Business Context and Reporting Period
Iron Mountain Incorporated filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The company provides information management, records storage, data protection, destruction, scanning, hybrid and related services across North America, Europe, Latin America and Asia Pacific.
Following the June 2, 2011 sale of the Digital Business to Autonomy, the digital operations are presented as discontinued operations. The New Zealand records management business was classified as held for sale and also presented as discontinued operations.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $762.9 million, up 5.3% | $1.513 billion, up 4.3% |
| Operating income | $147.4 million; 19.3% margin | $281.3 million; 18.6% margin |
| Income from continuing operations | $65.5 million; 8.6% margin | $142.7 million; 9.4% margin |
| Net income attributable to Iron Mountain | $252.7 million | $326.1 million |
| Diluted EPS from continuing operations | $0.32 | $0.71 |
| Adjusted OIBDA | $226.9 million; 29.7% margin | $442.6 million; 29.3% margin |
| Cash flow from operating activities | The filing does not provide a quarterly cash-flow figure | $243.1 million including discontinued operations; $241.2 million from continuing operations |
| Free cash flow before acquisitions and discretionary investments | The filing does not provide a quarterly figure | $139.5 million |
At June 30, 2011, cash and cash equivalents were $271.4 million and restricted cash was $35.1 million. Total long-term debt was $2.933 billion, including $66.2 million classified as current; long-term debt, net of current portion, was $2.867 billion.
The company reported $718.3 million of remaining availability under its new revolving credit facility, with no borrowings outstanding and $6.7 million of letters of credit. The new term loan balance was $500.0 million, with an interest rate of 4.0% at June 30, 2011.
Material Changes Versus the Prior Comparable Period
- Revenue increased $38.1 million, or 5.3%, in the second quarter and $62.8 million, or 4.3%, year to date. Internal revenue growth was 1.9% and 1.7%, respectively; foreign currency translation contributed 3.3% and 2.2%.
- Storage revenue increased 5.6% in the quarter and 5.2% year to date. Service revenue increased 4.8% and 3.3%, respectively, helped by higher recycled-paper prices and hybrid services.
- Operating income declined 6.7% in the quarter and 5.6% year to date. Adjusted OIBDA declined 2.7% in the quarter and 1.2% year to date, while the Adjusted OIBDA margin fell from 32.2% to 29.7% in the quarter and from 30.9% to 29.3% year to date.
- Income from continuing operations increased 33.9% in the quarter and 73.7% year to date, principally reflecting lower interest expense and substantially lower effective tax rates. The effective tax rate declined to 31.5% in the quarter and 24.7% year to date from 51.7% and 54.3%.
- Net income was materially increased by the $193.3 million after-tax gain on the sale of the Digital Business. The reported gain is not indicative of recurring operating performance.
- Operating cash flow from continuing operations declined 10.8% year to date to $241.2 million, primarily because of working-capital uses, including higher income-tax payments and lower customer collections.
- Capital expenditures declined to $99.4 million year to date from $131.1 million, while acquisition spending increased to $75.2 million from $11.8 million, primarily reflecting the acquisition of the remaining interest in the Polish joint venture.
- Financing activity included the early retirement of $231.3 million of senior subordinated notes, $261.0 million of stock repurchases and $75.0 million of dividends. The company also replaced its prior credit facilities with a new $725.0 million revolving facility and a $500.0 million term loan.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2011 capital expenditures of approximately $230.0 million, including approximately $20.0 million of real estate purchases, excluding potential acquisitions.
- The company stated that it expected to meet near-term cash requirements through operating cash flow, existing cash, the new credit agreement and other potential financings. It planned to operate around the midpoint of a target leverage range of 3x to 4x EBITDA.
- Management disclosed a commitment to return approximately $2.2 billion to stockholders through 2013, including approximately $1.2 billion by May 2012 through repurchases, dividends and potentially one-time dividends. Future payments remain subject to board approval, financial performance, market conditions and debt covenants.
- A $6.0 million revenue reduction was recorded for estimated potential pricing adjustments under a significant government contract. The contract was scheduled for renewal in fall 2011.
- The company recorded a $4.9 million impairment charge on the New Zealand Business and a $9.4 million related tax benefit in discontinued operations. It expected to complete the New Zealand sale by the end of May 2012.
- Aggregate additional losses for disclosed litigation and other contingencies were estimated to be reasonably possible up to $32.0 million over the next several years, in addition to amounts accrued. The filing does not provide a clear aggregate amount accrued for these matters.
- Material risks include high leverage and refinancing needs, debt covenant compliance, foreign-currency volatility, economic sensitivity of service activity, privacy and information-security liabilities, litigation, government-contract pricing adjustments, tax audits, integration of acquisitions and execution of the New Zealand divestiture.
- The company reported leverage ratios below covenant limits: revolving credit and term leverage of 2.8 versus a 5.5 maximum, bond leverage of 3.5 versus a 6.5 maximum, and fixed-charge coverage of 1.8 versus a 1.2 minimum at June 30, 2011.
Most Important Facts to Verify
- Whether the Digital Business sale proceeds, working-capital adjustment and associated tax payments were ultimately finalized as reported.
- The final purchase price and closing date for the New Zealand Business, and any additional impairment or tax consequences.
- Progress against the planned approximately $2.2 billion stockholder-return program and the effect of repurchases on leverage and liquidity.
- Whether operating cash flow and internal revenue growth improved after the year-to-date declines in cash generation and modest core-service growth.
- Compliance with leverage and fixed-charge coverage covenants as debt amortization, dividends, acquisitions and repurchases continue.
- The outcome of the government-contract renewal and any resulting pricing adjustments beyond the $6.0 million recorded reduction.
- Developments in the London fire, Brazilian labor litigation, Massachusetts tax notices and other contingencies, including exposure beyond the disclosed $32.0 million reasonably possible loss range.