IRON MOUNTAIN INCORPORATED The following discussion and analysis of our financial condition and results of operations for the three and six months endedJune 30, 2022 should be read in conjunction with our Condensed Consolidated Financial Statements and Notes thereto for the three and six months endedJune 30, 2022 , included herein, and our Consolidated Financial Statements and Notes thereto for the year endedDecember 31, 2021 , included in our Annual Report on Form 10-K filed with theUnited States Securities and Exchange Commission ("SEC") onFebruary 24, 2022 (our "Annual Report"). FORWARD-LOOKING STATEMENTS We have made statements in 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 current expectations regarding our future results from operations, economic performance, financial condition, goals, strategies, investment objectives, plans and achievements. These forward-looking statements are subject to various known and unknown risks, uncertainties and other factors, and you should not rely upon them except as statements of our present intentions and of our present expectations, which may or may not occur. When we use words such as "believes," "expects," "anticipates," "estimates", "plans", "intends", "pursue", "will" 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:
•our ability or inability to execute our strategic growth plan, including our ability to invest according to plan, grow our businesses (including through joint ventures), incorporate alternative technologies into our offerings, achieve satisfactory returns on new product offerings, continue our revenue management, expand internationally and manage our international operations, complete acquisitions on satisfactory terms, integrate acquired companies efficiently and transition to more sustainable sources of energy;
•changes in customer preferences and demand for our storage and information management services, including as a result of the shift from paper and tape storage to alternative technologies that require less physical space;
•the impact of our distribution requirements on our ability to execute our business plan;
•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 fund capital expenditures;
•our ability to remain qualified for taxation as a real estate investment trust
for
•the costs of complying with and our ability to comply with laws, regulations and customer requirements, including those relating to data privacy and cybersecurity issues, as well as fire and safety and environmental standards;
•the impact of attacks on our internal information technology ("IT") systems,
including the impact of such incidents on our reputation and ability to compete
and any litigation or disputes that may arise in connection with such incidents;
•changes in the political and economic environments in the countries in which
our international subsidiaries operate and changes in the global political
climate, particularly as we consolidate operations and move records and data
across borders;
•our ability to raise debt or equity capital and changes in the cost of our debt;
•our ability to comply with our existing debt obligations and restrictions in our debt instruments;
•the impact of service interruptions or equipment damage and the cost of power on our data center operations;
•the cost or potential liabilities associated with real estate necessary for our business;
•failures to implement and manage new IT systems;
•unexpected events, including those resulting from climate change or geopolitical events, could disrupt our operations and adversely affect our reputation and results of operations;
•other trends in competitive or economic conditions affecting our financial condition or results of operations not presently contemplated; and
•the other risks described in our periodic reports filed with the
Except as required by law, we undertake no obligation to update any forward-looking statements appearing in this report.
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Part I. Financial Information
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 ended
June 30, 2022 within each section. Trends and changes that are consistent for
both the three and six month periods are not repeated and are discussed on a
year to date basis only.
PROJECT SUMMIT
In October 2019 , we announced our global program designed to better position us
for future growth and achievement of our strategic objectives ("Project Summit")
which we completed as of December 31, 2021 . Project Summit has improved annual
Adjusted EBITDA (as defined below) by approximately $375.0 million exiting 2021,
of which approximately $160.0 million and $165.0 million were realized in 2021
and 2020, respectively, with the remainder to come in 2022.
ACQUISITION OF ITRENEW
OnJanuary 25, 2022 , in order to expand our asset lifecycle management ("ALM") operations, we acquired an approximately 80% interest inIntercept Parent, Inc. ("ITRenew"). FromJanuary 25, 2022 , we consolidate 100% of the revenues and expenses associated with this business.ITRenew is presented in Corporate and Other Business and primarily operates inthe United States . See Acquisitions within the Liquidity and Capital Resources section below for additional information.
DIVESTMENTS AND DECONSOLIDATIONS
IPM DIVESTMENT
OnJune 7, 2021 , we sold ourIntellectual Property Management ("IPM") business, also known as our technology escrow services business, which we predominantly operated inthe United States , for total gross consideration of approximately$215.4 million (the "IPM Divestment"). We have concluded that the IPM Divestment does not meet the criteria to be reported as discontinued operations in our consolidated financial statements, as our decision to divest this business does not represent a strategic shift that will have a major effect on our operations and financial results. Accordingly, the revenues and expenses associated with this business are presented as a component of operating income (loss) in our Condensed Consolidated Statements of Operations for the three and six months endedJune 30, 2021 and the cash flows associated with this business is presented as a component of cash flows from operations in our Condensed Consolidated Statements of Cash Flows for the six months endedJune 30, 2021 . Our IPM business represented approximately$6.0 million and$14.2 million of total revenues and approximately$2.5 million and$6.8 million of total net income for the three and six months endedJune 30, 2021 , respectively.
DECONSOLIDATIONS
OnMarch 24, 2022 , as a result of our loss of control, we deconsolidated the businesses included in the acquisition ofOSG Records Management (Europe) Limited , excludingUkraine . We recognized a loss of approximately$105.8 million associated with the deconsolidation to Other expense (income), net in the first quarter of 2022 representing the difference between the net asset value prior to the deconsolidation and subsequent remeasurement of the retained investment to fair value of zero. We have concluded that the deconsolidation does not meet the criteria to be reported as discontinued operations in our consolidated financial statements, as it does not represent a strategic shift that will have a major effect on our operations and financial results. Accordingly, the revenues and expenses associated with these businesses are presented as a component of operating income (loss) in our Condensed Consolidated Statements of Operations through the date of deconsolidation and the cash flows associated with these businesses are presented as a component of cash flows from operations in our Condensed Consolidated Statements of Cash Flows through the date of the deconsolidation. These businesses represented approximately$44.9 million of total revenues and$7.2 million of total net income for the year endedDecember 31, 2021 .
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Part I. Financial Information
GENERAL
RESULTS OF OPERATIONS -
•We have experienced steady volume in our Global RIM Business segment, with organic storage rental revenue growth driven primarily by revenue management. We expect organic storage rental revenue growth to benefit from revenue management and volume to be relatively stable in the near term. •Our organic service revenue growth is primarily due to increases in our service activity. We expect organic service revenue growth in 2022 to benefit from our new and existing digital offerings, as well as our traditional services.
•We expect total revenue and Adjusted EBITDA growth to accelerate in 2022 with continued focus on new product and service offerings, innovation, customer solutions and market expansion.
•We expect the impact of a stronger US dollar to create headwinds on reported total revenue and Adjusted EBITDA growth against prior periods through the remainder of 2022 and into 2023.
Cost of sales (excluding depreciation and amortization) and Selling, general and administrative expenses for the six months endedJune 30, 2022 consists of the following: COST OF SALES SELLING, GENERAL AND ADMINISTRATIVE EXPENSES [[Image Removed: irm-20220630_g4.jpg]]
[[Image Removed: irm-20220630_g5.jpg]]
NON-GAAP MEASURES ADJUSTED EBITDA We define Adjusted EBITDA as net income (loss) before interest expense, net, provision (benefit) for income taxes, depreciation and amortization (inclusive of our share of Adjusted EBITDA from our unconsolidated joint ventures), and excluding certain items we do not believe to be indicative of our core operating results, specifically:
EXCLUDED
•Acquisition and Integration Costs (as defined below) •Other (income) expense, net •Restructuring Charges (as defined below)
•Stock-based compensation expense •(Gain) loss on disposal/write-down of property, plant and equipment, net (including real estate)
Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by total revenues. We also show Adjusted EBITDA and Adjusted EBITDA Margin for each of our reportable segments under "Results of Operations - Segment Analysis" below.
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Part I. Financial Information
[[Image Removed: irm-20220630_g6.jpg]]
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. 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, net income (loss) or cash flows from operating activities (as determined in accordance with GAAP).
RECONCILIATION OF NET INCOME (LOSS) TO ADJUSTED EBITDA (IN THOUSANDS):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2022 2021 2022 2021
Net Income (Loss) $ 201,858 $
276,522
115,057 105,220 229,499 209,642
Provision (benefit) for income taxes 18,083 110,416 28,163 125,056
Depreciation and amortization 178,254 166,685 361,869 332,327
Acquisition and Integration Costs(1) 16,878 2,277 32,539 2,277
Restructuring Charges(2) - 39,443 - 79,254
(Gain) loss on disposal/write-down of
property, plant and equipment, net
(including real estate) (51,249) (128,935) (51,954) (133,386)
Other (income) expense, net, excluding our
share of losses (gains) from our
unconsolidated joint ventures (46,103) (189,605) 7,412 (187,484)
Stock-based compensation expense 20,256 22,536 31,597 33,269
Our share of Adjusted EBITDA reconciling
items from our unconsolidated joint
ventures 1,672 1,072 3,010 2,088
Adjusted EBITDA $ 454,706 $ 405,631 $ 885,700 $ 786,196
(1) Represent operating expenditures directly associated with the closing and
integration activities of our business acquisitions that have closed, or are
highly probable of closing, and include (i) advisory, legal and professional
fees to complete business acquisitions and (ii) costs to integrate acquired
businesses into our existing operations, including move, severance, facility
upgrade and system integration costs (collectively, "Acquisition and Integration
Costs"). Acquisition and Integration Costs do not include costs associated with
the formation of joint ventures or costs associated with the acquisition of
customer relationships.
(2) Represent operating expenses associated with the implementation of Project
Summit that primarily consisted 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
consultants who assisted with the design and execution of various initiatives as
well as project management activities and (iv) system implementation and data
conversion costs.
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Part I. Financial Information
ADJUSTED EPS
We define Adjusted EPS as reported earnings per share fully diluted from net
income (loss) attributable to Iron Mountain Incorporated (inclusive of our share
of adjusted losses (gains) from our unconsolidated joint ventures) and excluding
certain items, specifically:
EXCLUDED
•Acquisition and Integration Costs •Other (income) expense, net •Restructuring Charges •Stock-based compensation expense •Amortization related to the write-off of certain •Tax impact of reconciling items and discrete customer relationship intangible assets tax items
•(Gain) loss on disposal/write-down of property, plant and equipment, net (including real estate)
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
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2022 2021 2022 2021
Reported EPS-Fully Diluted from Net Income (Loss)
Attributable to Iron Mountain Incorporated $ 0.68 $ 0.95 $ 0.83 $ 1.11 Add/(Deduct):
Acquisition and Integration Costs 0.06 0.01 0.11 0.01 Restructuring Charges - 0.14 - 0.27 Amortization related to the write-off of certain customer relationship intangible assets - - 0.02 - (Gain) loss on disposal/write-down of property, plant and equipment, net (including real estate) (0.18) (0.44) (0.18) (0.46)
Other (income) expense, net, excluding our share of losses (gains) from our unconsolidated joint ventures
(0.16) (0.65) 0.03 (0.65)
Stock-based compensation expense 0.07 0.08 0.11 0.11
Tax impact of reconciling items and discrete tax (0.03) 0.31
items(1) (0.07) 0.30 Net Income (Loss) Attributable to Noncontrolling
-
Interests 0.01 - 0.01 Adjusted EPS-Fully Diluted from Net Income (Loss) Attributable to Iron Mountain Incorporated(2)$ 0.46 $ 0.38 $ 0.85 $ 0.70 (1)The difference between our effective tax rates and our structural tax rate (or adjusted effective tax rates) for the three and six months endedJune 30, 2022 and 2021 is primarily due to (i) the reconciling items above, which impact our reported net income (loss) 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 endedJune 30, 2022 and 2021 was 16.5% and 16.2%, respectively. The Tax Impact of Reconciling Items and Discrete Tax Items is calculated using the current quarter's estimate of the annual structural tax rate for the full year. This may result in the current period adjustment plus prior period reported quarterly adjustments not summing to the full year adjustment.
(2)Columns may not foot due to rounding.
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Part I. Financial Information
FFO (NAREIT) AND FFO (NORMALIZED)
Funds from operations ("FFO") is defined by the National Association of Real
Estate Investment Trusts ("Nareit") as net income (loss) excluding depreciation
on real estate assets, losses and gains on sale of real estate, net of tax, and
amortization of data center leased-based intangibles and adjusting for our share
of reconciling items from our unconsolidated joint ventures from FFO ("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 income (loss).
Although Nareit has published a definition of FFO, we modify FFO (Nareit), as is
common among REITs seeking to provide financial measures that most meaningfully
reflect their particular business ("FFO (Normalized)"). Our definition of FFO
(Normalized) excludes certain items included in FFO (Nareit) that we believe are
not indicative of our core operating results, specifically:
EXCLUDED
•Acquisition and Integration Costs •Stock-based compensation expense •Restructuring Charges •Real estate financing lease depreciation •(Gain) loss on disposal/write-down of property, plant and •Tax impact of reconciling items and discrete tax equipment, net (excluding real estate) items
•Other (income) expense, net
RECONCILIATION OF NET INCOME (LOSS) TO FFO (NAREIT) AND FFO (NORMALIZED) (IN
THOUSANDS):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2022 2021 2022 2021
Net Income (Loss) $ 201,858 $ 276,522 $ 243,565 $ 323,153
Add/(Deduct):
Real estate depreciation 75,008 74,784 154,341 150,831(Gain) loss on sale of real estate, net of tax (48,978) (102,476)
(48,764) (106,781)
Data center lease-based intangible assets
amortization 4,040 10,482 8,163 20,965
FFO (Nareit) 231,928 259,312 357,305 388,168
Add/(Deduct):
Acquisition and Integration Costs 16,878 2,277 32,539 2,277
Restructuring Charges - 39,443 - 79,254
(Gain) loss on disposal/write-down of property,
plant and equipment, net (excluding real estate) (2,270) (1,076) (3,189) (1,222)
Other (income) expense, net, excluding our share
of losses (gains) from our unconsolidated joint
ventures(1) (46,103) (189,605) 7,412 (187,484)
Stock-based compensation expense 20,256 22,536 31,597 33,269
Real estate financing lease depreciation 3,427 3,515 7,207 7,051
Tax impact of reconciling items and discrete tax
items(2) (8,250) 63,570 (20,876) 60,494
Our share of FFO (Normalized) reconciling items
from our unconsolidated joint ventures 374 (9) 354 (13)
FFO (Normalized) $ 216,240 $ 199,963 $ 412,349 $ 381,794
(1)Includes foreign currency transaction (gains) losses, net and other, net. See
Note 2.l. to Notes to Condensed Consolidated Financial Statements included in
this Quarterly Report for additional information regarding the components of
Other (income) expense, net.
(2)Represents the tax impact of (i) the reconciling items above, which impact
our reported net income (loss) before provision (benefit) for income taxes and
(ii) other discrete tax items. Discrete tax items resulted in a (benefit)
provision for income taxes of $(0.2) million and $(10.2) million for the three
and six months ended June 30, 2022 , respectively, and $13.3 million and $14.4
million for the three and six months ended June 30, 2021 , respectively.
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Part I. Financial Information
CRITICAL ACCOUNTING ESTIMATES
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 estimates 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 estimates 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. We have determined that no material changes concerning our critical accounting estimates have occurred sinceDecember 31, 2021 . See Note 2.e. to Notes to Condensed Consolidated Financial Statements included in this Quarterly Report for information regarding the reassessment of the composition of our reporting units as a result of the realignment of our global managerial structure during the second quarter of 2022.
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