Iron Mountain Incorporated — Form 10-Q Summary
Business context and reporting period
Iron Mountain is a global information-management services provider offering records and data storage, document management, secure destruction, courier and related services across North America, Europe, Latin America and Asia Pacific. This unaudited filing covers the three and nine months ended September 30, 2012, compared with the same 2011 periods. Results exclude the Digital, New Zealand and Italian businesses from continuing operations following their dispositions.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Total revenue | $748.1 million | $768.3 million | $2.247 billion | $2.273 billion |
| Operating income | $154.0 million | $135.2 million | $454.5 million | $421.7 million |
| Operating margin | 20.6% | 17.6% | 20.2% | 18.6% |
| Income from continuing operations | $53.7 million | $50.4 million | $156.2 million | $199.0 million |
| Net income attributable to Iron Mountain | $52.8 million | $37.3 million | $146.2 million | $363.5 million |
| Diluted EPS from continuing operations | $0.31 | $0.26 | $0.91 | $0.99 |
| Adjusted OIBDA | $244.1 million | $253.7 million | $705.6 million | $712.8 million |
| Adjusted OIBDA margin | 32.6% | 33.0% | 31.4% | 31.4% |
Storage rental revenue increased 1.7% in the quarter and 2.5% year to date, while service revenue declined 8.1% and 5.7%, respectively. The service decline was driven primarily by lower complementary-service activity and recycled-paper prices. Reported revenue was also reduced by foreign-exchange movements.
Q3 operating income benefited from the absence of the $42.5 million non-cash goodwill impairment recorded in Q3 2011 and from lower operating expenses. Adjusted OIBDA declined because of weaker revenue, particularly in North America. The nine-month continuing-operations tax rate increased to 40.3% from 24.7% in 2011, when tax benefits from previously unrecognized tax positions materially reduced the rate.
Cash flow from continuing operations was $311.7 million for the first nine months, down from $451.2 million. Capital expenditures were $165.5 million, acquisition spending was $106.2 million and additions to customer relationship and acquisition costs were $13.4 million. Cash and cash equivalents were $334.6 million at September 30, 2012, plus $36.6 million of restricted cash.
Total long-term debt was $3.739 billion, including $3.668 billion net of the current portion. The company had no revolving-credit borrowings, $722.1 million of remaining revolver availability and $2.9 million of outstanding letters of credit. The term loan interest rate was 2.3%. Leverage ratios remained within covenant limits, although revolving-credit and term-loan leverage increased to 3.6 from 3.4 at December 31, 2011, and bond leverage increased to 4.5 from 3.9.
Material changes versus the prior comparable period
- Quarterly revenue declined 2.6%; nine-month revenue declined 1.1%. Storage rental growth was offset by weaker service revenue.
- Quarterly operating margin improved by 300 basis points, while adjusted OIBDA margin declined 40 basis points. Nine-month adjusted OIBDA margin was unchanged at 31.4%.
- Quarterly continuing-operations income increased 6.6%, but nine-month continuing-operations income decreased 21.5%, primarily because of higher interest expense and the prior-year tax benefits.
- Net income attributable to Iron Mountain fell 59.8% for the nine months, largely because 2011 included a $200.3 million after-tax gain on the Digital Sale; 2012 included a $1.9 million loss on the Italian Business sale.
- In August 2012, the company issued $1.0 billion of 5.75% senior subordinated notes due 2024. Proceeds were used to redeem $320.0 million of 6.625% notes, $200.0 million of 8.75% notes, repay other borrowings and fund general corporate purposes.
- International revenue increased 0.6% for the first nine months and segment adjusted OIBDA increased 8.2%, while North American revenue and segment adjusted OIBDA declined 1.8% and 3.7%, respectively.
- The company acquired Grupo Store in Brazil and a controlling interest in Sispace AG in Switzerland during 2012, with aggregate acquisition consideration of approximately $117.9 million through September 30.
Guidance, outlook, risks and unusual items
- Management expected 2012 internal revenue growth of approximately negative 1% to positive 1% and 2012 capital expenditures of approximately $255.0 million, excluding potential acquisitions.
- The company is pursuing a REIT conversion targeted for no earlier than January 1, 2014. It estimated total conversion-related costs of $325 million to $425 million, including $225 million to $275 million of tax payments, and incremental operating and capital expenditures of $100 million to $150 million through 2014.
- REIT conversion depends on favorable IRS private-letter rulings, including treatment of racking as real estate, and continued compliance with REIT asset, income and distribution requirements. Failure to qualify could result in regular corporate taxation.
- A $700 million special dividend was declared after quarter-end, payable November 21, 2012 in cash and/or common stock, with aggregate cash capped at $140 million. The resulting share issuance was not known as of the filing date and would affect future weighted-average shares and EPS.
- The company expected to operate at a target leverage ratio of 3x to 4x EBITDA, but leverage could temporarily exceed that range because of REIT-related cash outlays. Debt agreements restrict acquisitions, dividends, additional indebtedness, investments and certain other actions.
- Management disclosed an unremediated material weakness in internal control over financial reporting related to identifying and monitoring price-reduction clauses in U.S. government contracts. Remediation actions were underway, with testing expected in the fourth quarter of 2012.
- The company voluntarily disclosed potential noncompliance with GSA pricing requirements and received a separate government subpoena related to a possible False Claims Act inquiry. Additional refunds, penalties, treble damages or interest were possible, but the amount was not determinable.
- Aggregate losses from litigation and other contingencies could exceed recorded amounts by up to approximately $38 million over the next several years. Massachusetts tax assessments totaled approximately $8.2 million, excluding potential further liabilities, and were being challenged.
- Other unusual items included a $10.6 million debt-extinguishment charge in Q3 2012, foreign-currency losses of $8.1 million for the first nine months, and $16.2 million of REIT-conversion costs during the first nine months.
Most important facts for investors to verify
- Whether service-revenue weakness, recycled-paper pricing and negative internal growth persist beyond 2012.
- The cash requirements, IRS rulings, tax payments and execution risks associated with the proposed REIT conversion.
- The effect of the special dividend, including the number of shares issued, cash paid and resulting dilution.
- Debt maturities, refinancing capacity, covenant headroom and the sustainability of dividends under the company’s leverage profile.
- The ultimate resolution and financial exposure from the GSA pricing matter, False Claims Act inquiry, Massachusetts tax assessments and other contingencies.
- Whether management remediates the disclosed internal-control material weakness and whether any restatement or estimate adjustment becomes necessary.