Iron Mountain Incorporated — Q2 2018 Form 10-Q Summary
Business context and reporting period
Iron Mountain provides physical records storage, data backup media storage, information management, document services, colocation and wholesale data center space, and related technology solutions. The filing covers the three and six months ended June 30, 2018; financial statements are unaudited. Iron Mountain operates as a U.S. real estate investment trust and reports six operating segments, including its Global Data Center Business.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $1.061 billion, up 11.7% | $2.103 billion, up 11.4% |
| Operating income | $203.4 million, up 19.5% | $367.9 million, up 15.7% |
| Income from continuing operations | $93.9 million, up 12.9% | $139.5 million, down 1.7% |
| Net income attributable to Iron Mountain | $93.4 million, up 18.8% | $138.1 million, up 1.0% |
| Diluted EPS from continuing operations | $0.33 | $0.49 |
| Adjusted EBITDA | $369.5 million, up 16.2% | $712.5 million, up 16.7% |
| Adjusted EBITDA margin | 34.8%, versus 33.5% | 33.9%, versus 32.3% |
| Operating cash flow from continuing operations | Not separately provided for the quarter | $393.8 million, versus $322.0 million |
Six-month revenue growth reflected acquisitions and divestitures, which contributed approximately 6.1 percentage points, favorable foreign currency movements of approximately 2.0 percentage points, and 3.3% consolidated internal growth. Storage rental revenue increased 12.4% and service revenue increased 9.7%.
As of June 30, 2018, cash and cash equivalents were $188.2 million, down from $925.7 million at December 31, 2017. Total debt was $8.177 billion, with a carrying amount of $8.086 billion, compared with total debt of $7.130 billion and a carrying amount of $7.043 billion at year-end. Current debt was $123.8 million, and $866.8 million remained available under the revolving credit facility.
Material changes versus the prior comparable period
- Revenue and operating income increased in both the quarter and year-to-date period, while six-month income from continuing operations declined modestly because of higher interest expense, depreciation and amortization, and other expense.
- Adjusted EBITDA increased substantially, supported by acquisitions, Recall-related synergies, cost management, and lower acquisition-related costs.
- The Global Data Center Business expanded materially following the acquisition of IO Data Centers on January 10, 2018, the Credit Suisse data centers on March 8, 2018, and EvoSwitch on May 25, 2018. Six-month Global Data Center revenue rose to $101.5 million from $16.6 million.
- Cash paid for acquisitions was $1.667 billion in the first six months of 2018, versus $38.2 million in the prior-year period. Capital expenditures increased to $217.6 million from $165.2 million.
- Interest expense increased to $199.7 million from $176.0 million for the first six months, primarily due to higher borrowings.
- Foreign currency translation produced a $105.7 million reduction in other comprehensive income for the first six months, compared with a $58.3 million benefit in the prior-year period.
- The company adopted ASC 606 using the modified retrospective method, reducing opening stockholders’ equity by $30.2 million. The adoption increased 2018 Adjusted EBITDA by approximately $8.0 million in the quarter and $12.0 million year to date.
Guidance, outlook, risks and unusual items
- Management expects 2018 internal storage rental revenue growth of approximately 3.0% to 3.5%.
- Expected 2018 capital expenditures are approximately $155 million to $165 million for maintenance and non-data-center investment, $200 million for the data center business, and $75 million for real estate investment, net of sales, and innovation.
- Management expects total Recall integration and IODC acquisition-related expenditures of approximately $395 million, with the majority expected by year-end 2018. Cumulative operating and capital expenditures through June 30, 2018 were $350.4 million.
- Management expects to reduce leverage over time through capital allocation and business growth, but stated that the company is operating above its long-term targeted leverage ratio. The June 30 net total lease-adjusted leverage ratio was 5.6 versus a maximum covenant level of 6.5; fixed charge coverage was 2.3 versus a minimum of 1.5.
- Risk factors include substantial leverage and refinancing requirements, restrictive debt covenants, acquisition integration, data security and privacy obligations, service interruptions and power costs in data centers, foreign currency volatility, changing customer technology preferences, REIT qualification, inflation, litigation, and the ability to fund dividends and capital expenditures.
- Contingencies include ordinary-course litigation and other claims. Management estimates reasonably possible additional aggregate losses of up to $17.2 million over several years, with some amounts potentially covered by insurance or indemnification.
- Access CIG disputed its obligation to pay up to $25.0 million of contingent consideration related to a prior divestiture and asserted unspecified indemnification claims. Iron Mountain is evaluating and expects to contest certain claims.
- The company entered into a $700 million Term Loan B, amended its revolving credit agreement, extended the credit agreement maturity to June 4, 2023, and increased its Australian dollar term loan. Interest-rate swaps with a $350 million notional amount were entered into to hedge part of the floating-rate exposure.
Most important facts for investors to verify
- Whether acquisition-driven data center growth produces the expected organic revenue, utilization and margin improvements.
- The pace of deleveraging and compliance with leverage, fixed-charge coverage and other debt covenants.
- Actual 2018 capital expenditures, acquisition and Recall integration costs, and resulting free cash flow after dividends.
- The sustainability of the 3.0% to 3.5% internal storage rental growth outlook amid flat or declining North American volumes and archival trends in data management services.
- The impact of foreign exchange movements, rising interest rates, tax reform, ASC 606 and future lease accounting on reported results and cash flows.
- The resolution and recoverability of the Access contingent consideration and related indemnification claims.