Business Context and Reporting Period
Iron Mountain Incorporated filed an unaudited Form 10-Q for the quarter ended March 31, 2015. The company provides records storage, data backup media storage, information management, document management, secure destruction and related services across North America, Europe, Latin America and Asia Pacific. Iron Mountain operated as a REIT for federal income tax purposes beginning January 1, 2014.
During the quarter, the company reorganized its reporting structure into five operating segments: North American Records and Information Management, North American Data Management, Western European, Other International, and Corporate and Other.
Financial Performance and Key Metrics
| Metric | Q1 2014 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $770.1 million | $749.3 million | Down 2.7% |
| Storage rental revenue | $458.9 million | $458.9 million | Approximately flat |
| Service revenue | $311.2 million | $290.4 million | Down 6.7% |
| Operating income | $132.6 million | $144.9 million | Up 9.3% |
| Operating margin | 17.2% | 19.3% | Up 210 basis points |
| Adjusted OIBDA | $228.5 million | $231.2 million | Up 1.2% |
| Adjusted OIBDA margin | 29.7% | 30.9% | Up 120 basis points |
| Income from continuing operations | $42.7 million | $41.7 million | Down 2.3% |
| Net income attributable to Iron Mountain | $41.7 million | $41.1 million | Down 1.4% |
| Diluted EPS | $0.22 | $0.19 | Down $0.03 |
| Cash flow from operations | $55.6 million | $5.5 million | Down 90.1% |
Storage rental internal growth was 3.0%, while service revenue internal growth was negative 1.0%, producing total internal revenue growth of 1.4%. Reported revenue was reduced by approximately 4.9% from foreign currency movements. Global records management net volumes increased 3.5% year over year.
Cost of sales declined to 42.9% of revenue from 43.5%, and selling, general and administrative expense declined to 26.2% from 27.9%. The improvement included lower REIT conversion costs, restructuring costs, bad debt expense, fuel and insurance costs. Depreciation and amortization was $86.0 million, compared with $86.4 million in the prior-year quarter.
The effective tax rate was 27.6%, compared with 45.8% in Q1 2014. Interest expense increased to $64.9 million from $62.3 million, and other expense increased to $22.3 million from $5.3 million, primarily because of higher foreign currency transaction losses.
Liquidity, Cash Flow and Debt
- Cash and cash equivalents were $119.6 million at March 31, 2015, compared with $125.9 million at December 31, 2014. Cash and restricted cash totaled $139.6 million.
- Operating cash flow was $5.5 million, affected primarily by unfavorable working-capital timing, including payments of accounts payable and accrued expenses.
- Investing cash flow was negative $76.2 million, including $74.8 million of capital expenditures, $6.4 million for acquisitions and $9.2 million of additions to customer relationship and acquisition costs.
- Financing cash flow was positive $68.9 million, including net debt proceeds and $102.5 million of cash dividends paid.
- Total long-term debt was $4.72 billion, including current maturities of $54.5 million. Net long-term debt was $4.67 billion.
- Debt included $823.9 million outstanding on the revolving credit facility, $248.8 million under the term loan and $220.8 million under a new accounts receivable securitization program.
- Remaining borrowing availability under the revolving credit facility was $663.9 million. The average revolving credit facility interest rate was 2.9% and the term loan rate was 2.4% at quarter-end.
- Credit Agreement net total lease-adjusted leverage was 5.5x versus a 6.5x maximum; fixed-charge coverage was 2.4x versus a 1.5x minimum.
- Management expects 2015 capital expenditures of approximately $330 million to $360 million, including approximately $25 million of planned real estate purchases, excluding potential acquisitions and additional real estate purchases above plan.
Material Changes Versus the Prior Comparable Period
- Revenue declined because service activity continued to weaken as stored records became more archival, while foreign currency depreciation materially reduced reported international revenue.
- Storage rental revenue remained stable in reported dollars but grew internally, supported by volume increases and pricing initiatives.
- Operating income and margins improved despite lower revenue, reflecting cost reductions and the absence of approximately $8.3 million of prior-year REIT conversion costs.
- Adjusted OIBDA increased modestly, although North American Data Management, Western Europe and Other International segment margins declined.
- Operating cash flow fell sharply because of working-capital timing, despite improved earnings and lower capital expenditures.
- Debt increased from $4.66 billion at December 31, 2014 to $4.72 billion at March 31, 2015, partly reflecting the new accounts receivable securitization program.
- Accumulated other comprehensive loss increased by approximately $56.1 million, primarily from foreign currency translation losses.
- The company divested international shredding operations in Australia, Ireland and the United Kingdom in December 2014; management stated that the divestiture did not qualify for discontinued-operations presentation.
Outlook, Commentary, Risks and Unusual Items
- Management expects 2015 consolidated internal revenue growth of approximately 0% to 2%.
- Management cited sales-force initiatives, customer-retention programs and statistical-based pricing as actions intended to improve storage rental growth.
- Service revenue remains exposed to reduced retrieval and re-file activity, lower transportation activity, project volatility and recycled-paper pricing.
- The company expects to remain highly leveraged for the foreseeable future and notes that its ability to service or refinance debt depends on future operating cash flow and financing availability.
- Debt agreements restrict acquisitions, dividends, additional indebtedness, investments, asset sales and other corporate actions. Failure to comply with leverage or fixed-charge coverage covenants could materially affect liquidity.
- Foreign exchange losses were $22.3 million in Q1 2015, versus $6.4 million in Q1 2014, primarily related to intercompany balances and foreign currency contracts.
- Goodwill was $2.36 billion at March 31, 2015. An interim goodwill impairment test following the reporting-unit reorganization found no impairment, although certain goodwill allocations remained preliminary.
- Aggregate reasonably possible litigation losses in excess of recorded amounts were estimated at up to $4.0 million over the next several years, with some amounts potentially covered by insurance or indemnity arrangements.
- On April 28, 2015, the company reached an agreement in principle to acquire Recall Holdings Limited. Consideration would primarily comprise Iron Mountain shares, with an optional cash component capped at A$225 million. The transaction remained subject to definitive documentation, due diligence, regulatory approvals, court approvals and shareholder approvals.
- In April 2015, the company completed four smaller acquisitions for an aggregate purchase price of approximately $15.3 million.
- Key ongoing risks include REIT qualification, technology-driven changes in records storage, privacy and data-protection liabilities, international political and economic conditions, foreign exchange volatility, acquisition integration, capital expenditure requirements and debt costs.
Important Facts for Investors to Verify
- Whether weak service revenue and negative service internal growth persist, particularly in North American Records and Information Management and North American Data Management.
- Whether reported revenue and earnings continue to be materially affected by foreign currency movements.
- Whether operating cash flow recovers from the Q1 working-capital decline and sufficiently funds capital expenditures, dividends and debt service.
- Progress toward reducing leverage and compliance with the Credit Agreement’s leverage and fixed-charge coverage covenants.
- The final terms, financing, approvals and completion status of the proposed Recall transaction.
- The effect of the new accounts receivable securitization program on liquidity, collateral requirements and consolidated leverage.
- Whether the company’s 2015 internal revenue growth expectation of 0% to 2% and capital expenditure expectation of $330 million to $360 million remain achievable.
- Whether preliminary goodwill allocations or future operating performance create impairment risk.