Iron Mountain Incorporated 2020 Q2 Form 10-Q Summary
Business context and reporting period
Iron Mountain provides records and information management, secure destruction, data management, and data center services globally. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, with comparisons to the corresponding 2019 periods. The company operates as a U.S. REIT and reports Global Records and Information Management, Global Data Center, and Corporate and Other segments.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Total revenue | $982.2 million | $1,066.9 million | Down 7.9% |
| Storage rental revenue | $677.0 million | $669.3 million | Up 1.1% |
| Service revenue | $305.3 million | $397.6 million | Down 23.2% |
| Operating income | $131.7 million | $193.1 million | Down 31.8% |
| Net income attributable to Iron Mountain | $(7.1) million | $92.4 million | Declined to a loss |
| Diluted EPS | $(0.02) | $0.32 | Declined |
| Adjusted EBITDA | $342.9 million | $350.9 million | Down 2.3% |
| Adjusted EBITDA margin | 34.9% | 32.9% | Up 200 basis points |
For the six months ended June 30, 2020, revenue was $2.051 billion, down 3.3%; operating income was $269.2 million, down 23.5%; net income attributable to Iron Mountain was $56.9 million, down 53.4%; and diluted EPS was $0.20 versus $0.42. Adjusted EBITDA was $706.0 million, up 4.5%, and Adjusted EBITDA margin was 34.4% versus 31.8%.
Six-month operating cash flow was $439.1 million, compared with $429.7 million in 2019. Capital expenditures were $200.2 million, acquisition cash payments were $118.5 million, and cash dividends paid were $359.5 million. Ending cash and cash equivalents, including restricted cash, were $907.2 million, compared with $162.0 million at June 30, 2019 and $193.6 million at December 31, 2019.
Total debt had a carrying amount of $9.630 billion at June 30, 2020, including $880.2 million classified as current. Long-term debt, net of current debt, was $8.750 billion. The company had $1.385 billion of remaining borrowing capacity under its revolving credit facility, subject to applicable limits, and was in compliance with its debt covenants.
Material changes versus the prior comparable period
- COVID-19 sharply reduced service activity, producing a 23.1% organic decline in consolidated service revenue during Q2 and a 12.8% organic decline for the first half.
- Storage rental revenue remained comparatively resilient, increasing 1.1% in Q2 and 2.1% for the first half on a reported basis. Six-month organic storage rental growth was 2.6%.
- Project Summit and other cost-containment measures increased Adjusted EBITDA margin despite lower revenue. The company reduced labor, transportation, selling, marketing, and information technology costs.
- Bad debt expense increased to $21.2 million for the first half from $8.8 million, reflecting increased customer collectability risk.
- The company recorded $39.3 million of restructuring charges in Q2 and $80.3 million in the first half. It also recorded a $23.0 million first-quarter goodwill impairment related to the Fine Arts reporting unit.
- In June, the company issued $2.4 billion of net proceeds from new senior notes, redeemed the $500 million 4⅜% Notes and $600 million 6% Notes due 2023, and repaid part of its revolving borrowings. The remaining $1.0 billion 5¾% Notes were redeemed on July 2, 2020.
- The company acquired OSG’s remaining 75% interest for approximately $95.5 million and acquired Glenbeigh Records Management for approximately $29.1 million. It also committed to invest an additional $36.0 million in the MakeSpace joint venture, of which $7.0 million had been funded by June 30.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects organic storage rental growth for the remainder of 2020 to approximate Q2 levels and expects organic service revenue declines to improve modestly as restrictions ease. The filing does not provide a full-year revenue or EPS forecast.
- Project Summit is expected to be substantially complete by the end of 2021. Estimated total implementation costs are approximately $450 million, with approximately $240 million expected in 2020. Management estimates annual Adjusted EBITDA improvement of approximately $150 million in 2020 and $375 million exiting 2021.
- Management expects 2020 capital expenditures of approximately $525 million, excluding potential acquisitions, opportunistic real estate investments, and Project Summit capital expenditures.
- COVID-19 continues to create risks related to service volumes, customer bankruptcies and collections, labor and facility utilization, capital spending, goodwill valuations, and the duration of economic disruption. The company temporarily reduced its workforce, furloughed or reduced hours for approximately one-third of its global workforce in Q2, deferred certain capital investments, and temporarily froze future acquisitions.
- COVID-19 costs excluded from non-GAAP measures were $9.3 million in Q2 and the first half, primarily for cleaning, personal protective equipment, and legal and professional fees.
- The company estimates reasonably possible additional aggregate litigation losses of up to $6.0 million over the next several years, with some amounts potentially covered by insurance or indemnity arrangements.
- The company declared a quarterly dividend of $0.6185 per share on August 5, 2020, payable October 2, 2020, subject to board approval and legal requirements.
- A non-U.S. subsidiary terminated relationships with entities subject to U.S. sanctions and continues to hold certain property as blocked property. The company is conducting an internal investigation and cooperating with the U.S. Treasury Department’s OFAC review.
Most important facts for investors to verify
- Whether COVID-19-related service declines and elevated bad debt expense persist or improve during the remainder of 2020.
- Progress toward Project Summit’s $450 million cost estimate and projected $150 million 2020 and $375 million exiting-2021 Adjusted EBITDA benefits.
- Debt reduction, refinancing needs, covenant headroom, interest expense, and the effect of the June and July 2020 note transactions on future cash flow.
- The sustainability of the dividend relative to operating cash flow, capital expenditures, acquisitions, and leverage.
- Potential future goodwill impairments, particularly for Fine Arts and reporting units with limited valuation cushion.
- The final outcome of the OFAC matter and any related compliance, legal, financial, or reputational consequences.