litigation losses of up to an additional $38.0 million over several years, a U.S. government inquiry concerning GSA contract pricing and possible refunds or penalties, and Massachusetts tax assessments totaling $12.3 million for 2004 through 2008, which the company is contesting.
Most important facts for investors to verify
- Whether service-revenue weakness and declining retrieval activity persist, particularly in North America.
- The timing and ultimate outcome of the IRS private letter rulings and the proposed REIT conversion.
- Actual REIT conversion costs, tax payments, system investments and any required stock or cash distributions.
- Debt maturity and refinancing plans, especially the $228.2 million of 7.25% GBP notes due April 15, 2014.
- Compliance with leverage and fixed-charge coverage covenants as operating results and REIT-related cash outlays evolve.
- Resolution and potential financial exposure from the GSA contract billing matter, Massachusetts tax assessments and other litigation.
- Whether operating cash flow remains sufficient to fund elevated capital expenditures, acquisitions, dividends and debt service.