Iron Mountain Incorporated — Q3 2013 Form 10-Q Summary
Business context and reporting period
Iron Mountain provides records storage, information management, document destruction, data protection and related services across North America, Europe, Latin America and Asia Pacific. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $755.6 million | $748.1 million | $2.257 billion | $2.247 billion |
| Operating income | $140.3 million | $154.0 million | $395.0 million | $454.5 million |
| Operating margin | 18.6% | 20.6% | 17.5% | 20.2% |
| Income from continuing operations | $5.5 million | $53.7 million | $51.4 million | $156.2 million |
| Net income attributable to Iron Mountain | $4.0 million | $52.8 million | $50.0 million | $146.2 million |
| Diluted EPS from continuing operations | $0.03 | $0.31 | $0.27 | $0.91 |
| Adjusted OIBDA | $240.5 million | $244.1 million | $700.6 million | $705.6 million |
| Adjusted OIBDA margin | 31.8% | 32.6% | 31.0% | 31.4% |
Storage rental revenue increased 2.5% in the quarter and 2.8% year to date. Service revenue declined 1.0% in the quarter and 2.7% year to date. Internal revenue growth was 1.0% in the quarter and 0.1% year to date.
Nine-month cash flow from continuing operations was $333.6 million, compared with $311.7 million in the prior-year period. Capital expenditures were $204.9 million, cash acquisitions were $122.7 million and additions to customer relationship and acquisition costs were $16.6 million. Cash and cash equivalents declined to $172.0 million at September 30, 2013 from $243.4 million at December 31, 2012; restricted cash was $33.6 million.
Total long-term debt was $4.025 billion, including $3.974 billion net of the current portion. Revolving facility borrowings were $524.0 million, with $973.7 million of remaining availability. The reported net total lease-adjusted leverage ratio was 4.9 versus a 6.5 maximum, and the fixed-charge coverage ratio was 2.4 versus a 1.5 minimum.
Material changes versus the prior comparable period
- Revenue growth was modest, while operating expenses increased 3.6% in Q3 and 3.9% for the first nine months, causing operating margins to contract.
- General and administrative expense rose substantially, including $69.2 million of REIT-related costs in the first nine months of 2013 versus $16.2 million in 2012.
- Q3 other expense increased to $46.0 million from $7.7 million, primarily because of $43.7 million of debt extinguishment and financing-cost charges and higher foreign-currency losses.
- The effective tax rate increased to 81.5% for Q3 and 63.4% for the first nine months, compared with 36.7% and 40.3%, respectively. A planned $253.0 million foreign-earnings repatriation produced a net approximately $26.0 million increase in the Q3 tax provision.
- North American revenue declined 0.2% in Q3 and 0.8% year to date, while International revenue increased 4.3% and 4.1%, respectively. International Adjusted OIBDA margin improved to 25.2% year to date from 22.3%.
- In August 2013, the company issued $600.0 million of 6% senior notes and C$200.0 million of senior notes, redeemed or tendered approximately $685.1 million of older debt, repaid revolving borrowings and amended its credit agreement. The refinancing increased Q3 interest expense but extended or replaced portions of the debt portfolio.
Guidance, outlook, commentary, risks and unusual items
- Management expected 2013 internal revenue growth of approximately 0% to 1% and 2013 capital expenditures of approximately $285.0 million, excluding potential acquisitions and additional conversion-related capital expenditures.
- The company continued pursuing a conversion to a real estate investment trust beginning January 1, 2014, subject to favorable IRS private letter rulings and other requirements. The IRS had been tentatively adverse regarding whether certain racking structures qualify as real estate, and an IRS working-group review was expected to delay definitive rulings.
- Management estimated total REIT conversion support costs of approximately $375 million to $475 million, including $225 million to $275 million of related tax payments. Incremental operating and capital expenditures through 2014 were estimated at $150 million to $200 million, with $89.6 million incurred during the first nine months of 2013.
- A restructuring plan was expected to generate annual cost savings of approximately $30 million to $40 million beginning in 2014. The company recorded approximately $5 million of restructuring costs in Q3 and expected approximately $25 million of additional costs in Q4 2013.
- The company acquired businesses in the United States, Brazil, Colombia and Peru for approximately $125.5 million through September 30. In October 2013, it acquired Cornerstone Records Management for approximately $191 million, including approximately $9 million held in escrow.
- Key operating risks include declining retrieval and re-file activity, customer migration toward digital technologies, foreign-currency volatility, high leverage and refinancing needs, acquisition integration, privacy and information-security obligations, litigation and regulatory matters, and uncertainty surrounding the REIT conversion.
- Potential litigation and other loss contingencies could result in aggregate losses of up to an additional $43 million over the next several years. The company also faces government contract billing inquiries and Massachusetts tax assessments; the filing does not provide a definitive ultimate loss amount for these matters.
Most important facts for investors to verify
- Whether the IRS ultimately grants the requested rulings and whether the company qualifies to elect REIT status.
- The timing and cash cost of the REIT conversion, including tax payments, systems work, restructuring and compliance expenses.
- Compliance with debt covenants and the company’s ability to refinance or reduce approximately $4.0 billion of debt while funding acquisitions, capital expenditures and dividends.
- Whether storage rental growth can offset continuing weakness in service revenue and retrieval activity.
- The final amounts and timing of government contract, tax, fire-related and other litigation liabilities.
- The effectiveness of the restructuring program and whether projected annual savings of $30 million to $40 million are realized.