Iron Mountain Incorporated: Q2 2010 Form 10-Q Summary
Business context and reporting period
Iron Mountain provides information management services, including physical and digital storage, records management, document destruction, data protection, fulfillment, electronic archiving and e-discovery. The filing covers the unaudited three and six months ended June 30, 2010, compared with the same 2009 periods. Effective January 1, 2010, the company aligned its European subsidiary reporting year-end with the calendar year; a $4.7 million charge was recorded in the six months ended June 30, 2010 for immaterial prior-period differences.
Financial results and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $779.8 million, up 4.5% | $1,556.3 million, up 5.9% |
| Storage revenue | $435.6 million, up 4.8% | $870.9 million, up 5.5% |
| Service revenue | $344.1 million, up 4.2% | $685.4 million, up 6.5% |
| Operating income | $150.4 million; 19.3% margin | $283.1 million; 18.2% margin |
| Adjusted OIBDA | $235.6 million; 30.2% margin | $453.0 million; 29.1% margin |
| Net income | $41.8 million; 5.4% margin | $67.6 million; 4.3% margin |
| Net income attributable to Iron Mountain | $41.3 million; diluted EPS $0.20 | $66.9 million; diluted EPS $0.33 |
| Cash flow from operations | Not separately reported | $268.1 million |
Reported revenue growth benefited from foreign currency translation, which contributed approximately 1.8 percentage points in the quarter and 2.5 percentage points year to date. Internal revenue growth was 2.2% and 3.0%, respectively. Complementary services growth was helped by higher recycled paper prices, including approximately $22.3 million of additional recycled paper revenue in the first half.
Cash and cash equivalents were $340.5 million at June 30, 2010, plus $35.1 million of restricted cash. Current assets were $1.125 billion versus current liabilities of $731.7 million. Total debt was $3.167 billion, including $37.7 million of current maturities, and net long-term debt was $3.129 billion. Revolving credit availability was $750.4 million, with $12.1 million drawn and $2.6 million of letters of credit outstanding.
Six-month investing cash outflows were $290.6 million, including $138.0 million of capital expenditures, $122.9 million for acquisitions and $35.1 million placed in restricted cash. Financing cash outflows were $79.2 million, including $66.2 million of debt repayment, $50.6 million of stock repurchases and $12.7 million of dividends. Capital expenditures were expected to be approximately $280 million for full-year 2010, excluding potential acquisitions.
Material changes versus the prior comparable period
- Operating income increased 9.0% in the quarter and 9.2% year to date; Adjusted OIBDA increased 8.3% and 9.6%, respectively.
- Net income attributable to Iron Mountain declined 52.9% in the quarter and 42.6% year to date, primarily because of higher taxes, unfavorable foreign currency-related items and the prior-year benefit from foreign currency gains.
- The effective tax rate increased to 53.7% from 13.6% in the quarter and to 57.1% from 28.4% year to date. Foreign currency gains and losses in jurisdictions with different tax rates were a major driver.
- Other expense, net changed from income of $18.4 million to expense of $4.0 million in the quarter, and from income of $11.2 million to expense of $12.8 million year to date. The six-month 2010 amount included the $4.7 million IME reporting-period change charge and $8.9 million of net foreign currency transaction losses.
- North American Physical Business performance strengthened: first-half revenue increased 4.7% and Adjusted OIBDA increased 13.9%, with margin rising to 42.8% from 39.4%.
- International Physical Business first-half revenue increased 10.5%, largely due to currency translation, while Adjusted OIBDA increased 6.6% and margin declined to 18.3% from 19.0%.
- Worldwide Digital Business first-half revenue increased 3.8%, but Adjusted OIBDA declined 40.6% to $14.0 million and margin fell to 11.9% from 20.8%, reflecting lower pricing, longer sales cycles and Mimosa integration costs.
- The company acquired Mimosa Systems for approximately $112 million in cash and approximately $2 million of options, and acquired the remaining 87% of its Greek joint venture for approximately $4.7 million.
- The board authorized up to $150 million of share repurchases. Approximately $54.3 million had been repurchased or remained unsettled by June 30, leaving $95.7 million authorized. The company also initiated a quarterly dividend of $0.0625 per share.
Guidance, outlook, commentary and risks
- Management expected approximately 3% internal revenue growth for 2010 and approximately $280 million of 2010 capital expenditures, excluding potential acquisitions.
- Management expected to fund near-term requirements through operating cash flow, existing cash, credit-facility borrowings and other financing sources. The filing states that the company was in compliance with its material debt covenants at June 30, 2010.
- The company described itself as highly leveraged. Revolving credit and term-loan leverage was 3.1 versus a maximum of 5.5; bond leverage was 3.8 versus a maximum of 6.5.
- Management cited economic pressure on new sales, longer sales cycles, lower pricing, higher destruction rates and weaker activity-based service volumes. Recycled paper prices create additional volatility in complementary services revenue.
- Goodwill totaled $2.544 billion. No impairment indicators were identified as of June 30, 2010, but the Asia Pacific reporting unit had only a 9% fair-value cushion at the October 1, 2009 review date.
- The company received approximately $21 million of insurance proceeds related to the Chile earthquake and expected additional proceeds. Future business-interruption recoveries and property recoveries may affect other income and gains on asset disposals.
- Outstanding litigation included claims related to the 2006 London facility fire. Management believed insurance coverage and defenses were adequate and did not expect a material financial impact. The Pittsburgh litigation was settled in July 2010 without a material impact.
- In August 2010, the company called $200 million of its 7.75% notes due 2015. It expected to pay a redemption premium and record an approximately $1.8 million third-quarter charge.
Important facts for investors to verify
- Whether internal revenue growth and the approximately 3% full-year 2010 expectation were achieved, excluding favorable currency effects.
- The sustainability of operating-margin and Adjusted OIBDA improvement, particularly in North American Physical Business.
- Whether digital-business profitability recovered after the Mimosa acquisition and integration.
- Debt repayment, refinancing needs, covenant headroom and the effect of the 2010 note redemption on interest expense and liquidity.
- The ultimate amount and timing of Chile earthquake insurance recoveries and any related accounting gains.
- Developments in London fire claims, tax examinations, goodwill impairment assumptions and other legal or contingent liabilities.
- Actual capital expenditures, acquisition spending, share repurchases and dividends relative to operating cash flow.