IRON MOUNTAIN INCORPORATED The following discussion and analysis of our financial condition and results of operations for the three and six months endedJune 30, 2020 should be read in conjunction with our Condensed Consolidated Financial Statements and Notes thereto for the three and six months endedJune 30, 2020 , included herein, and our Consolidated Financial Statements and Notes thereto for the year endedDecember 31, 2019 , included in our Annual Report on Form 10-K filed with theUnited States Securities and Exchange Commission ("SEC") onFebruary 13, 2020 (our "Annual Report"). FORWARD-LOOKING STATEMENTS We have made statements in this Quarterly Report on Form 10-Q (this "Quarterly Report") that constitute "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements concern our operations, economic performance, financial condition, goals, beliefs, future growth strategies, investment objectives, plans and current expectations, such as our (1) commitment to future dividend payments, (2) expected change in volume of records stored with us, (3) expectations that profits will increase in our growth portfolio, including our higher-growth markets, and that our growth portfolio will become a larger part of our business over time, (4) expectations related to our revenue management programs and continuous improvement initiatives, (5) expectations related to our leverage ratio and capital requirements, (6) expected ability to identify and complete acquisitions and drive returns on invested capital, (7) anticipated capital expenditures, (8) expectations and assumptions regarding the possible impact from the COVID-19 (as defined below) pandemic on us and our customers, including on our businesses, financial position, results of operations and cash flows and the goodwill associated with our reporting units, (9) expected benefits, costs and actions related to, and timing of, Project Summit (as defined and discussed below) and (10) statements regarding the durability of our core storage business. These forward-looking statements are subject to various known and unknown risks, uncertainties and other factors. When we use words such as "believes," "expects," "anticipates," "estimates" or similar expressions, we are making forward-looking statements. Although we believe that our forward-looking statements are based on reasonable assumptions, our expected results may not be achieved, and actual results may differ materially from our expectations. In addition, important factors that could cause actual results to differ from expectations include, among others:
• the severity and duration of the COVID-19 pandemic and its effects on
the global economy, including its effects on us, the markets we serve
and our customers and the third parties with whom we do business within
those markets;
• our ability to remain qualified for taxation as a real estate investment
trust for
• the adoption of alternative technologies and shifts by our customers to
storage of data through non-paper based technologies;
• changes in customer preferences and demand for our storage and
information management services;
• our ability or inability to execute our strategic growth plan, expand
internationally, complete acquisitions on satisfactory terms, and to
integrate acquired companies efficiently;
• changes in the amount of our growth and maintenance capital expenditures
and our ability to raise capital and invest according to plan;
• our ability to execute on Project Summit and the potential impacts of
Project Summit on our ability to retain and recruit employees and
execute on our strategy;
• the cost and our ability to comply with laws, regulations and customer
demands relating to data security and privacy issues, as well as fire
and safety standards;
• the impact of litigation or disputes that may arise in connection with
incidents in which we fail to protect our customers' information or our
internal records or information technology ("IT") systems and the impact
of such incidents on our reputation and ability to compete;
• changes in the price for our storage and information management services
relative to the cost of providing such storage and information
management services;
• changes in the political and economic environments in the countries in
which our international subsidiaries operate and changes in the global
political climate;
• the impact of executing on our growth strategy through joint ventures;
• our ability to comply with our existing debt obligations and
restrictions in our debt instruments or to obtain additional financing
to meet our working capital needs;
• the impact of service interruptions or equipment damage and the cost of
power on our data center operations;
• changes in the cost of our debt;
• the impact of alternative, more attractive investments on dividends;
• the cost or potential liabilities associated with real estate necessary
for our business;
42--------------------------------------------------------------------------------
Table of Contents
• the performance of business partners upon whom we depend for technical
assistance or management expertise; and
• other trends in competitive or economic conditions affecting ourfinancial condition or results of operations not presently contemplated.
Additional risks and facts that may affect us, including as a result of the COVID-19 pandemic, are set forth in our filings with theSEC , including under "Item 1A. Risk Factors" in our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 filed with theSEC onMay 7, 2020 (the "March 31, 2020 Quarterly Report") and our Annual Report. You should not rely upon forward-looking statements except as statements of our present intentions and of our present expectations, which may or may not occur. You should read these cautionary statements as being applicable to all forward-looking statements wherever they appear. Except as required by law, we undertake no obligation to release publicly the result of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events or otherwise. Readers are also urged to carefully review and consider the various disclosures we have made in this Quarterly Report, as well as our other periodic reports filed with theSEC including under "Risk Factors" in theMarch 31, 2020 Quarterly Report and in our Annual Report.
Overview
The following discussions set forth, for the periods indicated, management's discussion and analysis of financial condition and results of operations. Significant trends and changes are discussed for the three and six months endedJune 30, 2020 within each section.
COVID-19
InDecember 2019 , a novel strain of coronavirus ("COVID-19") was reported to have surfaced inWuhan, China . InJanuary 2020 , COVID-19 spread to other countries, includingthe United States , and theWorld Health Organization subsequently declared COVID-19 a pandemic. This resulted inU.S. federal, state and local and foreign governments and private entities mandating various restrictions, including travel restrictions, restrictions on public gatherings, stay-at-home orders and advisories and the quarantining of peoplewho may have been exposed to the virus ("Mandated Restrictions"). In response, we temporarily closed certain of our offices and facilities across the world and implemented certain travel restrictions for our employees. While we have since reopened the majority of the offices and facilities that had been temporarily closed, Mandated Restrictions in certain locations and certain travel restrictions we have imposed for employees remain in place, which continue to disrupt how we operate our business. The preventative and protective actions that governments have ordered, or we have implemented as an organization, have resulted in a period of reduced operations and business disruption for us, our customers and other third parties with which we do business. The effects of the pandemic, including the effects on the economy and the preventative and protective actions taken to date, have included, but are not limited to: (i) declines in our service revenues; (ii) higher operating costs and reduced leverage associated with labor, vehicle and facility costs for service operations that are not being fully utilized, and (iii) limited delays in cash collections and increased bad debt expense due to bankruptcy of, and increased collectability risk from, some of our customers. We have not made any adjustments for these impacts in our reported results or in calculating our various non-GAAP measures (as described below). We have also incurred other costs due to the COVID-19 pandemic which are direct, incremental and not expected to recur once the pandemic ends, primarily associated with the purchase of personal protective equipment for our employees, increased cleaning costs and legal and professional fees. We have excluded these costs in calculating our various non-GAAP measures. The broader impacts of the COVID-19 pandemic on our financial position, results of operations and cash flows remain uncertain and difficult to predict as information continues to rapidly evolve, and the severity and duration of the pandemic remains unknown, as is our visibility to its effect on the markets we serve and our customers within those markets. Project Summit InOctober 2019 , we announced our global program designed to better position us for future growth and achievement of our strategic objectives ("Project Summit"). Project Summit focuses on simplifying our global structure by combining our core records and information management operations under one global leader and rebalancing our resources, streamlining managerial structures and leveraging our global and regional customer facing resources. As part of Project Summit, we are also implementing systems and process changes designed to make our organization more agile and dynamic, streamline our organization and reallocate our resources to better align with our strategic goals. Since Project Summit was announced, we have identified additional opportunities to streamline our business and operations, as well as accelerated the timing of certain opportunities previously identified. Such opportunities include leveraging new technology solutions to enable us to modernize our service delivery model and more efficiently utilize our fleet, labor and real estate, which has broadened the initial scope of Project Summit. 43
--------------------------------------------------------------------------------
Table of Contents
The activities associated with Project Summit began in the fourth quarter of 2019 and are expected to be substantially complete by the end of 2021. We expect the total program benefits associated with Project Summit to be fully realized exiting 2021. Including the expanded scope of Project Summit described above, we estimate that Project Summit will improve annual Adjusted EBITDA (as defined below) by approximately$375.0 million exiting 2021, an increase from our original estimate of$200.0 million . In addition, we expect Project Summit to improve annual Adjusted EBITDA by approximately$150.0 million in 2020, an increase from our original estimate of$80.0 million . We will continue to evaluate our overall operating model, as well as various opportunities and initiatives, including those associated with real estate consolidation, system implementation and process changes, which could result in the identification and implementation of additional actions associated with Project Summit and incremental costs and benefits. Including the expanded scope of Project Summit described above, we estimate that the implementation of Project Summit will result in total costs of approximately$450.0 million , a$210.0 million increase from our original estimate of$240.0 million , of which we expect to incur$240.0 million in 2020. These costs include (1) operating expenditures ("Restructuring Charges") that primarily consist of: (i) employee severance costs; (ii) internal costs associated with the development and implementation of Project Summit initiatives; (iii) professional fees, primarily related to third party consultantswho are assisting with the design and execution of various initiatives as well as project management activities and (iv) system implementation and data conversion costs, and (2) capital expenditures. The following table presents (in thousands) the total costs related to Project Summit, comprised of Restructuring Charges (primarily related to employee severance costs, internal costs associated with the development and implementation of Project Summit initiatives and professional fees) and capital expenditures for both the three and six months endedJune 30, 2020 and from the inception of Project Summit throughJune 30, 2020 . From the inception of For the Three Months For the Six Months Ended Project Summit through Ended June 30, 2020 June 30, 2020 June 30, 2020 Restructuring Charges $ 39,298 $ 80,344 $ 128,941 Capital Expenditures associated with Project Summit 827 2,105 2,105 Total $ 40,125 $ 82,449 $ 131,046
See Note 10 to Notes to Condensed Consolidated Financial Statements included in this Quarterly Report for more information on the Restructuring Charges.
During the fourth quarter of 2019, as a result of the realignment of our global
managerial structure and changes to our internal financial reporting associated
with Project Summit, we reassessed the composition of our reportable operating
segments and reporting units, as discussed in Note 2.h. to Notes to Consolidated
Financial Statements included in our Annual Report. As a result of the
managerial structure changes associated with Project Summit, we have the
following reportable operating segments: (i) Global Records and Information
Management ("Global RIM") Business (which consists of our former North American
Records and Information Management Business (excluding our technology escrow
services business, which is included as a component of our Corporate and Other
Business), North American Data Management Business, Western European Business
and Other International Business segments); (ii) Global Data Center Business;
and (iii) Corporate and Other Business (which includes our Adjacent Businesses
and our technology escrow services business). As a result of these changes,
previously reported segment information has been restated to conform to the
current presentation.
44--------------------------------------------------------------------------------
Table of Contents
Change in Presentation
We have historically classified our significant acquisition costs which represent operating expenditures associated with (1) the acquisition ofRecall Holdings Limited ("Recall") that we completed onMay 2, 2016 (the "Recall Transaction"), including: (i) advisory and professional fees to complete the Recall Transaction; (ii) costs associated with the divestments required in connection with receipt of regulatory approvals (including transitional services); and (iii) costs to integrate Recall with our existing operations, including moving, severance, facility upgrade, REIT integration and system upgrade costs, as well as certain costs associated with our shared service center initiative for our finance, human resources and information technology functions; and (2) the advisory and professional fees to complete the acquisition ofIO Data Centers, LLC ("IODC") (collectively, "Significant Acquisition Costs"), as components of Selling, general and administrative expenses and Cost of sales. Beginning in the fourth quarter of 2019, we present Significant Acquisition Costs as its own line item within Operating Expenses in our Condensed Consolidated Statements of Operations. The prior periods have been confirmed to this presentation. There were no Significant Acquisition Costs for the three and six months endedJune 30, 2020 as all of the costs associated with the Recall Transaction and IODC were incurred as ofDecember 31, 2019 . Significant Acquisition Costs for the three and six months endedJune 30, 2019 were approximately$1.9 million and$4.6 million , respectively. General Our revenues consist of storage rental revenues as well as service revenues and are reflected net of sales and value added taxes. Storage rental revenues, which are considered a key driver of financial performance for the storage and information management services industry, primarily consist of recurring periodic rental charges related to the storage of materials or data (generally on a per unit basis) that are typically retained by customers for many years, technology escrow services that protect and manage source code and revenues associated with our data center operations. Service revenues include charges for related service activities, the most significant of which include: (1) the handling of records, including the addition of new records, temporary removal of records from storage, refiling of removed records and courier operations, consisting primarily of the pickup and delivery of records upon customer request; (2) destruction services, consisting primarily of secure shredding of sensitive documents and the related sale of recycled paper, the price of which can fluctuate from period to period, and customer termination and permanent removal fees; (3) other services, including the scanning, imaging and document conversion services of active and inactive records and project revenues; and (4) consulting services. Our service revenue growth has been negatively impacted by declining activity rates as stored records are becoming less active. While customers continue to store their records and tapes with us, they are less likely than they have been in the past to retrieve records for research and other purposes, thereby reducing service activity levels. Cost of sales (excluding depreciation and amortization) primarily consists of wages and benefits for field personnel, facility occupancy costs (including rent and utilities), transportation expenses (including vehicle leases and fuel), other product cost of sales and other equipment costs and supplies. Of these, wages and benefits and facility occupancy costs are the most significant. Selling, general and administrative expenses consist primarily of wages and benefits for management, administrative, IT, sales, account management and marketing personnel, as well as expenses related to communications and data processing, travel, professional fees, bad debts, training, office equipment and supplies. Trends in facility occupancy costs are impacted by the total number of facilities we occupy, the mix of properties we own versus properties we occupy under leases, fluctuations in per square foot occupancy costs, and the levels of utilization of these properties. Trends in total wages and benefits in dollars and as a percentage of total consolidated revenue are influenced by changes in headcount and compensation levels, achievement of incentive compensation targets, workforce productivity and variability in costs associated with medical insurance and workers' compensation. The expansion of our international businesses has impacted the major cost of sales components and selling, general and administrative expenses. Our international operations are more labor intensive relative to revenue than our operations inNorth America and, therefore, labor costs are a higher percentage of international segment revenue. In addition, the overhead structure of our expanding international operations has generally not achieved the same level of overhead leverage as our North American operations, which may result in an increase in selling, general and administrative expenses as a percentage of consolidated revenue as our international operations become a larger percentage of our consolidated results. 45
--------------------------------------------------------------------------------
Table of Contents
Our consolidated revenues and expenses are subject to the net effect of foreign currency translation related to our operations outsidethe United States . It is difficult to predict the future fluctuations of foreign currency exchange rates and how those fluctuations will impact our Consolidated Statements of Operations. As a result of the relative size of our international operations, these fluctuations may be material on individual balances. Our revenues and expenses from our international operations are generally denominated in the local currency of the country in which they are derived or incurred. Therefore, the impact of currency fluctuations on our operating income and operating margin is partially mitigated. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, we compare the percentage change in the results from one period to another period in this report using constant currency presentation. The constant currency growth rates are calculated by translating the 2019 results at the 2020 average exchange rates. Constant currency growth rates are a non-GAAP measure. The following table is a comparison of underlying average exchange rates of the foreign currencies that had the most significant impact on ourUnited States dollar-reported revenues and expenses: Percentage of United States Dollar-Reported Average Exchange Revenue for the Rates for the Percentage Three Months Ended Three Months Ended Strengthening / June 30, June 30, (Weakening) of 2020 2019 2020 2019 Foreign Currency Australian dollar 3.2 % 3.4 %$ 0.657 $ 0.700 (6.1 )% Brazilian real 1.8 % 2.6 %$ 0.186 $ 0.255 (27.1 )% Britishpound sterling 5.6 % 6.4 %$ 1.241 $ 1.285 (3.4 )% Canadian dollar 5.3 % 5.7 %$ 0.721 $ 0.748 (3.6 )% Euro 7.4 % 7.5 %$ 1.101 $ 1.124 (2.0 )% Percentage of United States Dollar-Reported Average Exchange Revenue for the Rates for the Percentage Six Months Ended Six Months Ended Strengthening / June 30, June 30, (Weakening) of 2020 2019 2020 2019 Foreign Currency Australian dollar 3.1 % 3.4 %$ 0.657 $ 0.706 (6.9 )% Brazilian real 2.0 % 2.6 %$ 0.206 $ 0.260 (20.8 )% Britishpound sterling 5.9 % 6.5 %$ 1.261 $ 1.294 (2.6 )% Canadian dollar 5.4 % 5.7 %$ 0.734 $ 0.750 (2.1 )% Euro 7.3 % 7.5 %$ 1.102 $ 1.130 (2.5 )% The percentage ofUnited States dollar-reported revenues for all other foreign currencies was 13.6% and 13.8% for the three and six months endedJune 30, 2020 , respectively, and 12.6% and 12.7% for the three and six months endedJune 30, 2019 , respectively. 46
--------------------------------------------------------------------------------
Table of Contents Non-GAAP Measures Adjusted EBITDA Adjusted EBITDA is defined as (loss) income from continuing operations before interest expense, net, provision (benefit) for income taxes, depreciation and amortization, and also excludes certain items that we believe are not indicative of our core operating results, specifically: (1) (gain) loss on disposal/write-down of property, plant and equipment, net (including real estate); (2) intangible impairments; (3) other expense (income), net (which includes foreign currency transaction (gains) losses, net, and debt extinguishment expense); (4) Significant Acquisition Costs; (5) Restructuring Charges; and (6) COVID-19 Costs (as defined below). Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by total revenues. We use multiples of current or projected Adjusted EBITDA in conjunction with our discounted cash flow models to determine our estimated overall enterprise valuation and to evaluate acquisition targets. We believe Adjusted EBITDA and Adjusted EBITDA Margin provide our current and potential investors with relevant and useful information regarding our ability to generate cash flows to support business investment. These measures are an integral part of the internal reporting system we use to assess and evaluate the operating performance of our business. Adjusted EBITDA excludes both interest expense, net and the provision (benefit) for income taxes. These expenses are associated with our capitalization and tax structures, which we do not consider when evaluating the operating profitability of our core operations. Finally, Adjusted EBITDA does not include depreciation and amortization expenses, in order to eliminate the impact of capital investments, which we evaluate by comparing capital expenditures to incremental revenue generated and as a percentage of total revenues. Adjusted EBITDA and Adjusted EBITDA Margin should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with accounting principles generally accepted inthe United States of America ("GAAP"), such as operating income, (loss) income from continuing operations, net (loss) income or cash flows from operating activities from continuing operations (as determined in accordance with GAAP). Reconciliation of (Loss) Income from Continuing Operations to Adjusted EBITDA (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 (Loss) Income from Continuing Operations$ (7,113 ) $ 92,347 $ 57,779 $ 122,823 Add/(Deduct): Provision (Benefit) for Income Taxes 9,683 10,646 19,370 21,199 Other Expense (Income), Net 25,700 (15,192 ) (17,026 ) 18 Interest Expense, Net 103,456 105,314 209,105 207,750 (Gain) Loss on disposal/write-down of property, plant and equipment, net (1,275 ) (8,405 ) (2,330 ) (7,803 ) Depreciation and amortization 163,850 164,331 326,434 326,814 Significant Acquisition Costs - 1,901 - 4,647 Restructuring Charges 39,298 - 80,344 - COVID-19 Costs(1) 9,285 - 9,285 - Intangible impairments - - 23,000 - Adjusted EBITDA$ 342,884 $ 350,942 $ 705,961 $ 675,448
_______________________________________________________________
(1) Costs that are incremental and directly attributable to the COVID-19
pandemic which are not expected to recur once the pandemic ends ("COVID-19
Costs"). For the three and six months ended
$7.6 million and$1.6 million of COVID-19 Costs are included within in Cost of sales and Selling, general and administrative expenses, respectively, on our Condensed Consolidated Statements of Operations. These costs primarily consist of incremental cleaning costs, the purchase of personal protective equipment for our employees and legal and professional fees. 47
--------------------------------------------------------------------------------
Table of Contents
Adjusted EPS
Adjusted EPS is defined as reported earnings per share fully diluted from continuing operations excluding: (1) (gain) loss on disposal/write-down of property, plant and equipment, net (including real estate); (2) intangible impairments; (3) other expense (income), net (which includes foreign currency transaction (gains) losses, net, and debt extinguishment expense); (4) Significant Acquisition Costs; (5) Restructuring Charges; (6) COVID-19 Costs; and (7) the tax impact of reconciling items and discrete tax items. Adjusted EPS includes income (loss) attributable to noncontrolling interests. We do not believe these excluded items to be indicative of our ongoing operating results, and they are not considered when we are forecasting our future results. We believe Adjusted EPS is of value to our current and potential investors when comparing our results from past, present and future periods.
Reconciliation of Reported EPS-Fully Diluted from Continuing Operations to Adjusted EPS-Fully Diluted from Continuing Operations:
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Reported EPS-Fully Diluted from Continuing
Operations $ (0.02 ) $ 0.32 $ 0.20 $ 0.42
Add/(Deduct):
Income (Loss) Attributable to Noncontrolling
Interests - - - -
Other Expense (Income), Net 0.09 (0.05 ) (0.06 ) -
(Gain) Loss on disposal/write-down of property,
plant and equipment, net - (0.03 ) (0.01 ) (0.03 )
Significant Acquisition Costs - 0.01 - 0.02
Restructuring Charges 0.14 - 0.28 -
COVID-19 Costs 0.03 - 0.03 -
Intangible impairments - - 0.08 -
Tax Impact of Reconciling Items and Discrete Tax
Items(1) (0.01 ) (0.01 ) (0.03 ) (0.01 )
Adjusted EPS-Fully Diluted from Continuing
Operations(2) $ 0.22 $ 0.23 _______________________________________________________________
(1) The difference between our effective tax rates and our structural tax rate
(or adjusted effective tax rates) for the three and six months ended
above, which impact our reported (loss) income from continuing operations
before provision (benefit) for income taxes but have an insignificant
impact on our reported provision (benefit) for income taxes and (ii) other
discrete tax items. Our structural tax rate for purposes of the
calculation of Adjusted EPS for the three and six months ended June 30,
2020 and 2019 was 17.1% and 17.7%, respectively.
(2) Columns may not foot due to rounding.
FFO (Nareit) and FFO (Normalized)
Funds from operations ("FFO") is defined by the National Association of Real
Estate Investment Trusts ("Nareit") and us as net (loss) income excluding
depreciation on real estate assets, gains on sale of real estate, net of tax and
amortization of data center leased-based intangibles ("FFO (Nareit)"). FFO
(Nareit) does not give effect to real estate depreciation because these amounts
are computed, under GAAP, to allocate the cost of a property over its useful
life. Because values for well-maintained real estate assets have historically
increased or decreased based upon prevailing market conditions, we believe that
FFO (Nareit) provides investors with a clearer view of our operating
performance. Our most directly comparable GAAP measure to FFO (Nareit) is net
(loss) income. Although Nareit has published a definition of FFO, modifications
to FFO (Nareit) are common among REITs as companies seek to provide financial
measures that most meaningfully reflect their particular business. Our
definition of FFO (Normalized) excludes certain items included in FFO (Nareit)
that we believe are not indicative of our core operating results, specifically:
(1) (gain) loss on disposal/write-down of property, plant and equipment
(excluding real estate), net; (2) intangible impairments; (3) other expense
(income), net (which includes foreign currency transaction (gains) losses, net,
and debt extinguishment expense); (4) real estate financing lease depreciation;
(5) Significant Acquisition Costs; (6) Restructuring Charges; (7) COVID-19
Costs; (8) the tax impact of reconciling items and discrete tax items; (9)
(income) loss from discontinued operations, net of tax; and (10) (gain) loss on
sale of discontinued operations, net of tax.
48--------------------------------------------------------------------------------
Table of Contents
Reconciliation of Net (Loss) Income to FFO (Nareit) and FFO (Normalized) (in
thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Net (Loss) Income $ (7,113 ) $ 92,475 $ 57,779 $ 122,927
Add/(Deduct):
Real Estate Depreciation(1) 75,719 74,161 152,306 147,240
Gains on Sale of Real Estate, Net of Tax (1,089 ) (30,512 ) (1,581 ) (30,512 )
Data Center Lease-Based Intangible Assets
Amortization(2) 10,379 11,372 21,732 23,981
FFO (Nareit) 77,896 147,496 230,236 263,636
Add/(Deduct):
(Gain) Loss on disposal/write-down of
property, plant and equipment (excluding real
estate), net (155 ) 27,587 (399 ) 28,189
Other Expense (Income), Net(3) 25,700 (15,192 ) (17,026 ) 18
Real Estate Financing Lease Depreciation 3,431 3,113 6,594 6,617
Significant Acquisition Costs - 1,901 - 4,647
Restructuring Charges 39,298 - 80,344 -
COVID-19 Costs 9,285 - 9,285 -
Intangible impairments - - 23,000 -
Tax Impact of Reconciling Items and Discrete
Tax Items(4) (3,241 ) (10,168 ) (10,053 ) (10,144 )
(Income) Loss from Discontinued Operations,
Net of Tax(5) - (128 ) - (104 )
FFO (Normalized) $ 152,214 $ 154,609 $ 321,981 $ 292,859 _______________________________________________________________
(1) Includes depreciation expense related to owned real estate assets (land
improvements, buildings, building improvements, leasehold improvements and
racking), excluding depreciation related to real estate financing leases.
(2) Includes amortization expense for Data Center In-Place Lease Intangible
Assets and Data Center Tenant Relationship Intangible Assets as discussed
in Note 2.i. to Notes to Consolidated Financial Statements included in our
Annual Report.
(3) Includes (i) foreign currency transaction losses (gains), net of
million and
2020, respectively, and
and six months ended
extinguishment expense of
Statements included in this Quarterly Report.
(4) Represents the tax impact of (i) the reconciling items above, which impact
our reported (loss) income from continuing operations before provision
(benefit) for income taxes but have an insignificant impact on our
reported provision (benefit) for income taxes and (ii) other discrete tax
items. Discrete tax items resulted in a (benefit) provision for income
taxes of
three and six months ended June 30, 2019 , respectively.
(5) Net of a de minimis tax benefit for the three and six months ended June
30, 2019 .
49--------------------------------------------------------------------------------
Table of Contents
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements and for the period then ended. On an ongoing basis, we evaluate the estimates used. We base our estimates on historical experience, actuarial estimates, current conditions and various other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities and are not readily apparent from other sources. Actual results may differ from these estimates. Our critical accounting policies include the following, which are listed in no particular order: • Revenue Recognition
• Accounting for Acquisitions
• Impairment of Tangible and Intangible Assets
• Income Taxes Further detail regarding our critical accounting policies can be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report, and the Consolidated Financial Statements and the Notes included therein and should be read in conjunction with the disclosure below which addresses updates in light of the COVID-19 pandemic.
Impairment of Tangible and Intangible Assets
Goodwill and other indefinite-lived intangible assets not subject to amortization:Goodwill and intangible assets with indefinite lives are not amortized but are reviewed annually for impairment, or more frequently if impairment indicators arise. Other than goodwill, we currently have no intangible assets that have indefinite lives and which are not amortized. We have selectedOctober 1 as our annual goodwill impairment review date. We performed our annual goodwill impairment review as ofOctober 1, 2019 and concluded that as ofOctober 1, 2019 goodwill was not impaired. As ofDecember 31, 2019 , no factors were identified that would alter ourOctober 1, 2019 goodwill impairment analysis. Our reporting units as ofDecember 31, 2019 are described in detail in Note 2.h. to Notes to Consolidated Financial Statements included in our Annual Report. The goodwill associated with acquisitions completed during the first six months of 2020 (which are described in Note 4 to Notes to Condensed Consolidated Financial Statements included in this Quarterly Report) has been incorporated into our reporting units as they existed as ofDecember 31, 2019 . There were no other changes to the composition of our reporting units for the six months endedJune 30, 2020 . During the first quarter of 2020, we concluded that we had a triggering event related to our Fine Arts reporting unit, requiring us to perform an interim goodwill impairment test. The primary factor contributing to our conclusion was the expected impact of the COVID-19 pandemic to this particular business and its customers and revenue sources, which caused us to believe it was more likely than not that the carrying value of our Fine Arts reporting unit exceeded its fair value. During the first quarter of 2020, we performed an interim goodwill impairment test for our Fine Arts reporting unit utilizing a discounted cash flow model, with updated assumptions on future revenues, operating expenditures and capital expenditures. As a result of the interim goodwill impairment test, we concluded that the fair value of the Fine Arts reporting unit was less than its carrying value, primarily due to near-term revenue declines that are unable to be fully mitigated by the cost reduction measures we have taken. Therefore, we recorded a$23.0 million impairment charge on the goodwill associated with this reporting unit during the first quarter of 2020. The remaining goodwill for this reporting unit subsequent to the impairment charge was approximately$15.0 million . As disclosed in our Annual Report, ourGlobal Data Center reporting unit had an estimated fair value that exceeded its carrying value by less than 20%. AtMarch 31, 2020 , we determined we did not have a triggering event requiring an interim impairment test on the goodwill associated with ourGlobal Data Center reporting unit. Additionally, we concluded that, as ofMarch 31, 2020 , we did not have a triggering event requiring an interim impairment test on the goodwill associated with our other reporting units. During the second quarter of 2020, no factors were identified that would alter our interim goodwill impairment analysis performed during the first quarter of 2020, or change the conclusions reached at that time. 50
--------------------------------------------------------------------------------
Table of Contents
Reporting unit valuations have generally been determined using a combined approach based on the present value of future cash flows (the "Discounted Cash Flow Model") and market multiples. There are inherent uncertainties and judgments involved when determining the fair value of our reporting units for purposes of our annual impairment testing or upon a triggering event. The success of each of these businesses and the achievement of certain key assumptions developed by management and used in the Discounted Cash Flow Model are contingent upon various factors, which may be impacted by the economic effects of the COVID-19 pandemic. Such factors include, but are not limited to: (i) our ability to maintain, or grow, storage rental and service revenues in line with current expectations and (ii) our ability to manage our fixed and variable costs in line with potential future revenue declines. These factors are incremental to those previously outlined in our Annual Report, which included, but were not limited to: (i) achieving growth from existing customers, (ii) sales to new customers, (iii) increased market penetration and (iv) accurately timing the capital investments related to expansions. In addition, the discount rates utilized in our valuation models could be impacted by changes in the underlying interest rates and risk premiums which could also result in future goodwill impairments. However, the duration and severity of the COVID-19 pandemic, as well as the related economic impact on both our business and the businesses of our customers, remain uncertain as of the filing of this Quarterly Report. As such, the current assumptions we used in determining the fair values of our reporting units may materially change as we gain additional visibility into the impact to our business and our customers' businesses. If our reporting units are not able to meet the assumptions we used in the Discounted Cash Flow Model, or there are any future adverse market conditions that are not currently known or are more severe than we currently expect, including relating to the COVID-19 pandemic, it could lead to a fair value that is less than the carrying value in any one of our reporting units and cause future goodwill impairments.
Recent Accounting Pronouncements
See Note 2.n. to Notes to Condensed Consolidated Financial Statements included in this Quarterly Report for a description of recently issued accounting pronouncements, including those recently adopted.
51--------------------------------------------------------------------------------
Table of Contents
Results of Operations
Comparison of the three and six months ended
Three Months Ended
June 30, Dollar Percentage
2020 2019 Change Change
Revenues $ 982,239 $ 1,066,907 $ (84,668 ) (7.9 )%
Operating Expenses 850,513 873,792 (23,279 ) (2.7 )%
Operating Income 131,726 193,115 (61,389 ) (31.8 )%
Other Expenses, Net 138,839 100,768 38,071 37.8 %
(Loss) Income from Continuing
Operations (7,113 ) 92,347 (99,460 ) (107.7 )%
Income (Loss) from Discontinued
Operations, Net of Tax - 128 (128 ) (100.0 )%
Net (Loss) Income (7,113 ) 92,475 (99,588 ) (107.7 )%
Net (Loss) Income Attributable to
Noncontrolling Interests (27 ) 34 (61 ) (179.4 )%
Net (Loss) Income Attributable to Iron
Mountain Incorporated $ (7,086 ) $ 92,441 $ (99,527 ) (107.7 )%
Adjusted EBITDA(1) $ 342,884 $ 350,942 $ (8,058 ) (2.3 )%
Adjusted EBITDA Margin(1) 34.9 % 32.9 %
Six Months Ended
June 30, Dollar Percentage
2020 2019 Change Change
Revenues $ 2,050,970 $ 2,120,770 $ (69,800 ) (3.3 )%
Operating Expenses 1,781,742 1,768,980 12,762 0.7 %
Operating Income 269,228 351,790 (82,562 ) (23.5 )%
Other Expenses, Net 211,449 228,967 (17,518 ) (7.7 )%
Income (Loss) from Continuing
Operations 57,779 122,823 (65,044 ) (53.0 )%
Income (Loss) from Discontinued
Operations, Net of Tax - 104 (104 ) (100.0 )%
Net Income (Loss) 57,779 122,927 (65,148 ) (53.0 )%
Net Income (Loss) Attributable to
Noncontrolling Interests 890 925 (35 ) (3.8 )%
Net Income (Loss) Attributable to Iron
Mountain Incorporated $ 56,889 $ 122,002 $ (65,113 ) (53.4 )%
Adjusted EBITDA(1) $ 705,961 $ 675,448 $ 30,513 4.5 %
Adjusted EBITDA Margin(1) 34.4 % 31.8 %
______________________________________________________________
(1) See "Non-GAAP Measures-Adjusted EBITDA" in this Quarterly Report for the
definitions of Adjusted EBITDA and Adjusted EBITDA Margin, a
reconciliation of Adjusted EBITDA to Income (Loss) from ContinuingOperations and a discussion of why we believe these non-GAAP measures
provide relevant and useful information to our current and potential
investors.
52--------------------------------------------------------------------------------
Table of Contents
REVENUES
Consolidated revenues consist of the following (in thousands):
Three Months Ended Percentage Change
June 30, Dollar Constant Organic
2020 2019 Change Actual Currency(1) Growth(2)
Storage Rental $ 676,956 $ 669,288 $ 7,668 1.1 % 3.7 % 2.3 %
Service 305,283 397,619 (92,336 ) (23.2 )% (21.3 )% (23.1 )%
Total Revenues $ 982,239 $ 1,066,907 $ (84,668 ) (7.9 )% (5.6 )% (7.2 )%
Six Months Ended Percentage Change
June 30, Dollar Constant Organic
2020 2019 Change Actual Currency(1) Growth(2)
Storage Rental $ 1,360,503 $ 1,332,262 $ 28,241 2.1 % 4.3 % 2.6 %
Service 690,467 788,508 (98,041 ) (12.4 )% (10.5 )% (12.8 )%
Total Revenues $ 2,050,970 $ 2,120,770 $ (69,800 ) (3.3 )% (1.2 )% (3.1 )%
________________________________________________________________
(1) Constant currency growth rates are calculated by translating the 2019
results at the 2020 average exchange rates.
(2) Our organic revenue growth rate, which is a non-GAAP measure, represents
the year-over-year growth rate of our revenues excluding the impact of
business acquisitions, divestitures and foreign currency exchange rate
fluctuations. Our organic revenue growth rate includes the impact of
acquisitions of customer relationships.
Storage Rental Revenues
In the three and six months endedJune 30, 2020 , the increase in reported consolidated storage rental revenues was driven by consolidated organic storage rental revenue growth and the favorable impact of acquisitions, partially offset by unfavorable fluctuations in foreign currency exchange rates. The impact of acquisitions contributed 1.7% to the reported storage rental revenue growth rates for the six months endedJune 30, 2020 compared to the prior year period, primarily driven by acquisitions in our Global RIM Business segment. While our core storage business remains durable in spite of the COVID-19 pandemic, we have experienced some decreases in new storage volume. Organic storage rental revenue growth of 2.6% in the six months endedJune 30, 2020 compared to the prior year period was driven by organic storage rental revenue growth of 2.0% in our Global RIM Business segment primarily driven by revenue management. Organic storage rental revenue growth in our Global Data Center Business segment was 7.2% for the six months endedJune 30, 2020 compared to the prior year period, primarily related to increased customer leasing activity. Excluding the impact of acquisitions, our Global RIM Business segment net volumes as ofJune 30, 2020 decreased by 1.1% over the ending volume as ofJune 30, 2019 . Including the impact of acquisitions, our Global RIM Business segment net volumes as ofJune 30, 2020 increased by 2.1% over the ending volume as ofJune 30, 2019 . Foreign currency exchange rate fluctuations decreased our reported storage rental revenue growth rate for the six months endedJune 30, 2020 by 2.2%, compared to the prior year period. 53
--------------------------------------------------------------------------------
Table of Contents
Service Revenues
In the three and six months endedJune 30, 2020 , the decrease in reported consolidated service revenues was driven by organic service revenue declines and unfavorable fluctuations in foreign currency exchange rates, partially offset by the favorable impact of acquisitions. Our reported consolidated service revenues during the three months endedJune 30, 2020 were significantly impacted by the COVID-19 pandemic, primarily due to decreases in our service activity, and particularly in regions where governments have imposed restrictions on non-essential business operations. In the three months endedJune 30, 2020 , organic service revenue declined 23.1% compared to the prior year period, primarily driven by organic service revenue declines of 22.0% in our Global RIM Business segment. In the six months endedJune 30, 2020 , organic service revenue declined 12.8% compared to the prior year period, primarily driven by organic service revenue declines of 12.0% in our Global RIM Business segment. The impact of acquisitions contributed 2.3% to the reported service revenue growth rates for the six months endedJune 30, 2020 , compared to the prior year period. Foreign currency exchange rate fluctuations decreased our reported service revenue growth rate for the six months endedJune 30, 2020 by 1.9%, compared to the prior year period. Total Revenues For the reasons stated above, our reported consolidated revenues decreased$84.7 million , or 7.9%, to$982.2 million and$69.8 million , or 3.3%, to$2,051.0 million for the three and six months endedJune 30, 2020 , respectively, from$1,066.9 million and$2,120.8 million for three and six months endedJune 30, 2019 , respectively. The impact of acquisitions contributed 1.9% to the reported consolidated revenue growth rate for the six months endedJune 30, 2020 compared to the prior year period. Consolidated organic revenue declined 3.1% in the six months endedJune 30, 2020 compared to the prior year period. Foreign currency exchange rate fluctuations decreased our reported consolidated revenue growth rate for the six months endedJune 30, 2020 by 2.1%, compared to the prior year period. 54
--------------------------------------------------------------------------------
Table of Contents
Organic Growth-Eight-Quarter Trend
2018 2019 2020
Third Quarter Fourth Quarter First Quarter Second Quarter Third Quarter Fourth Quarter First Quarter Second Quarter
Storage Rental Revenue 2.3 % 1.9 % 2.0 % 2.4 % 3.0 % 2.5 % 3.0 % 2.3 %
Service Revenue 7.1 % 6.1 % 1.8 % (2.0 )% (3.0 )% (0.7 )% (2.3 )% (23.1 )%
Total Revenues 4.1 % 3.5 % 1.9 % 0.7 % 0.7 % 1.3 % 1.0 % (7.2 )%
During the past eight quarters, our organic storage rental revenue growth rate
has ranged between 1.9% and 3.0%. Consolidated organic storage rental revenue
growth and consolidated total organic revenue growth were benefited by (i) 0.3%
and 0.2%, respectively, for the second quarter of 2019 related to a $1.7 million
customer lease modification fee in our Global Data Center Business segment, (ii)
0.3% and 0.2%, respectively, for the third quarter of 2019 related to a $1.7
million customer lease modification fee in our Global Data Center Business
segment and (iii) 0.3% and 0.2%, respectively, for the fourth quarter of 2019
related to a $2.0 million customer lease modification fee in our Global Data
Center Business segment. Our organic storage rental revenue growth rates have
increased over the past two fiscal years, as organic storage rental revenue
growth for full year 2018 and 2019 was 2.4% and 2.5%, respectively. At various
points in the economic cycle, organic storage rental revenue growth may be
influenced by changes in pricing and volume. In 2018 and 2019, we experienced
relatively steady net volume in our Global RIM Business segment, with organic
storage rental revenue growth coming primarily from revenue management. While
our core storage business remains durable in spite of the COVID-19 pandemic, we
have experienced some decreases in new storage volume. The impact that the
pandemic will have on our future organic storage rental revenue growth remains
uncertain and will be dependent on the severity and duration of the COVID-19
pandemic. For the remainder of 2020 we expect organic storage rental revenue
growth to approach the same levels we experienced in the second quarter of 2020.
The organic growth rate for service revenue is inherently more volatile than the
organic growth rate for storage rental revenues due to the more discretionary
nature of certain services we offer, such as large special projects, and, as a
commodity, the volatility of pricing for recycled paper. These revenues, which
are often event-driven and impacted to a greater extent by economic downturns as
customers defer or cancel the purchase of certain services as a way to reduce
their short-term costs, may be difficult to replicate in future periods. The
organic growth rate for total service revenues over the past eight quarters
reflects reduced retrieval/re-file activity and a related decrease in
transportation revenues within our Global RIM Business segment. The increases in
organic service revenue growth rates of 7.1% and 6.1% in the third and fourth
quarters of 2018 reflect a strong contribution from our secure shredding
business, which benefited from higher recycled paper prices, higher destruction
activity and acquisitions of customer relationships. Organic service revenue
growth declined to 1.8%, negative 2.0%, negative 3.0% and negative 0.7% for the
first, second, third and fourth quarters of 2019, respectively, reflecting
declining recycled paper prices and moderation of destruction activity compared
to previous quarters. Organic service revenue growth declined to negative 2.3%
in the first quarter of 2020, reflecting continued weakness in recycled paper
prices and to a lesser extent, recycled paper volume decline. In the second
quarter of 2020, organic service revenue growth declined to negative 23.1%,
significantly impacted by the COVID-19 pandemic, primarily due to decreases in
our service activity, particularly in regions where governments have imposed
restrictions on non-essential business operations. The severity of future
service level declines is uncertain and is dependent on the duration and
severity of the COVID-19 pandemic, the resulting governmental and business
actions and the duration and strength of any ensuing economic recovery that may
follow, specifically within the markets in which we operate and among our
customers. As restrictions associated with the COVID-19 pandemic are relaxed, we
expect our service activity levels to continue to gradually improve. We expect
organic service revenue declines to slightly improve for the remainder of 2020.
55--------------------------------------------------------------------------------
Table of Contents OPERATING EXPENSES COVID-19 A significant portion of our cost base is fixed, particularly with regard to our storage business. However, at lower service activity levels, we do have a number of options to manage our costs and capital expenditures. As a result of the COVID-19 pandemic, we have taken certain actions during the six months endedJune 30, 2020 , including, but not limited to: (i) the termination of nearly all of our temporary and contract workers; (ii) reductions in our full-time and part-time work forces; (iii) the introduction of furloughs, reduced hours or other temporary reduction measures impacting approximately one-third of our global workforce during the second quarter of 2020; (iv) the deferral of certain previously planned non-essential capital investments and (v) the implementation of a temporary freeze on future acquisitions. While we have implemented cost savings measures to address the decreased level of service activity, we continue to incur higher operating costs and reduced leverage associated with labor, vehicle and facility costs for service operations that are not being fully utilized, as well as, increased bad debt expense due to bankruptcy of, and increased collectability risk from, some of our customers. We have not made any adjustments for these impacts in our reported results or in calculating our various non-GAAP measures. We have also incurred other costs due to the COVID-19 pandemic which are direct, incremental and not expected to recur once the pandemic ends, primarily associated with the purchase of personal protective equipment for our employees, increased cleaning costs and legal and professional fees. We have excluded these costs in calculating our various non-GAAP measures. We can provide no assurance that the cost savings measures we have taken, or may take in future periods, will be sufficient to offset any future service level declines, and we continue to evaluate additional cost saving measures as additional information regarding the COVID-19 pandemic and the related economic downturn become known. Cost of Sales
Consolidated cost of sales (excluding depreciation and amortization) consists of the following expenses (in thousands):
Percentage Change % of Percentage
Three Months Ended Consolidated Change
June 30, Dollar Constant Revenues (Favorable)/
2020 2019 Change Actual Currency 2020 2019 Unfavorable
Labor $ 164,672 $ 206,623 $ (41,951 ) (20.3 )% (17.6 )% 16.8 % 19.4 % (2.6 )%
Facilities 173,618 176,950 (3,332 ) (1.9 )% 0.7 % 17.7 % 16.6 % 1.1 %
Transportation 28,162 41,959 (13,797 ) (32.9 )% (31.6 )% 2.9 % 3.9 % (1.0 )%
Product Cost of
Sales and Other 32,593 38,277 (5,684 ) (14.8 )% (11.5 )% 3.3 % 3.6 % (0.3 )%
COVID-19 Costs 7,648 - 7,648 100.0 % 100.0 % 0.8 % - % 0.8 %
Total Cost of
Sales $ 406,693 $ 463,809 $ (57,116 ) (12.3 )% (9.7 )% 41.4 % 43.5 % (2.1 )%
Percentage Change % of Percentage
Six Months Ended Consolidated Change
June 30, Dollar Constant Revenues (Favorable)/
2020 2019 Change Actual Currency 2020 2019 Unfavorable
Labor $ 368,518 $ 411,914 $ (43,396 ) (10.5 )% (8.0 )% 18.0 % 19.4 % (1.4 )%
Facilities 358,150 351,669 6,481 1.8 % 4.2 % 17.5 % 16.6 % 0.9 %
Transportation 67,100 82,999 (15,899 ) (19.2 )% (17.7 )% 3.3 % 3.9 % (0.6 )%
Product Cost of
Sales and Other 72,198 77,873 (5,675 ) (7.3 )% (4.4 )% 3.5 % 3.7 % (0.2 )%
COVID-19 Costs 7,648 - 7,648 100.0 % 100.0 % 0.4 % - % 0.4 %
Total Cost of
Sales $ 873,614 $ 924,455 $ (50,841 ) (5.5 )% (3.1 )% 42.6 % 43.6 % (1.0 )%
Labor
On a constant dollar basis, labor expenses for the six months ended June 30,
2020 decreased by $32.0 million , or 8.0%, compared to the prior year period,
primarily driven by lower labor expenses in our Global RIM Business segment,
reflecting cost containment actions taken in response to lower service activity
levels in the second quarter of 2020 due to the COVID-19 pandemic, partially
offset by incremental labor costs associated with recent acquisitions in our
Global RIM Business segment.
56--------------------------------------------------------------------------------
Table of Contents
Facilities
On a constant dollar basis, facilities expenses for the six months endedJune 30, 2020 increased by$14.3 million , or 4.2%, compared to the prior year period, driven by increases in rent expense, in part due to recent acquisitions in our Global RIM Business segment, as well as higher property taxes and utility costs, partially offset by lower insurance and building maintenance costs.
Transportation
On a constant dollar basis, transportation expenses for the six months endedJune 30, 2020 decreased by$14.4 million , or 17.7%, compared to the prior year period, primarily driven by lower third-party carrier costs and fuel costs, reflecting cost containment actions taken in response to lower service activity levels in the second quarter of 2020 due to the COVID-19 pandemic.
Product Cost of Sales and Other
Product cost of sales and other, which includes cartons, media and other service, storage and supply costs and is highly correlated to service revenue streams, particularly project revenues. On a constant dollar basis, product cost of sales and other for the six months endedJune 30, 2020 decreased by$3.3 million , or 4.4%, compared to the prior year period. The decrease in product cost of sales and other was primarily driven by lower operating supplies and product costs, reflecting cost containment actions taken in response to lower service activity levels in the second quarter of 2020 due to the COVID-19 pandemic.
COVID-19 Costs
COVID-19 Costs included in cost of sales were$7.6 million for the six months endedJune 30, 2020 and primarily consist of incremental cleaning costs and the purchase of personal protective equipment for our employees. 57
--------------------------------------------------------------------------------
Table of Contents
Selling, General and Administrative Expenses
Selling, general and administrative expenses consists of the following expenses (in thousands):
% of Percentage
Three Months Ended Percentage Change Consolidated Change
June 30, Dollar Constant Revenues (Favorable)/
2020 2019 Change Actual Currency 2020 2019 Unfavorable
General and
Administrative $ 136,181 $ 143,842 $ (7,661 ) (5.3 )% (3.3 )% 13.9 % 13.5 % 0.4 %
Sales,
Marketing and
Account
Management 52,385 62,536 (10,151 ) (16.2 )% (14.4 )% 5.3 % 5.9 % (0.6 )%
Information
Technology 36,765 42,029 (5,264 ) (12.5 )% (10.8 )% 3.7 % 3.9 % (0.2 )%
Bad Debt Expense 14,979 3,749 11,230 299.5 % 306.3 % 1.5 % 0.4 % 1.1 %
COVID-19 Costs 1,637 - 1,637 100.0 % 100.0 % 0.2 % - % 0.2 %
Total Selling,
General and
Administrative
Expenses $ 241,947 $ 252,156 $ (10,209 ) (4.0 )% (2.0 )% 24.6 % 23.6 % 1.0 %
% of Percentage
Six Months Ended Percentage Change Consolidated Change
June 30, Dollar Constant Revenues (Favorable)/
2020 2019 Change Actual Currency 2020 2019 Unfavorable
General and
Administrative $ 265,379 $ 295,174 $ (29,795 ) (10.1 )% (8.4 )% 12.9 % 13.9 % (1.0 )%
Sales,
Marketing and
Account
Management 111,844 128,706 (16,862 ) (13.1 )% (11.5 )% 5.5 % 6.1 % (0.6 )%
Information
Technology 80,644 88,200 (7,556 ) (8.6 )% (7.3 )% 3.9 % 4.2 % (0.3 )%
Bad Debt Expense 21,176 8,787 12,389 141.0 % 143.2 % 1.0 % 0.4 % 0.6 %
COVID-19 Costs 1,637 - 1,637 100.0 % 100.0 % 0.1 % - % 0.1 %
Total Selling,
General and
Administrative
Expenses $ 480,680 $ 520,867 $ (40,187 ) (7.7 )% (6.1 )% 23.4 % 24.6 % (1.2 )%
General and Administrative
On a constant dollar basis, general and administrative expenses for the six months endedJune 30, 2020 decreased by$24.3 million , or 8.4%, compared to the prior year period, primarily driven by a decrease in compensation expense and other employee related costs, as well as lower professional fees, reflecting benefits from Project Summit and ongoing cost containment measures.
Sales, Marketing and Account Management
On a constant dollar basis, sales, marketing and account management expenses for the six months endedJune 30, 2020 decreased by$14.5 million , or 11.5%, compared to the prior year period, primarily driven by a decrease in compensation expense and other employee related costs, reflecting benefits from Project Summit and ongoing cost containment measures.
Information Technology
On a constant dollar basis, information technology expenses for the six months endedJune 30, 2020 decreased by$6.3 million , or 7.3%, compared to the prior year period, primarily driven by a decrease in compensation expense and other employee related costs, as well as lower professional fees, reflecting benefits from Project Summit and ongoing cost containment measures. 58
--------------------------------------------------------------------------------
Table of Contents
Bad Debt Expense
We maintain an allowance for doubtful accounts based on reasonable and supportable forecasts for expected future collectability of our outstanding receivables that is calculated based on our past loss experience, current and prior trends in our aged receivables, current economic and macroeconomic conditions, and specific circumstances of individual receivable balances. We continually monitor our customers' payment activity and make adjustments to the allowance as necessary. Bad debt expense for the six months endedJune 30, 2020 increased by$12.4 million on a constant dollar basis compared to the prior year period, primarily driven by increased collectability risk resulting from the COVID-19 pandemic. COVID-19 Costs COVID-19 Costs included in selling, general and administrative expenses were$1.6 million for the six months endedJune 30, 2020 and primarily consist of legal and professional fees related to actions taken in direct response to the COVID-19 pandemic. Depreciation and Amortization Our depreciation and amortization charges result primarily from depreciation related to storage systems, which include racking structures, buildings, building and leasehold improvements and computer systems hardware and software. Amortization relates primarily to customer relationship intangible assets, contract fulfillment costs and data center lease-based intangible assets. Both depreciation and amortization are impacted by the timing of acquisitions. Depreciation expense decreased$1.7 million , or 0.7%, on a reported dollar basis for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . See Note 2.f. to Notes to Consolidated Financial Statements included in our Annual Report for additional information regarding the useful lives over which our property, plant and equipment is depreciated. Amortization expense increased$1.3 million , or 1.3%, on a reported dollar basis for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . Restructuring Charges Restructuring Charges for the six months endedJune 30, 2020 were approximately$80.3 million and primarily consist of employee severance, internal costs associated with the development and implementation of Project Summit initiatives and professional fees. Intangible impairments
The intangible impairment charge for the six months ended
Gain on disposal/write-down of property, plant and equipment, net
Consolidated gain on disposal/write-down of property, plant and equipment, net, for the six months endedJune 30, 2019 was approximately$7.8 million . The gain for the six months endedJune 30, 2019 primarily consisted of gains associated with the sale of certain land and buildings in theUnited Kingdom of approximately$36.0 million in the second quarter of 2019. These gains were partially offset by losses primarily associated with (i) an impairment charge on the assets associated with the select offerings within our Iron Mountain Iron Cloud portfolio of approximately$24.0 million and (ii) the write-down of certain property, plant and equipment in our Global RIM Business segment of approximately$3.1 million . OTHER EXPENSES, NET Interest Expense, Net Consolidated interest expense, net increased$1.3 million , or 0.7%, to$209.1 million in the six months endedJune 30, 2020 from$207.8 million in the six months endedJune 30, 2019 . This increase was mainly driven by higher average debt outstanding during the six months endedJune 30, 2020 . See Note 5 to Notes to Condensed Consolidated Financial Statements included in this Quarterly Report for additional information regarding our indebtedness. 59
--------------------------------------------------------------------------------
Table of Contents
Other Expense (Income), Net
Other expense (income), net consists of the following (in thousands):
Three Months Ended Six Months Ended
June 30, Dollar June 30, Dollar
2020 2019 Change 2020 2019 Change
Foreign currency transaction
losses (gains), net $ 1,471 $ (19,331 ) $ 20,802 $ (35,928 ) $ (1,634 ) $ (34,294 )
Debt extinguishment expense 17,040 - 17,040 17,040 - 17,040
Other, net 7,189 4,139 3,050 1,862 1,652 210
Other Expense (Income), Net
Foreign Currency Transaction Losses (Gains)
We recorded net foreign currency transaction gains of$35.9 million in the six months endedJune 30, 2020 , based on period-end exchange rates. These gains resulted primarily from the impact of changes in the exchange rate of the British pound sterling againstthe United States dollar compared toDecember 31, 2019 on our intercompany balances with and between certain of our subsidiaries. We recorded net foreign currency transaction gains of$1.6 million in the six months endedJune 30, 2019 , based on period-end exchange rates. These gains resulted primarily from the impact of changes in the exchange rate of the British pound sterling againstthe United States dollar compared toDecember 31, 2018 on our intercompany balances with and between certain of our subsidiaries. These gains were partially offset by losses primarily from the impact of changes in the exchange rate of the Euro againstthe United States dollar compared toDecember 31, 2018 on our intercompany balances with and between certain of our subsidiaries. Debt Extinguishment Expense During the second quarter of 2020, we recorded debt extinguishment expense of$17.0 million comprised of the call premium associated with the early redemption of the 6% Notes due 2023, as well as the write-off of unamortized deferred financing costs associated with the early redemption of the 43/8% Notes and the 6% Notes due 2023 (both as defined and described below).
Other, net
Included in Other, net are losses on certain of our equity method investments, which are partially offset by a gain of approximately$10.0 million recorded during the first quarter of 2020 in connection with our acquisition of the remaining 75% equity interest inOSG Records Management (Europe) Limited ("OSG" and such acquisition, the "OSG Acquisition"), as our previously held 25% equity investment in OSG was remeasured to fair value at the closing date of the OSG Acquisition. 60
--------------------------------------------------------------------------------
Table of Contents
Provision for Income Taxes
We provide for income taxes during interim periods based on our estimate of the effective tax rate for the year. Discrete items and changes in our estimate of the annual effective tax rate are recorded in the period they occur. Our effective tax rate is subject to variability in the future due to, among other items: (1) changes in the mix of income between our qualified REIT subsidiaries and our domestic taxable REIT subsidiaries, as well as among the jurisdictions in which we operate; (2) tax law changes; (3) volatility in foreign exchange gains and losses; (4) the timing of the establishment and reversal of tax reserves; and (5) our ability to utilize net operating losses that we generate.
Our effective tax rates for the three and six months ended
Three Months Ended Six Months Ended
June 30, June 30,
2020(1) 2019(2) 2020(2) 2019(2)
Effective Tax Rate(1) - % 10.3 % 25.1 % 14.7 %
_______________________________________________________________
(1) For the three months ended
taxes of
provision for income taxes of
rate is not meaningful.
(2) The primary reconciling items between the federal statutory tax rate of
21.0% and our overall effective tax rate for the six months ended
2020 and for the three and six months ended
derived from the dividends paid deduction and the impact of differences in
the tax rates at which our foreign earnings are subject, including foreign
exchange gains and losses in different jurisdictions with different tax
rates.
INCOME (LOSS) FROM CONTINUING OPERATIONS AND ADJUSTED EBITDA
The following table reflects the effect of the foregoing factors on our
consolidated Income (Loss) From Continuing Operations and Adjusted EBITDA (in
thousands):
Three Months Ended June 30, Dollar
2020 2019 Change Percentage Change
(Loss) Income from Continuing
Operations $ (7,113 ) $ 92,347 $ (99,460 ) (107.7 )%
(Loss) Income from Continuing
Operations as a percentage of
Consolidated Revenue (0.7 )% 8.7 %
Adjusted EBITDA $ 342,884 $ 350,942 $ (8,058 ) (2.3 )%
Adjusted EBITDA Margin 34.9 % 32.9 %
Six Months Ended June 30, Dollar
2020 2019 Change Percentage Change
Income (Loss) from Continuing
Operations $ 57,779 $ 122,823 $ (65,044 ) (53.0 )%
Income (Loss) from Continuing
Operations as a percentage of
Consolidated Revenue 2.8 % 5.8 %
Adjusted EBITDA $ 705,961 $ 675,448 $ 30,513 4.5 %
Adjusted EBITDA Margin 34.4 % 31.8 %
Consolidated Adjusted EBITDA for the six months ended June 30, 2020 increased by
$30.5 million , or 4.5%, and consolidated Adjusted EBITDA Margin increased by 260
basis points compared to the same prior year period, reflecting benefits from
Project Summit and ongoing cost containment measures.
61--------------------------------------------------------------------------------
Table of Contents
Segment Analysis (in thousands)
See Note 9 to Notes to Consolidated Financial Statements included in our Annual Report for a description of our reportable operating segments.
Global RIM Business
Percentage Change
Three Months Ended June 30, Dollar Constant Organic
2020 2019 Change Actual Currency Growth
Storage Rental $ 584,402 $ 579,575 $ 4,827 0.8 % 3.8 % 2.0 %
Service 292,700 375,281 (82,581 ) (22.0 )% (20.0 )% (22.0 )%
Segment Revenue $ 877,102 $ 954,856 $ (77,754 ) (8.1 )% (5.6 )% (7.5 )%
Segment Adjusted EBITDA(1) $ 383,816 $ 395,579 $ (11,763 )
Segment Adjusted EBITDA Margin(2) 43.8 % 41.4 %
Percentage Change
Six Months Ended June 30, Dollar Constant Organic
2020 2019 Change Actual Currency Growth
Storage Rental $ 1,174,415 $ 1,155,348 $ 19,067 1.7 % 4.1 % 2.0 %
Service 659,106 745,391 (86,285 ) (11.6 )% (9.6 )% (12.0 )%
Segment Revenue $ 1,833,521 $ 1,900,739 $ (67,218 ) (3.5 )% (1.2 )% (3.5 )%
Segment Adjusted EBITDA(1) $ 775,787 $ 761,415 $ 14,372
Segment Adjusted EBITDA Margin(2) 42.3 % 40.1 %
_______________________________________________________________
(1) See "Non-GAAP Measures-Adjusted EBITDA" in this Quarterly Report for the
definitions of Adjusted EBITDA and Adjusted EBITDA Margin, a
reconciliation of Adjusted EBITDA to Income (Loss) from ContinuingOperations and a discussion of why we believe these non-GAAP measures
provide relevant and useful information to our current and potential
investors.
(2) Segment Adjusted EBITDA Margin is calculated by dividing Segment Adjusted
EBITDA by total segment revenues.
For the three months endedJune 30, 2020 , reported revenue in our Global RIM Business segment decreased 8.1%, compared to the three months endedJune 30, 2019 , due to organic revenue declines and unfavorable fluctuations in foreign currency exchange rates, partially offset by the favorable impact of acquisitions. The organic revenue decline of 7.5% was primarily the result of organic service revenue declines of 22.0%. Our reported service revenues during the three months endedJune 30, 2020 were significantly impacted by the COVID-19 pandemic, primarily due to decreases in our service activity, particularly in regions where governments have imposed restrictions on non-essential business operations. Organic storage rental revenue growth of 2.0% was driven by revenue management. The impact of acquisitions contributed 1.9% to the reported revenue growth rate for the three months endedJune 30, 2020 , compared to the prior year period. Foreign currency exchange rate fluctuations decreased our reported revenue growth rate for the three months endedJune 30, 2020 by 2.5%, compared to the prior year period. For the six months endedJune 30, 2020 , reported revenue in our Global RIM Business segment decreased 3.5%, compared to the six months endedJune 30, 2019 , due to organic revenue declines and unfavorable fluctuations in foreign currency exchange rates, partially offset by the favorable impact of acquisitions. The organic revenue decline of 3.5% was primarily the result of organic service revenue declines of 12.0%, mainly driven by the COVID-19 pandemic, partially offset by organic storage rental revenue growth of 2.0% driven by revenue management. The impact of acquisitions contributed 2.3% to the reported revenue growth rate for the six months endedJune 30, 2020 , compared to the prior year period. Foreign currency exchange rate fluctuations decreased our reported revenue growth rate for the six months endedJune 30, 2020 by 2.3%, compared to the prior year period. Adjusted EBITDA Margin increased 220 basis points during the six months endedJune 30, 2020 compared to the prior year period, primarily driven by benefits from Project Summit, ongoing cost containment measures and revenue management. 62
--------------------------------------------------------------------------------
Table of Contents
Global Data Center Business
Percentage Change
Three Months Ended June 30, Dollar Constant Organic
2020 2019 Change Actual Currency Growth
Storage Rental $ 63,812 $ 60,582 $ 3,230 5.3 % 5.8 % 5.8 %
Service 2,956 1,709 1,247 73.0 % 73.4 % 73.4 %
Segment Revenue $ 66,768 $ 62,291 $ 4,477 7.2 % 7.6 % 7.6 %
Segment Adjusted
EBITDA(1) $ 30,558 $ 27,641 $ 2,917
Segment Adjusted EBITDA
Margin(2) 45.8 % 44.4 %
Percentage Change
Six Months Ended June 30, Dollar Constant Organic
2020 2019 Change Actual Currency Growth
Storage Rental $ 128,407 $ 120,300 $ 8,107 6.7 % 7.2 % 7.2 %
Service 5,718 3,527 2,191 62.1 % 62.5 % 62.5 %
Segment Revenue $ 134,125 $ 123,827 $ 10,298 8.3 % 8.8 % 8.8 %
Segment Adjusted
EBITDA(1) $ 61,454 $ 53,652 $ 7,802
Segment Adjusted EBITDA
Margin(2) 45.8 % 43.3 %
_______________________________________________________________
(1) See "Non-GAAP Measures-Adjusted EBITDA" in this Quarterly Report for the
definitions of Adjusted EBITDA and Adjusted EBITDA Margin, a
reconciliation of Adjusted EBITDA to Income (Loss) from ContinuingOperations and a discussion of why we believe these non-GAAP measures
provide relevant and useful information to our current and potential
investors.
(2) Segment Adjusted EBITDA Margin is calculated by dividing Segment Adjusted
EBITDA by total segment revenues.
For the six months endedJune 30, 2020 , reported revenue in our Global Data Center Business segment increased 8.3% compared to the six months endedJune 30, 2019 , due to organic revenue growth, partially offset by unfavorable fluctuations in foreign currency exchange rates. Organic storage rental revenue growth in our Global Data Center Business segment was 7.2% for the six months endedJune 30, 2020 compared to the prior year period, reflecting increased customer leasing activity. Adjusted EBITDA Margin increased 250 basis points during the six months endedJune 30, 2020 compared to the prior year period primarily due to ongoing cost containment measures. 63
--------------------------------------------------------------------------------
Table of Contents
Corporate and Other Business
Percentage Change
Three Months Ended June 30, Dollar Constant Organic
2020 2019 Change Actual Currency Growth
Storage Rental $ 28,742 $ 29,131 $ (389 ) (1.3 )% (0.9 )% 1.0 %
Service 9,627 20,629 (11,002 ) (53.3 )% (52.7 )% (52.0 )%
Segment Revenue $ 38,369 $ 49,760 $ (11,391 ) (22.9 )% (22.3 )% (21.2 )%
Segment Adjusted
EBITDA(1) $ (71,490 ) $ (72,278 ) $ 788
Segment Adjusted
EBITDA(1) as a
percentage of
Consolidated Revenue (7.3 )% (6.8 )%
Percentage Change
Six Months Ended June 30, Dollar Constant Organic
2020 2019 Change Actual Currency Growth
Storage Rental $ 57,681 $ 56,614 $ 1,067 1.9 % 2.2 % 4.5 %
Service 25,643 39,590 (13,947 ) (35.2 )% (34.5 )% (35.3 )%
Segment Revenue $ 83,324 $ 96,204 $ (12,880 ) (13.4 )% (12.8 )% (12.0 )%
Segment Adjusted
EBITDA(1) $ (131,280 ) $ (139,619 ) $ 8,339
Segment Adjusted
EBITDA(1) as a
percentage of
Consolidated Revenue (6.4 )% (6.6 )%
_______________________________________________________________
(1) See "Non-GAAP Measures-Adjusted EBITDA" in this Quarterly Report for the
definitions of Adjusted EBITDA and Adjusted EBITDA Margin, a
reconciliation of Adjusted EBITDA to Income (Loss) from ContinuingOperations and a discussion of why we believe these non-GAAP measures
provide relevant and useful information to our current and potential
investors.
For the six months ended June 30, 2020 , reported revenue in our Corporate and
Other Business segment decreased 13.4% compared to the prior year period,
primarily due to organic service revenue declines. The organic service revenue
decline reflects lower service activity levels in our Fine Arts business,
primarily related to the COVID-19 pandemic. Adjusted EBITDA in our Corporate and
Other Business segment increased $8.3 million for the six months ended June 30,
2020 compared to the prior year period reflecting benefits from Project Summit
and ongoing cost containment measures.
64--------------------------------------------------------------------------------
Table of Contents
Liquidity and Capital Resources
COVID-19
While we have broad geographic and customer diversification with operations in approximately 50 countries, and no single customer accounting for more than 1% of our revenue during the six months endedJune 30, 2020 , COVID-19 is a global pandemic impacting numerous industries and geographies. While we do not currently believe that the implications of the COVID-19 pandemic have had a material adverse impact on our ability to collect our accounts receivable, global economic conditions related to the COVID-19 pandemic may have a material adverse effect on our customers, which could impact our future ability to collect our accounts receivable. We continue to monitor the credit worthiness of our customers and customer payment trends, as well as the related impact on our liquidity. Project Summit As disclosed above, inOctober 2019 , we announced Project Summit. We estimate that the implementation of Project Summit will result in total costs of$450.0 million . During the six months endedJune 30, 2020 , we incurred approximately$82.4 million of costs related to Project Summit which were comprised of$80.3 million of Restructuring Charges, primarily related to employee severance costs, internal costs associated with the development and implementation of Project Summit initiatives and professional fees, and$2.1 million of capital expenditures.
© Edgar Online, source
