Iron Mountain Incorporated — Form 10-Q Summary
Business context and reporting period
Iron Mountain provides records and information management, storage rental, data protection, secure destruction, document management and related services across North America, Europe, Latin America and Asia Pacific. The filing covers the three and six months ended June 30, 2015. The company operated as a REIT beginning January 1, 2014 and reorganized its reportable segments into North American Records and Information Management, North American Data Management, Western European, Other International, and Corporate and Other.
Unless otherwise indicated, amounts are in thousands. The financial statements are unaudited.
Key financial metrics
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Total revenue | $759.7 million | $786.9 million | $1.509 billion | $1.557 billion |
| Operating income | $129.5 million | $147.3 million | $274.4 million | $279.9 million |
| Operating margin | 17.0% | 18.7% | 18.2% | 18.0% |
| Adjusted OIBDA | $223.2 million | $241.8 million | $454.4 million | $470.4 million |
| Adjusted OIBDA margin | 29.4% | 30.7% | 30.1% | 30.2% |
| Net income attributable to Iron Mountain | $53.3 million | $271.6 million | $94.4 million | $313.3 million |
| Diluted EPS from continuing operations | $0.25 | $1.41 | $0.45 | $1.63 |
| Cash flow from operations | Not separately provided | Not separately provided | $179.7 million | $195.6 million |
Storage rental revenue was $461.2 million in the second quarter and $920.1 million year to date. Service revenue was $298.5 million in the second quarter and $588.9 million year to date. Reported revenue declined primarily because of unfavorable foreign-exchange translation; constant-currency revenue growth was 2.2% in both the quarter and first six months.
At June 30, 2015, cash and cash equivalents were $117.1 million, compared with $125.9 million at December 31, 2014. Total assets were $6.423 billion and total equity was $722.2 million. Long-term debt, including current maturities, totaled $4.789 billion, with $70.2 million classified as current. The company had $631.4 million of remaining availability under its revolving credit facility and $33.8 million of outstanding letters of credit.
Material changes versus the prior comparable period
- Second-quarter revenue decreased 3.5%; first-half revenue decreased 3.1%. Foreign-currency movements reduced reported consolidated revenue growth by approximately 5.7% in the quarter and 5.3% year to date.
- Internal revenue growth was 1.6% in the quarter and 1.5% year to date. Storage rental internal growth was 2.7% and 2.9%, respectively, while service internal growth was flat in the quarter and negative 0.5% year to date.
- Operating income fell 12.1% in the quarter but declined only 2.0% year to date. Adjusted OIBDA decreased 7.7% in the quarter and 3.4% year to date.
- Service activity remained pressured by lower retrieval and refiling activity and the increasingly archival nature of stored data. North American Data Management’s first-half Adjusted OIBDA margin declined to 51.8% from 58.7%, primarily due to higher overhead and lower service revenue.
- Net income and EPS declined sharply because the 2014 periods included substantial REIT-conversion tax benefits: $230.1 million in the second quarter and $212.2 million for the first six months. The 2014 first-half period also included a $7.5 million after-tax gain on the sale of real estate.
- First-half operating cash flow declined 8.1% to $179.7 million, primarily because of unfavorable working-capital timing.
- The company completed six acquisitions for approximately $18.4 million during the first six months of 2015 and entered into a $250 million accounts receivable securitization program, of which $217.5 million was outstanding at June 30.
- Parent cash dividends paid during the first six months increased to $203.2 million from $104.9 million in the prior-year period; the declared quarterly dividend was $0.475 per share.
Guidance, outlook, commentary and unusual items
- Management expected 2015 consolidated revenue internal growth of approximately 0% to 2% and 2015 capital expenditures of approximately $330 million to $360 million, including approximately $25 million of planned real-estate purchases.
- Management cited stable storage rental growth, sales-force and customer-retention initiatives, and data-driven pricing enhancements. Other International markets continued to produce strong internal growth, while developed-market service activity remained weaker.
- On June 8, 2015, Iron Mountain agreed to acquire Recall Holdings. Assuming the maximum cash-election scenario, consideration was expected to include approximately 51 million Iron Mountain shares and approximately $335 million of cash. The transaction was expected to close in the first half of 2016, subject to shareholder, regulatory, court, listing and other conditions. Total transaction cost, including cash consideration and repayment of Recall debt but excluding integration costs, was estimated at approximately $1.0 billion.
- The Recall transaction could require additional debt financing and would increase leverage, dilution, integration risk and foreign-exchange exposure. Certain termination circumstances could require reimbursement fees of A$25.5 million or, for specified antitrust failures, A$76.5 million.
- On July 2, 2015, after quarter-end, the company refinanced its existing credit agreement with a new $1.5 billion revolving facility and a $250 million term loan. A debt-extinguishment charge of approximately $2.3 million was expected in the third quarter.
- The company implemented an overhead optimization plan in the third quarter of 2015, expected to generate approximately $50 million of annual savings in 2016 and produce an approximately $10 million third-quarter charge, primarily for severance.
- Key risks include high leverage, debt refinancing and covenant compliance, interest-rate and currency exposure, REIT qualification, technology substitution for paper storage, privacy and information-security liabilities, acquisition integration, litigation, customer demand, inflation and the ability to sustain dividends.
- Debt covenants remained within limits at June 30, 2015, but leverage increased: net total lease-adjusted leverage was 5.7x versus a 6.5x maximum, and fixed-charge coverage was 2.3x versus a 1.5x minimum. Management stated that covenant noncompliance could materially affect liquidity and financial condition.
- Aggregate reasonably possible litigation losses beyond recorded accruals were estimated at up to $10 million over the next several years, subject to insurance or indemnification. Management did not expect the Italy or Argentina facility fires to have a material consolidated impact.
Most important facts an investor should verify
- Whether the Recall acquisition closed on the disclosed terms, including final cash consideration, shares issued, financing and integration costs.
- Post-refinancing debt balances, interest expense, leverage ratios and remaining borrowing capacity.
- Whether revenue internal growth remains within the 0%–2% 2015 expectation, particularly storage rental growth versus declining service activity.
- Execution of the overhead optimization plan and whether the projected $50 million of 2016 savings materialize without impairing growth or service quality.
- Cash-flow coverage of dividends, capital expenditures, acquisitions and Recall-related funding requirements.
- Continued qualification as a REIT and the impact of foreign exchange, tax audits and changes in the mix of REIT and taxable REIT subsidiary earnings.
- Goodwill and intangible-asset valuation following the 2015 segment reorganization and any subsequent acquisition integration.