Iron Mountain Incorporated — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2011. The interim financial statements are unaudited. Iron Mountain provides global information-management, records-storage, data-protection, destruction and related services across North America, Europe, Latin America and Asia Pacific.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total revenue | $772.1 million | $731.1 million | $2.285 billion | $2.181 billion |
| Operating income | $116.8 million | $107.0 million | $398.0 million | $405.1 million |
| Operating margin | 15.1% | 14.6% | 17.4% | 18.6% |
| Income from continuing operations | $33.5 million | $27.5 million | $176.2 million | $109.6 million |
| Net income attributable to Iron Mountain | $37.3 million | $(153.8) million | $363.5 million | $(86.9) million |
| Diluted EPS from continuing operations | $0.17 | $0.14 | $0.88 | $0.54 |
| Diluted EPS attributable to Iron Mountain | $0.19 | $(0.76) | $1.81 | $(0.43) |
| Adjusted OIBDA | $252.3 million | $251.4 million | $694.9 million | $699.4 million |
| Adjusted OIBDA margin | 32.7% | 34.4% | 30.4% | 32.1% |
Revenue and operating performance
- Q3 revenue increased 5.6%; nine-month revenue increased 4.8%. Internal revenue growth was 2.5% for Q3 and 2.0% year to date, with foreign exchange contributing approximately 2.3% to reported growth.
- Storage revenue increased 6.2% in Q3 and 5.5% year to date. Service revenue increased 4.8% in Q3 and 3.8% year to date.
- Q3 North American Physical revenue increased 3.3%, while Adjusted OIBDA declined 2.1% and margin fell to 44.7% from 47.1%. Nine-month revenue increased 1.9%, while Adjusted OIBDA declined 1.0%.
- Q3 International Physical revenue increased 12.6% and Adjusted OIBDA increased 33.9%. Nine-month revenue increased 13.6% and Adjusted OIBDA increased 22.7%, supported by currency, acquisitions, productivity gains and pricing actions.
- Reported operating income benefited from lower impairment charges than in the prior-year period, but underlying Adjusted OIBDA margins contracted due to higher corporate, sales and marketing, incentive compensation and technology costs.
Cash flow, liquidity and debt
- Cash flow from operating activities was $451.0 million for the first nine months, including $450.2 million from continuing operations, compared with $445.0 million and $430.7 million, respectively, in the prior-year period.
- Management-defined free cash flow before acquisitions and discretionary investments was $304.8 million, compared with $257.5 million in the prior-year period.
- Capital expenditures were $148.3 million, acquisition spending was $75.2 million and additions to customer relationship and acquisition costs were $16.9 million. Management expected approximately $225 million of 2011 capital expenditures, including approximately $18 million for real estate purchases.
- Cash and cash equivalents were $480.9 million at September 30, 2011, and cash plus restricted cash was $516.0 million. The company had $671.0 million of remaining availability under its revolving credit facility, subject to borrowing limitations.
- Total long-term debt was $3.320 billion, including the current portion of $63.2 million; long-term debt net of current maturities was $3.257 billion. The company described itself as highly leveraged.
- The new credit agreement includes a $725 million revolving facility and a $500 million term loan facility, both generally maturing in 2016. Debt covenants include leverage and fixed-charge coverage requirements. September 30, 2011 leverage ratios were below permitted maximums, and fixed-charge coverage was 1.6 versus a 1.2 minimum.
- Financing activities included $394.0 million of net proceeds from new 2019 notes, $231.3 million of early note retirement, $548.5 million of share repurchases and $125.7 million of dividends.
Material changes versus the prior comparable period
- Continuing-operations income rose 21.8% in Q3 and 60.7% for the first nine months, primarily reflecting revenue growth, lower interest expense, lower impairment charges and favorable discrete tax benefits.
- Net income comparisons were significantly affected by discontinued operations. The company recorded a $200.3 million after-tax gain in the first nine months of 2011 on the sale of its Digital Business, versus a $192.9 million loss from discontinued operations in the prior-year period.
- The Digital Business was sold to Autonomy on June 2, 2011 for approximately $395.4 million in cash before related adjustments and costs. The parties disputed the working-capital adjustment, which was referred to an independent accounting firm.
- The New Zealand records-management business was classified as discontinued operations and sold on October 3, 2011 for approximately $10.0 million, subject to post-closing working-capital adjustment. Management anticipated an approximately $1.8 million gain in the fourth quarter.
- In Q3 2011, the company recorded a provisional $45.0 million goodwill impairment for Western Europe, an $8.0 million Italian customer-relationship intangible impairment and approximately $6.6 million of Italian property, plant and equipment impairments. The goodwill charge and related tax benefit were subject to fourth-quarter refinement.
- The company repurchased approximately 16.8 million shares during the first nine months, reducing outstanding shares materially. Remaining repurchase authorization at September 30 was $540.3 million.
- SG&A increased 12.7% for the first nine months, including $15.0 million of advisory and other costs related to a proxy contest and higher incentive compensation. Transportation costs also increased materially.
Guidance, outlook, risks and unusual items
- Management expected to fund near-term cash requirements through operating cash flow, existing cash, the new credit agreement and other potential financings. The company planned to operate around the midpoint of a 3x–4x EBITDA target leverage range.
- Iron Mountain committed to approximately $2.2 billion of shareholder payouts through 2013, including approximately $1.2 billion returned by May 2012. Through November 3, 2011, approximately $764 million had been returned. Future payouts were expected to be funded with operating cash flow and borrowings.
- Management cited risks from high leverage, refinancing needs, covenant compliance, economic conditions, customer demand, foreign exchange, inflation, privacy and information-security obligations, litigation, acquisitions and international operations.
- Aggregate reasonably possible litigation losses beyond accrued amounts were estimated at up to $33.3 million over the next several years.
- A government contract review resulted in a $6.0 million revenue reduction in the first nine months for estimated potential overbillings. The company also faced Massachusetts tax notices of intention to assess totaling $7.9 million, including interest and penalties.
- The company settled certain Brazilian labor claims for approximately $1.1 million if all 531 eligible individuals accept the settlement. A patent lawsuit relating to the former Digital Business was assumed and indemnified by Autonomy.
- A November 4, 2011 fire at a leased facility in Aprilla, Italy caused extensive damage and appeared to be a total loss. The company expected insurance coverage and did not expect a material consolidated impact; revenue from the facility was less than 0.5% of consolidated revenue.
- The effective tax rate benefited from recognition of previously unrecognized tax benefits of $31.9 million in Q3 and $36.2 million for the first nine months. Future tax rates remain subject to foreign earnings mix, tax law, foreign exchange and tax-audit outcomes.
Important facts for investors to verify
- Final valuation and tax adjustments for the provisional Western Europe goodwill impairment.
- Resolution of the disputed Digital Sale working-capital adjustment and related Autonomy obligations.
- Post-closing adjustments and the actual gain on the New Zealand sale.
- Sustainability of Adjusted OIBDA margins amid higher SG&A, sales investment, incentive compensation and transportation costs.
- Capacity to fund the planned shareholder payouts while maintaining covenant compliance and refinancing access.
- Progress on the Aprilla, Italy fire insurance claim and any resulting operational or customer liabilities.
- Exposure to litigation, tax assessments, government-contract pricing adjustments and other contingencies not fully resolved at September 30, 2011.