Americold Realty Trust(COLD) - 2023 Q2 - Quarterly Report

FORM 10-Q Filing Information General Information This section details Americold Realty Trust, Inc.'s Form 10-Q filing, including its corporate status, NYSE listing, and compliance as a large accelerated filer - Americold Realty Trust, Inc. is a Maryland corporation, listed on the New York Stock Exchange (NYSE) under the trading symbol COLD[177] - The registrant is classified as a 'large accelerated filer' and has filed all required reports under the Securities Exchange Act of 1934 during the preceding 12 months[43][178] Common Stock Outstanding as of August 1, 2023 | Class | Outstanding at August 1, 2023 | | :------------------------ | :---------------------------- | | Common Stock, $0.01 par value per share | 270,254,951 | Table of Contents The Table of Contents outlines the Form 10-Q's structure, dividing it into Part I (Financial Information) and Part II (Other Information) - The report is structured into two main parts: Part I - Financial Information (Items 1-4) and Part II - Other Information (Items 1-6)[44][179] PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents Americold Realty Trust, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive loss, equity, and cash flows, with accompanying notes Condensed Consolidated Balance Sheets The Condensed Consolidated Balance Sheets present the company's financial position as of June 30, 2023, compared to December 31, 2022, detailing changes in assets, liabilities, and equity Key Balance Sheet Figures (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :----------------------------------- | :------------ | :---------------- | | Total assets | $8,215,759 | $8,104,561 | | Total liabilities | $4,626,000 | $4,316,683 | | Total equity | $3,589,759 | $3,787,878 | | Property, buildings and equipment – net | $5,061,513 | $5,065,817 | | Goodwill | $1,036,332 | $1,033,637 | | Assets held for sale | $106,368 | $— | | Liabilities held for sale | $112,752 | $— | Condensed Consolidated Statements of Operations The Condensed Consolidated Statements of Operations detail the company's revenues, operating expenses, and net loss for the three and six months ended June 30, 2023 and 2022, showing a significant increase in net loss for the current periods Key Income Statement Figures (in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenues | $649,610 | $729,756 | $1,326,099 | $1,435,451 | | Total operating expenses | $628,943 | $706,091 | $1,273,083 | $1,403,795 | | Operating income | $20,667 | $23,665 | $53,016 | $31,656 | | Loss from continuing operations before income taxes | $(96,063) | $(4,828) | $(97,897) | $(21,333) | | Net (loss) income | $(104,802) | $3,953 | $(107,373) | $(13,492) | | Basic (loss) earnings per share | $(0.39) | $0.01 | $(0.40) | $(0.05) | | Diluted (loss) earnings per share | $(0.39) | $0.01 | $(0.40) | $(0.05) | - The company reported a net loss of $104.8 million for the three months ended June 30, 2023, compared to a net income of $3.95 million in the prior year, and a net loss of $107.37 million for the six months ended June 30, 2023, compared to a net loss of $13.49 million in the prior year[209] - Key factors contributing to the increased loss include significant 'Acquisition, cyber incident and other, net' expenses ($27.2 million for Q2 2023 vs $5.66 million for Q2 2022) and a 'Loss on put option' of $56.6 million related to the Comfrio acquisition[209] Condensed Consolidated Statements of Comprehensive Loss The Condensed Consolidated Statements of Comprehensive Loss show the total comprehensive loss for the three and six months ended June 30, 2023 and 2022, including net loss and other comprehensive income (loss) components Key Comprehensive Loss Figures (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net (loss) income | $(104,802) | $3,953 | $(107,373) | $(13,492) | | Change in unrealized net gain (loss) on foreign currency | $6,143 | $(23,867) | $6,322 | $(12,681) | | Unrealized gain on cash flow hedges | $22,359 | $1,558 | $9,795 | $1,709 | | Total comprehensive loss | $(76,576) | $(18,542) | $(90,869) | $(24,560) | - Total comprehensive loss for the three months ended June 30, 2023, was $(76.6) million, an increase from $(18.5) million in the prior year, primarily due to the net loss, despite positive foreign currency translation adjustments and unrealized gains on cash flow hedges[184] Condensed Consolidated Statements of Equity The Condensed Consolidated Statements of Equity present the changes in stockholders' equity and noncontrolling interests for the six months ended June 30, 2023 and 2022, reflecting net losses, distributions, and stock-based compensation Key Equity Changes (in thousands) | Metric | Balance - December 31, 2022 | Balance - June 30, 2023 | | :----------------------------------------- | :-------------------------- | :---------------------- | | Total equity | $3,787,878 | $3,589,759 | | Net loss | — | $(107,373) | | Other comprehensive income (loss) | — | $10,377 | | Distributions on common stock, restricted stock and OP units | — | $(119,613) | | Stock-based compensation expense | — | $11,609 | - Total equity decreased from $3,787.9 million at December 31, 2022, to $3,589.8 million at June 30, 2023, primarily driven by net losses and distributions[20][50] Condensed Consolidated Statements of Cash Flows The Condensed Consolidated Statements of Cash Flows summarize the cash generated from or used in operating, investing, and financing activities for the six months ended June 30, 2023 and 2022, showing a decrease in net cash provided by operating activities Key Cash Flow Figures (in thousands) | Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $82,768 | $133,242 | | Net cash used in investing activities | $(162,674) | $(191,960) | | Net cash provided by financing activities | $76,513 | $52,219 | | Net decrease in cash, cash equivalents and restricted cash | $(3,393) | $(6,499) | | Cash, cash equivalents and restricted cash: End of period | $48,873 | $74,616 | - Net cash provided by operating activities decreased by $50.5 million, from $133.2 million in H1 2022 to $82.8 million in H1 2023, primarily due to the payment of the annual bonus accrual in 2023 and limitations on bill collection due to the Cyber Incident[437] - Investing activities included $40.7 million for the Comfrio joint venture acquisition and $20.1 million for a lease buyout, partially offset by $36.9 million from the sale of the LATAM joint venture[438] Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations and disclosures for the condensed consolidated financial statements, covering accounting policies, significant events, segment information, debt, derivatives, and other financial details General Information and Basis of Presentation This section describes Americold Realty Trust, Inc. as a self-administered and self-managed REIT focused on temperature-controlled logistics, real estate, and value-added services, outlining the basis of financial statement preparation - Americold Realty Trust, Inc. operates as a REIT, specializing in temperature-controlled logistics, real estate, and value-added services, with a global network of 242 warehouses[115][189] - The unaudited Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP for interim financial information and SEC rules, requiring management to make estimates and assumptions[54][215] - The company's Board of Directors approved a plan to terminate the Americold Retirement Income Plan (ARIP) on February 28, 2023, with expected cash contributions in 2023 to fully fund it[29][56] Acquisitions, Held for Sale, Discontinued Operations and Dispositions This note details the acquisition of the remaining 78% equity interest in the Comfrio joint venture, its classification as held for sale and discontinued operations, and the sale of the company's minority ownership in the LATAM JV - The company acquired the remaining 78% interest in the Comfrio joint venture for $56.6 million in May 2023, after the exercise of a put option, and classified it as held for sale and discontinued operations[196][221] Loss from Discontinued Operations (Comfrio) (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $14,237 | $— | $14,237 | $— | | Pre-tax loss | $(8,034) | $(3,288) | $(10,415) | $(4,936) | | Loss from discontinued operations, net of tax | $(8,275) | $(3,288) | $(10,656) | $(4,936) | - The company sold its remaining 15% equity interest in the LATAM JV for $36.9 million on May 30, 2023, recognizing a $0.3 million gain[60][122] Acquisition, Cyber Incident and Other, Net This note details the components of 'Acquisition, cyber incident and other, net' expenses, which significantly increased for the three and six months ended June 30, 2023, primarily due to costs associated with a cybersecurity incident and Project Orion Acquisition, Cyber Incident and Other, Net Expenses (in thousands) | Component | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Acquisition and integration related costs | $2,402 | $3,786 | $4,188 | $10,071 | | Cyber incident related costs, net of insurance recoveries | $18,998 | $(819) | $18,998 | $(793) | | Severance costs | $2,793 | $910 | $6,209 | $3,474 | | Project Orion expenses | $2,543 | $— | $4,488 | $— | | Total acquisition, cyber incident and other, net | $27,235 | $5,663 | $34,382 | $15,738 | - Cyber incident related costs of $19.0 million were incurred during the three and six months ended June 30, 2023, comprising incremental internal labor, professional fees, customer claims, and insurance deductibles[28][34] - Project Orion expenses, related to the transformation of technology systems and implementation of a new ERP system, amounted to $2.5 million for the three months and $4.5 million for the six months ended June 30, 2023[34][198] Debt This note provides a summary of the company's outstanding indebtedness, including Senior Unsecured Notes, Term Loans, and Revolving Credit Facility, detailing their carrying amounts and effective interest rates Outstanding Indebtedness (in thousands) | Debt Type | June 30, 2023 Carrying Amount | December 31, 2022 Carrying Amount | | :--------------------------------------- | :---------------------------- | :-------------------------------- | | Senior Unsecured Notes | $1,768,175 | $1,752,875 | | Senior Unsecured Term Loans | $833,800 | $829,450 | | Senior Unsecured Revolving Credit Facility | $723,436 | $500,052 | | Total indebtedness, net of deferred financing costs | $3,313,563 | $3,069,333 | - The total principal amount of indebtedness increased from $3,082.4 million at December 31, 2022, to $3,325.4 million at June 30, 2023[62] - The weighted-average effective interest rate for Senior Unsecured Notes was 3.25% at June 30, 2023, and for Senior Unsecured Term Loans was 4.66%, while the Revolving Credit Facility had a weighted-average effective interest rate of 6.03%[62] Derivative Financial Instruments This note details the company's use of derivative instruments, including interest rate swaps to manage interest rate volatility and cross-currency swaps to manage foreign exchange rate risk on intercompany loans - The company uses interest rate swap agreements to reduce exposure to fluctuations in cash flows due to changes in interest rates, effectively exchanging variable-rate amounts for fixed-rate payments[67] - Cross-currency swaps are used to mitigate foreign currency exchange rate risk on foreign-currency denominated intercompany loans, hedging $153.5 million AUD and $37.5 million NZD balances as of June 30, 2023[68] Fair Value of Derivative Financial Instruments (in thousands) | Derivative Type | June 30, 2023 Fair Value | December 31, 2022 Fair Value | | :----------------------- | :----------------------- | :--------------------------- | | Foreign exchange contracts | $10,882 | $7,948 | | Interest rate contracts | $24,124 | $15,572 | | Total fair value of derivatives | $35,006 | $23,520 | Fair Value Measurements This note outlines the fair value measurements of the company's assets and liabilities, categorizing them by the fair value hierarchy (Level 2 and Level 3 inputs) Fair Value Measurements (in thousands) | Instrument | Fair Value Hierarchy | June 30, 2023 Fair Value | December 31, 2022 Fair Value | | :--------------------------------------- | :------------------- | :----------------------- | :--------------------------- | | Interest rate swap assets | Level 2 | $24,124 | $15,572 | | Cross currency swap assets | Level 2 | $10,882 | $7,948 | | Senior unsecured notes, term loans, and revolving credit facility | Level 3 | $3,069,105 | $2,829,574 | - The fair values of cash, accounts receivable, accounts payable, accrued expenses, and revolving line of credit approximate their carrying amounts due to short-term maturities[79] - The valuation of the Comfrio acquisition and associated put option liability utilized Level 3 inputs, including terms of the put option agreement and estimated future cash flows[80] Income Taxes This note explains the company's effective tax rate, which varies from the U.S. federal income tax rate due to its REIT designation, highlighting the impact of pre-tax income/losses by jurisdiction and a non-recurring tax benefit - The company's effective tax rate is primarily influenced by its REIT designation, which generally treats it as a non-tax paying entity[107] - The effective tax rate for the three and six months ended June 30, 2023, was favorably impacted by the blend of pre-tax book income and losses across jurisdictions[107] - A non-recurring $6.5 million discrete net tax benefit was recognized in the three and six months ended June 30, 2022, due to the deconsolidation of Chilean operations[107] Commitments and Contingencies This note addresses the company's legal proceedings, environmental matters, and OSHA compliance, stating that no material unrecorded contingent liabilities exist as of June 30, 2023 - The company is involved in litigation with Preferred Freezer Services, LLC (PFS) regarding alleged breach of a confidentiality agreement, with PFS seeking damages and an injunction[38][111] - The company denies PFS's allegations and believes the claims are without merit, intending to vigorously defend itself, and does not expect a material adverse impact on its financial statements[39] - The company is subject to environmental laws and regulations, particularly concerning ammonia as a refrigerant in most warehouses, and believes it is in compliance in all material respects with no material unrecorded contingent environmental liabilities[1][40][41] - The company's U.S. warehouses are subject to OSHA regulations, and it believes it is in substantial compliance, with no material unrecorded contingent liabilities as of June 30, 2023, and December 31, 2022[2] Accumulated Other Comprehensive (Loss) Income This note details the components of Accumulated Other Comprehensive (Loss) Income (AOCI), including foreign currency translation adjustments, unrealized gains and losses on designated derivatives, and pension and other postretirement benefits Components of AOCI (in thousands) | Component | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cumulative translation adjustment | $14,427 | $(84,167) | $25,228 | $(96,674) | | Derivative net investment hedges | $(8,284) | $55,330 | $(18,906) | $79,023 | | Total foreign currency translation adjustments | $6,143 | $(23,867) | $6,322 | $(12,681) | | Total pension and other postretirement benefits, net of tax | $(388) | $(113) | $310 | $(46) | | Total unrealized gain on derivative contracts | $22,359 | $1,558 | $9,795 | $1,709 | | Total change in other comprehensive income (loss) | $28,114 | $(22,422) | $16,427 | $(11,018) | - AOCI activity for the three months ended June 30, 2023, showed a total change in other comprehensive income of $28.1 million, a significant improvement from a loss of $(22.4) million in the prior year, driven by positive cumulative translation adjustments and unrealized gains on derivatives[5] Segment Information This note describes the company's three reportable segments: Warehouse, Transportation, and Third-party managed, and presents their revenues and contributions, with a reconciliation to loss before income taxes - The company's principal operations are organized into three reportable segments: Warehouse, Transportation, and Third-party managed, each managed separately with distinct strategies[6] Segment Revenues and Contribution (in thousands) | Segment | Three Months Ended June 30, 2023 Revenue | Three Months Ended June 30, 2022 Revenue | Six Months Ended June 30, 2023 Revenue | Six Months Ended June 30, 2022 Revenue | | :------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------------------- | :------------------------------------- | | Warehouse | $581,170 | $564,379 | $1,176,222 | $1,105,304 | | Transportation | $58,072 | $81,891 | $126,150 | $160,801 | | Third-party managed | $10,368 | $83,486 | $23,727 | $169,346 | | Total revenues | $649,610 | $729,756 | $1,326,099 | $1,435,451 | | | | | | | | Segment Contribution | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | Warehouse | $172,842 | $150,985 | $347,669 | $297,243 | | Transportation | $9,809 | $13,585 | $21,469 | $22,114 | | Third-party managed | $1,400 | $3,721 | $2,479 | $7,222 | | Total segment contribution | $184,051 | $168,291 | $371,617 | $326,579 | - Warehouse segment revenues increased by 3.0% for the three months and 6.4% for the six months ended June 30, 2023, while Transportation and Third-party managed segments saw significant revenue declines due to strategic shifts and customer transitions[10] Loss/Earnings per Common Share This note details the calculation of basic and diluted loss/earnings per common share using the two-class method, and provides a reconciliation of weighted-average common shares outstanding - Basic and diluted (loss)/earnings per common share are calculated by dividing net income or loss attributable to common stockholders by the weighted-average number of common shares outstanding, using the two-class method[11] Weighted-Average Common Shares Outstanding (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Weighted average common shares outstanding – basic | 270,462 | 269,497 | 270,387 | 269,464 | | Weighted average common shares outstanding – diluted | 270,462 | 270,384 | 270,387 | 269,464 | - For the three and six months ended June 30, 2023, potential common shares were antidilutive due to a net loss, resulting in no adjustments between basic and diluted loss per share[150] Revenue from Contracts with Customers This note disaggregates revenue from customer contracts by segment and geographic region, explains performance obligations, and details contract balances, including accounts receivable and unearned revenue Total Revenues from Contracts with All Customers by Segment and Region (in thousands) | Segment/Region | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | North America | $512,981 | $575,342 | $1,047,688 | $1,123,076 | | Europe | $67,380 | $84,926 | $139,051 | $170,063 | | Asia-Pacific | $65,417 | $64,781 | $131,922 | $132,604 | | South America | $3,832 | $4,707 | $7,438 | $9,708 | | Total revenues | $649,610 | $729,756 | $1,326,099 | $1,435,451 | - As of June 30, 2023, the company had $652.0 million of remaining unsatisfied performance obligations from non-cancellable contracts, with 17% expected to be recognized in 2023 and the remaining 83% over a weighted average period of 12.3 years through 2038[159] - Receivable balances related to contracts with customers under ASC 606 were $446.0 million at June 30, 2023, and unearned revenue balances were $31.2 million[161][162] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, discussing key business drivers, segment performance, and factors affecting financial results Management's Overview Americold Realty Trust, Inc. is a global leader in temperature-controlled logistics, real estate, and value-added services, operating a network of 242 warehouses across North America, Europe, Asia-Pacific, and South America, managed through three primary business segments - The company operates a global network of 242 temperature-controlled warehouses, encompassing approximately 1.5 billion cubic feet, with 195 in North America, 27 in Europe, 18 in Asia-Pacific, and 2 in South America[115] - The business is managed through three primary segments: Warehouse, Transportation, and Third-party managed[115] - The company holds minority interests in two joint ventures: SuperFrio (35 warehouses in Brazil) and RSA JV (1 warehouse in Dubai), and 26 warehouses in Brazil are classified as held-for-sale[115] Components of Our Results of Operations This section details the revenue and cost components for each of the company's operating segments: Warehouse, Transportation, and Third-Party Managed, along with other consolidated operating expenses Warehouse Segment The Warehouse segment's primary revenues come from rent, storage, and a wide array of value-added services, with costs mainly driven by labor and power, which are subject to various external factors - Primary revenues for the Warehouse segment include rent, storage, and value-added services such as handling, blast freezing, case-picking, kitting, repackaging, and e-commerce fulfillment[138] - Labor is the largest cost component, influenced by headcount, compensation, third-party labor, collective bargaining, customer requirements, productivity, and governmental regulations[81] - Power is the second largest cost, impacted by price fluctuations in operating regions and business mix (temperature zone/freezing type)[83] Transportation Segment The Transportation segment generates revenue from arranging product transportation, including fuel and capacity surcharges, with costs primarily from third-party carrier charges and operational expenses for company-employed drivers and assets - Transportation fees, including fuel and capacity surcharges, are charged for arranging product transportation[116] - Cost of operations primarily consists of third-party carrier charges, influenced by driver and equipment availability, and costs for company-employed drivers and assets (wages, fuel, tolls, insurance, maintenance)[116] Third-Party Managed Segment The Third-Party Managed segment earns management and incentive fees, with substantially all expenses reimbursed by third-party owners, meaning costs are typically passed through to customers - Revenues include reimbursement of substantially all expenses for managed warehouses, management fees, and incentive fees based on performance and cost-savings[117] - Cost of operations for this segment is reimbursed on a pass-through basis[117] - The company strategically transitioned its largest third-party managed customer's warehouses to a new provider in Q4 2022, ceasing those operations[117] Other Consolidated Operating Expenses This section covers corporate-level expenses not allocated to specific segments, including depreciation and amortization, selling, general and administrative (SG&A), and acquisition, cyber incident and other, net expenses - Depreciation and amortization charges primarily result from the capital-intensive nature of the business, covering warehouses, equipment, and intangible assets like customer relationships[139] - Corporate-level SG&A expenses include wages, benefits, equity incentive plans, professional fees, and IT personnel, influenced by headcount and compensation levels[140] - Acquisition, cyber incident and other, net expenses are highly variable and include acquisition/integration costs, Project Orion costs, litigation, severance, terminated site operations, and cyber incident related costs[141] Key Factors Affecting Our Business and Financial Results This section discusses various internal and external factors influencing the company's business and financial performance, including a recent cybersecurity incident, strategic dispositions, market risks, seasonality, foreign currency impacts, and operational efficiency initiatives Cybersecurity Incident The company experienced a cybersecurity incident on April 26, 2023, impacting systems and operations for a limited period, with remediation efforts ongoing and resulting in estimated lost revenue and net operating income - A cybersecurity incident occurred on April 26, 2023, impacting systems and partially disrupting operations, leading to preventative measures like shutting down systems and enhanced security monitoring[120][216] - All locations resumed operations at pre-cyberattack levels by June 30, 2023, with incremental charges of $19.0 million recorded for remediation and response efforts[28][120] - The incident resulted in an estimated $15.0 million in lost revenue and $9.0 million in lost net operating income for the warehouse segment during Q2 2023, with additional costs expected in H2 2023[143] Sale of Outstanding Minority Ownership in LATAM JV The company completed the sale of its remaining 15% equity interest in the LATAM JV for $36.9 million, recognizing a gain of $0.3 million - The company sold its remaining 15% equity interest in the LATAM JV for $36.9 million on May 30, 2023[60][122] - A gain of $0.3 million was recognized from the sale, recorded in 'Other (income) expense, net'[60][122] Significant Risks and Uncertainties This section refers to the comprehensive list of risk factors detailed in the company's 2022 Annual Report on Form 10-K, which could materially impact the business - The company's business is subject to significant risks and uncertainties, as detailed in 'Item 1A - Risk Factors' of its 2022 Annual Report on Form 10-K[123][168] Seasonality The company's business is influenced by seasonal and cyclical factors in the food industry, but fixed commitment contracts and southern hemisphere operations help mitigate revenue volatility, with physical occupancy typically peaking between mid-September and early December - The company mitigates revenue and earnings volatility from seasonal food industry business through fixed commitment contracts with customers[146] - Southern hemisphere operations (Australia, New Zealand, South America) help balance seasonality due to complementary growing and harvesting cycles[124] - Physical occupancy rates are generally lowest in May and June, gradually increasing to peak between mid-September and early December due to annual harvests and holiday inventory build-up[146] Foreign Currency Translation Impact on Our Operations Consolidated revenues and expenses are subject to variations from foreign currency translation, which can materially impact results due to the relative size of international operations, though partially mitigated as revenues and expenses are denominated in local currencies - Foreign currency translation causes variations in consolidated revenues and expenses, which can materially impact results due to the size of international operations[147][171] - The impact of foreign currency fluctuations is partially mitigated because international revenues and expenses are typically denominated in local currencies[171] - Constant currency metrics are used to assess underlying business performance by applying prior-year average foreign exchange rates to current local currency results, removing the effect of currency movements[126] Focus on Our Operational Effectiveness and Cost Structure The company continuously implements initiatives to streamline business processes, reduce costs, and enhance operational effectiveness, including integrating acquisitions, standardizing processes, and investing in energy efficiency projects - Initiatives include realigning and centralizing business processes, integrating acquired assets, implementing standardized operational processes, and launching new information technology tools[466] - Investments in energy efficiency projects, such as LED lighting, thermal energy storage, and motion-sensor technology, aim to reduce kilowatt-hour consumption and energy spend[466] - Project Orion, initiated in 2022, aims to enhance operational effectiveness and integrate acquisitions through technology system transformation and new ERP software implementation[198][466] Strategic Shift within Our Transportation Segment The company has strategically shifted its Transportation segment to focus on more profitable, value-added programs that complement its warehouse business, moving away from commoditized, low-margin services - The company is exiting commoditized, non-scalable, or low-margin transportation services in favor of more profitable, value-added programs like regional, national, truckload, and retailer-specific multi-vendor consolidation services[231] - This strategic shift aims to improve efficiency, reduce transportation and logistics costs for warehouse customers, and drive increased client retention and high occupancy levels in temperature-controlled warehouses[231] Historically Significant Customer A historically significant customer, which accounted for over 10% of total revenues in 2022, transitioned its third-party managed warehouses to a new provider in Q4 2022, impacting the segment's revenues - One customer accounted for over 10% of total revenues for the three and six months ended June 30, 2022, primarily within the third-party managed segment[232] - This customer transitioned its managed warehouses to a new third-party provider in Q4 2022, resulting in the company no longer serving them in that segment[117][233] Revenues from Historically Significant Customer (in millions) | Period | Total Revenues | Reimbursements for Expenses | | :----------------------------------- | :------------- | :-------------------------- | | Three Months Ended June 30, 2022 | $75.2 | $73.0 | | Six Months Ended June 30, 2022 | $153.2 | $147.8 | Economic Occupancy of our Warehouses Economic occupancy, defined as physically occupied pallets plus contractually committed pallets, is a key driver of financial results, with the company actively seeking fixed storage commitment contracts to mitigate seasonality and ensure customer space - Economic occupancy is defined as the aggregate number of physically occupied pallets and additional pallets contractually committed, without duplication[234] - The company actively seeks fixed storage commitment contracts with new and existing customers to mitigate the impact of seasonality on physical occupancy and ensure necessary space[234] - Economic occupancy is regarded as an important driver of financial results[234] Throughput at our Warehouses Throughput, representing the volume of pallets entering and exiting warehouses, significantly impacts warehouse services revenues, influenced by food manufacturers' production levels and shifts in consumer demand - Throughput, the volume of pallets entering and exiting warehouses, is a key factor impacting warehouse services revenues, as customers are typically billed based on throughput levels[235] - Throughput is influenced by food manufacturers' production levels (responding to market conditions, labor, supply chain, consumer preferences) and changes in inventory turnover due to consumer demand shifts[235] How We Assess the Performance of Our Business This section explains the key metrics and methodologies used by management to evaluate business performance, including segment contribution (NOI), same store analysis, and constant currency metrics, to provide a clear understanding of operational results Segment Contribution (Net Operating Income or "NOI") Segment contribution (NOI) is a non-GAAP measure used to evaluate segment performance, calculated as segment revenues less cost of operations, excluding corporate-level expenses, with the company also analyzing NOI and NOI margin for warehouse rent/storage and services operations - Segment contribution (NOI) is a non-GAAP measure used to evaluate segment performance, calculated as segment revenues minus cost of operations, excluding depreciation, amortization, impairment, corporate SG&A, and acquisition/cyber incident/other expenses[136][252] - The company also analyzes 'segment contribution (NOI) margin' (segment contribution divided by segment revenues) and breaks down warehouse segment NOI into rent/storage and services components[237][238] Same Store Analysis The company uses a 'same store' analysis to evaluate the performance of its owned or leased warehouses, defining the same store population annually to ensure consistent comparisons by excluding newly acquired, sold, or developed properties - The 'same store' population includes properties owned or leased for the entirety of two comparable periods and with at least twelve months of consecutive normalized operations prior to January 1 of the prior calendar year[239][255] - 'Same store contribution (NOI)' is calculated as same store revenues less cost of operations, also presented on a constant currency basis to remove foreign exchange rate movements[240] - As of June 30, 2023, the portfolio consisted of 242 total warehouses, with 220 classified as same store and 17 as non-same store[242][283] Constant Currency Metrics Constant currency metrics are non-GAAP calculations used to assess business performance by translating current period results at prior period exchange rates, thereby isolating the impact of underlying operations from foreign currency fluctuations - Constant currency reporting translates current period results into U.S. dollars using average foreign exchange rates from the comparable prior period[243] - This non-GAAP measure helps investors understand underlying business performance by excluding the impact of uncontrollable foreign currency movements[243] Results of Operations This section provides a detailed comparison of the company's operating results for the three and six months ended June 30, 2023, versus 2022, broken down by segment and highlighting key financial drivers and changes Comparison of Results for the Three Months Ended June 30, 2023 and 2022 This sub-section analyzes the financial performance for the second quarter of 2023 compared to 2022, detailing revenue, cost of operations, and contribution (NOI) for each segment, as well as other consolidated expenses and income Warehouse Segment Warehouse segment revenues increased by 3.0% (4.1% on a constant currency basis) for Q2 2023, driven by pricing initiatives and improved economic occupancy, despite a slight decline in throughput due to the cyber incident, with cost of operations decreasing slightly Warehouse Segment Performance (Three Months Ended June 30, in thousands) | Metric | 2023 Actual | 2023 Constant Currency | 2022 Actual | Change Actual | Change Constant Currency | | :------------------------------------ | :---------- | :--------------------- | :---------- | :------------ | :----------------------- | | Total warehouse segment revenues | $581,170 | $587,715 | $564,379 | 3.0 % | 4.1 % | | Total warehouse segment cost of operations | $408,328 | $413,039 | $413,394 | (1.2)% | (0.1)% | | Warehouse segment contribution (NOI) | $172,842 | $174,676 | $150,985 | 14.5 % | 15.7 % | | Total warehouse segment margin | 29.7 % | 29.7 % | 26.8 % | 299 bps | 297 bps | - Revenue growth was primarily from same store pool due to pricing initiatives, rate escalations, and improved economic occupancy, partially offset by throughput decline from the cyber incident[260] - Warehouse segment NOI increased by 14.5% (15.7% on a constant currency basis) to $172.8 million, with margin improving by 299 basis points[289] Same Store and Non-Same Store Results (Three Months) Same store results for Q2 2023 showed increased economic occupancy and rent/storage revenues per pallet, while throughput declined due to the cyber incident, with non-same store results impacted by expansions and acquisitions Same Store Warehouse Performance (Three Months Ended June 30, in thousands) | Metric | 2023 Actual | 2023 Constant Currency | 2022 Actual | Change Actual | Change Constant Currency | | :------------------------------------ | :---------- | :--------------------- | :---------- | :------------ | :----------------------- | | Total same store revenues | $553,097 | $559,274 | $538,270 | 2.8 % | 3.9 % | | Total same store cost of operations | $381,233 | $385,690 | $385,727 | (1.2)% | — % | | Same store contribution (NOI) | $171,864 | $173,584 | $152,543 | 12.7 % | 13.8 % | | Economic occupancy percentage | 84.8 % | n/a | 78.0 % | 687 bps | n/a | | Throughput pallets (in thousands) | 8,678 | n/a | 9,571 | (9.3)% | n/a | - Same store economic occupancy increased by 687 basis points to 84.8%, driven by increased food production and improved labor market, despite shrinking end-consumer basket sizes[296] - Same store throughput pallets decreased by 9.3% due to the Cyber Incident and a slight decline in end-consumer demand[269] Transportation Segment Transportation segment revenues decreased significantly by 29.1% for Q2 2023, primarily due to a strategic transition in the UK, softening demand, and the cyber incident, though margin improved due to rate increases Transportation Segment Performance (Three Months Ended June 30, in thousands) | Metric | 2023 Actual | 2023 Constant Currency | 2022 Actual | Change Actual | Change Constant Currency | | :------------------------------------ | :---------- | :--------------------- | :---------- | :------------ | :----------------------- | | Transportation revenues | $58,072 | $59,198 | $81,891 | (29.1)% | (27.7)% | | Transportation cost of operations | $48,263 | $49,256 | $68,306 | (29.3)% | (27.9)% | | Transportation segment contribution (NOI) | $9,809 | $9,942 | $13,585 | (27.8)% | (26.8)% | | Transportation margin | 16.9 % | 16.8 % | 16.6 % | 30 bps | 21 bps | - Revenue decrease was primarily driven by the strategic transition of UK transportation business to a third-party logistics model, softening macro-environment demand, and the cyber incident[271] - Transportation segment margin increased by 30 basis points to 16.9%, mainly due to rate increases[299] Third-Party Managed Segment Third-party managed segment revenues and contribution (NOI) experienced substantial decreases for Q2 2023, primarily due to the strategic exit of operations for the company's largest domestic customer in this segment Third-Party Managed Segment Performance (Three Months Ended June 30, in thousands) | Metric | 2023 Actual | 2023 Constant Currency | 2022 Actual | Change Actual | Change Constant Currency | | :------------------------------------ | :---------- | :--------------------- | :---------- | :------------ | :----------------------- | | Third-party managed revenues | $10,368 | $10,814 | $83,486 | (87.6)% | (87.0)% | | Third-party managed cost of operations | $8,968 | $9,324 | $79,765 | (88.8)% | (88.3)% | | Third-party managed segment contribution | $1,400 | $1,490 | $3,721 | (62.4)% | (60.0)% | | Third-party managed margin | 13.5 % | 13.8 % | 4.5 % | 905 bps | 932 bps | - The significant decreases in revenue, cost, and NOI were primarily caused by the strategic exit of operations for the historically largest domestic customer in this segment[301] Other Consolidated Operating Expenses (Three Months) This section details changes in corporate-level operating expenses for Q2 2023, including depreciation and amortization, selling, general and administrative (SG&A), and acquisition, cyber incident and other, net expenses - Depreciation and amortization expense increased by 2.7% to $84.9 million, mainly due to recently completed expansions and developments, partially offset by favorable foreign currency translation[334] - Corporate-level SG&A expenses decreased by 4.4% to $53.8 million, driven by lower stock-based compensation, partially offset by increased travel and professional fees[302][335] - Acquisition, cyber incident and other, net expenses increased significantly to $27.2 million, primarily due to $19.0 million in cyber incident costs, $2.8 million in severance, and $2.5 million in Project Orion implementation costs[303] Other Expense and Income (Three Months) This section highlights significant changes in other expense and income items for Q2 2023, including a gain from real estate sale, increased interest expense, impairment of a related party loan, and a substantial loss on a put option Other (Expense) Income (Three Months Ended June 30, in thousands) | Metric | 2023 Actual | 2022 Actual | Change % | | :----------------------------------------- | :---------- | :---------- | :------- | | Interest expense | $(36,431) | $(26,545) | 37.2 % | | Loss on debt extinguishment, modifications and termination of derivative instruments | $(627) | $(627) | — % | | Loss from investments in partially owned entities | $(709) | $(359) | 97.5 % | | Impairment of related party loan receivable | $(21,972) | $— | n/r | | Loss on put option | $(56,576) | $— | n/r | - Interest expense increased by 37.2% to $36.4 million, driven by rising interest rates on floating-rate debt and higher outstanding borrowings[278] - A $22.0 million impairment of a related party loan receivable was recorded for a loan to Comfrio, which was fully impaired during Q2 2023[337] - A $56.6 million loss on put option was recognized, representing the estimated loss when the exercise of the Comfrio put option became probable[279] Income Tax Benefit (Expense) (Three Months) Income tax expense for Q2 2023 was $0.5 million, a significant increase from a $12.1 million benefit in Q2 2022, primarily due to improved operating results and the absence of a non-recurring tax benefit from the prior year - Income tax expense for Q2 2023 was $0.5 million, compared to a $12.1 million income tax benefit in Q2 2022[306] - The change is primarily due to improved operating results and the non-recurring $6.5 million discrete tax benefit recognized in Q2 2022 from the deconsolidation of Chilean operations[306] Comparison of Results for the Six Months Ended June 30, 2023 and 2022 This sub-section analyzes the financial performance for the first six months of 2023 compared to 2022, detailing revenue, cost of operations, and contribution (NOI) for each segment, as well as other consolidated expenses and income Warehouse Segment Warehouse segment revenues increased by 6.4% (7.9% on a constant currency basis) for H1 2023, driven by pricing initiatives and improved economic occupancy, despite a slight decline in throughput due to the cyber incident, with cost of operations also increasing Warehouse Segment Performance (Six Months Ended June 30, in thousands) | Metric | 2023 Actual | 2023 Constant Currency | 2022 Actual | Change Actual | Change Constant Currency | | :------------------------------------ | :---------- | :--------------------- | :---------- | :------------ | :----------------------- | | Total warehouse segment revenues | $1,176,222 | $1,192,228 | $1,105,304 | 6.4 % | 7.9 % | | Total warehouse segment cost of operations | $828,553 | $840,188 | $808,061 | 2.5 % | 4.0 % | | Warehouse segment contribution (NOI) | $347,669 | $352,040 | $297,243 | 17.0 % | 18.4 % | | Total warehouse segment margin | 29.6 % | 29.5 % | 26.9 % | 267 bps | 264 bps | - Revenue growth was primarily from the same store pool due to pricing initiatives, rate escalations, and improved economic occupancy, partially offset by throughput decline from the cyber incident[340] - Warehouse segment NOI increased by 17.0% (18.4% on a constant currency basis) to $347.7 million, with margin improving by 267 basis points[310] Same Store and Non-Same Store Analysis (Six Months) Same store results for H1 2023 showed increased economic occupancy and rent/storage revenues per pallet, while throughput declined due to the cyber incident, with non-same store results impacted by expansions and acquisitions Same Store Warehouse Performance (Six Months Ended June 30, in thousands) | Metric | 2023 Actual | 2023 Constant Currency | 2022 Actual | Change Actual | Change Constant Currency | | :------------------------------------ | :---------- | :--------------------- | :---------- | :------------ | :----------------------- | | Total same store revenues | $1,124,503 | $1,139,267 | $1,054,379 | 6.7 % | 8.1 % | | Total same store cost of operations | $771,631 | $782,355 | $756,715 | 2.0 % | 3.4 % | | Same store contribution (NOI) | $352,872 | $356,912 | $297,664 | 18.5 % | 19.9 % | | Economic occupancy percentage | 84.7 % | n/a | 77.5 % | 722 bps | n/a | | Throughput pallets (in thousands) | 17,868 | n/a | 18,902 | (5.5)% | n/a | - Same store economic occupancy increased by 722 basis points to 84.7%, driven by improved customer service initiatives and increased food production[318] - Same store throughput pallets decreased by 5.5% due to the cyber incident and a slight decline in end-consumer demand[348] Transportation Segment Transportation segment revenues decreased by 21.5% for H1 2023, primarily due to a strategic transition in the UK, softening demand, and the cyber incident, though margin improved significantly Transportation Segment Performance (Six Months Ended June 30, in thousands) | Metric | 2023 Actual | 2023 Constant Currency | 2022 Actual | Change Actual | Change Constant Currency | | :------------------------------------ | :---------- | :--------------------- | :---------- | :------------ | :----------------------- | | Transportation revenues | $126,150 | $130,453 | $160,801 | (21.5)% | (18.9)% | | Total transportation cost of operations | $104,681 | $108,561 | $138,687 | (24.5)% | (21.7)% | | Transportation segment contribution (NOI) | $21,469 | $21,892 | $22,114 | (2.9)% | (1.0)% | | Transportation margin | 17.0 % | 16.8 % | 13.8 % | 327 bps | 303 bps | - Revenue decrease was primarily driven by the strategic transition of UK transportation business to a 3PL model, softening macro-environment demand, and the cyber incident[320] - Transportation segment margin increased by 327 basis points to 17.0%, mainly due to rate increases[321]