Iron Mountain Incorporated 2017 Q2 Form 10-Q Summary
Business context and reporting period
Iron Mountain provides physical records and data storage, information management, secure shredding, data management and related services across North America, Europe, Latin America, Asia and Africa. The filing covers the unaudited three and six months ended June 30, 2017, compared with the corresponding 2016 periods. The company has operated as a U.S. REIT since 2014. Results include the May 2016 Recall acquisition and related integration activity.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $949.8 million; up 7.5% | $1.889 billion; up 15.6% |
| Storage rental revenue | $590.2 million; up 9.6% | $1.163 billion; up 16.3% |
| Service revenue | $359.6 million; up 4.2% | $726.2 million; up 14.4% |
| Operating income | $170.2 million; 17.9% margin | $317.9 million; 16.8% margin |
| Income from continuing operations | $83.1 million; 8.8% margin | $142.0 million; 7.5% margin |
| Net income attributable to Iron Mountain | $78.6 million; $0.30 diluted EPS | $136.8 million; $0.52 diluted EPS |
| Adjusted EBITDA | $318.1 million; 33.5% margin | $610.6 million; 32.3% margin |
| FFO (Normalized) | $144.6 million | $271.9 million |
| Operating cash flow from continuing operations | Not separately provided for the quarter | $322.0 million |
| Capital expenditures | Not separately provided for the quarter | $165.2 million cash basis |
Cash and cash equivalents were $291.0 million at June 30, 2017, compared with $236.5 million at December 31, 2016. Total debt had a carrying amount of $6.452 billion, including $423.3 million classified as current. The company had $982.9 million of maximum remaining availability under its revolving credit facility, subject to borrowing-base and leverage limitations.
At June 30, 2017, the net total lease-adjusted leverage ratio was 5.8 versus a maximum of 6.5, the net secured debt lease-adjusted leverage ratio was 2.5 versus a maximum of 4.0, and the fixed-charge coverage ratio was 2.2 versus a minimum of 1.5. The board declared a quarterly dividend of $0.5500 per share, and the second-quarter dividend was paid July 3, 2017.
Material changes versus the prior comparable period
- Second-quarter income from continuing operations increased from a $14.7 million loss to $83.1 million of income; six-month income increased 193.9% to $142.0 million.
- Adjusted EBITDA increased 21.7% in the quarter and 23.0% year to date. Adjusted EBITDA margin expanded from 29.6% to 33.5% in the quarter and from 30.4% to 32.3% year to date.
- Revenue growth was driven primarily by the Recall acquisition. Management estimated that acquisitions and divestitures contributed 5.9% of quarterly growth and 13.9% of year-to-date growth; internal revenue growth was 2.5% and 2.3%, respectively.
- Internal storage rental revenue growth was 4.8% in the quarter and 3.9% year to date. Internal service revenue declined 1.1% in the quarter and 0.4% year to date, reflecting lower retrieval, re-file and project activity as stored records become more archival.
- Selling, general and administrative expense declined 14.3% in the quarter and 1.5% year to date, partly because Recall-related costs declined. Recall Costs were $20.0 million in the quarter and $40.5 million year to date, compared with $50.4 million and $68.7 million, respectively, in 2016.
- Interest expense increased to $90.0 million in the quarter and $176.0 million year to date, reflecting higher average debt and interest rates.
- Other income included a $38.9 million gain from the May 2017 sale of the Russia and Ukraine operations. The company received a 25% equity interest in the buyer and accounts for that investment under the equity method.
- Cash flow from continuing operations increased to $322.0 million from $205.6 million. Investing cash use declined to $221.0 million from $402.6 million, while financing cash flow changed from $312.9 million of inflow to $61.6 million of outflow.
Guidance, outlook, commentary and risks
- Management expects 2017 internal storage rental revenue growth of approximately 2.5% to 3.0%.
- Expected 2017 capital expenditures, excluding potential acquisitions, opportunistic real estate investments and Recall integration capital, are approximately $320 million to $370 million.
- Total Recall acquisition and integration expenditures are estimated at approximately $380 million, with most expected by the end of 2018. Cumulative operating and capital expenditures were $255.5 million through June 30, 2017.
- Management stated that the Transformation Initiative remains on target to deliver $125 million of overhead cost reductions by the end of 2017.
- The company expects to fund near-term and long-term requirements through operating cash flow, cash on hand, borrowings, securitizations, mortgages, notes and potentially equity. Management noted that leverage is above its long-term target.
- In July 2017, the company acquired Fileminders for approximately €24.9 million. It also agreed to acquire FORTRUST, a Denver data center business, for approximately $128 million, subject to closing conditions; approximately $54.5 million was expected to be paid in cash and the remainder in unregistered shares.
- Key risks include high leverage and refinancing needs, covenant compliance, interest-rate and foreign-currency exposure, REIT qualification, integration and realization of Recall synergies, acquisition execution, technology-driven reductions in physical records, declining service activity, data security and privacy liabilities, fire-related claims, litigation, inflation and international political and economic conditions.
- The accounts receivable securitization program, with $250 million outstanding, terminates March 6, 2018, when all obligations become due. Debt agreements restrict certain acquisitions, dividends, additional borrowings, investments and asset sales.
- The filing states that disclosure controls and procedures were effective as of June 30, 2017, with no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Reconcile reported revenue growth with the substantial contribution from Recall and assess underlying internal growth, particularly the continued decline in service revenue.
- Review debt maturities, refinancing plans and covenant headroom, including the March 2018 accounts receivable securitization maturity.
- Evaluate whether operating cash flow can support dividends, capital expenditures, Recall integration spending and planned acquisitions while reducing leverage.
- Separate recurring operating performance from the $38.9 million Russia and Ukraine divestment gain, the $4.2 million customer termination fee and other non-GAAP adjustments.
- Monitor the remaining Recall integration liability and total expected expenditures, as well as the timing and quality of projected cost savings.
- Verify completion, funding and dilution implications of the planned FORTRUST acquisition and the financial impact of the Fileminders acquisition.
- Assess exposure to currency movements, foreign operations, data security incidents, fires, customer claims and other contingencies; management estimated reasonably possible additional aggregate litigation losses of up to $18 million over several years, subject to insurance or indemnification.