Iron Mountain Incorporated — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013, with quarterly information for the fourth quarter. The filing was dated February 28, 2014 and received an unqualified audit opinion. Iron Mountain provides physical and electronic records storage, information management, data protection, document management and secure destruction services in 36 countries, serving more than 155,000 customers.
Financial performance and position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $3,025.9 million | $3,005.3 million | 0.7% |
| Storage rental revenue | $1,784.7 million | $1,733.1 million | 3.0% |
| Service revenue | $1,241.2 million | $1,272.1 million | (2.4%) |
| Operating income | $492.4 million | $557.0 million | (11.6%) |
| Operating margin | 16.3% | 18.5% | Down 220 bps |
| Income from continuing operations | $100.0 million | $183.5 million | (45.5%) |
| Net income attributable to Iron Mountain | $97.3 million | $171.7 million | (43.4%) |
| Diluted EPS from continuing operations | $0.52 | $1.05 | Down $0.53 |
| Adjusted OIBDA | $895.9 million | $912.2 million | (1.8%) |
| Adjusted OIBDA margin | 29.6% | 30.4% | Down 80 bps |
| Operating cash flow from continuing operations | $506.6 million | $443.7 million | 14.2% |
| Capital expenditures, cash basis | $287.3 million | $240.7 million | 19.4% |
| Cash paid for acquisitions | $317.1 million | $125.1 million | Higher investment |
At December 31, 2013, cash and cash equivalents were $120.5 million, or $154.4 million including restricted cash. Total debt was $4.17 billion, up from $3.83 billion, while total equity declined to $1.06 billion from $1.16 billion. The company had $820.8 million of remaining borrowing capacity under its $1.5 billion revolving credit facility. Approximately 84% of debt was fixed rate, and the weighted-average interest rate was 6.2%.
The company declared regular quarterly dividends of $0.27 per share throughout 2013, totaling $1.08 per share for the year. Approximately $206.8 million of cash dividends were paid. The share repurchase authorization had $66.0 million remaining at year-end.
Material changes versus the prior comparable period
- Revenue growth was limited because 3.0% storage rental growth was offset by a 2.4% decline in service revenue. Internal revenue growth was negative 0.2%, while acquisitions contributed 1.6% and foreign exchange reduced reported growth by approximately 0.7%.
- North American revenue declined 0.8% and segment Adjusted OIBDA margin fell to 40.6% from 41.7%, principally because of lower retrieval and transportation activity, restructuring charges and other strategic costs.
- International revenue increased 4.8%, with segment Adjusted OIBDA rising 18.7% and margin improving to 24.4% from 21.5%, supported by productivity gains, pricing and cost controls.
- Operating expenses increased 3.5%, including a 8.7% increase in selling, general and administrative expense. General and administrative expense included $82.9 million of REIT-related costs versus $34.4 million in 2012.
- Income was also reduced by $23.4 million of restructuring costs, $43.7 million of debt extinguishment expense and $36.2 million of foreign-currency transaction losses.
- The effective tax rate increased slightly to 38.7% from 38.5%. A foreign earnings repatriation generated a net $21.4 million increase in the 2013 tax provision.
- Acquisitions included Cornerstone Records Management for approximately $191 million and businesses in the United States, Brazil, Colombia, Peru and China. Aggregate 2013 consideration was approximately $321 million, including $141.8 million of initially recorded goodwill.
Fourth-quarter 2013 items
| Metric | Q4 2013 | Q4 2012 |
|---|---|---|
| Total revenue | $768.5 million | $758.5 million |
| Operating income | $97.4 million | $102.6 million |
| Income from continuing operations | $48.5 million | $27.3 million |
| Net income attributable to Iron Mountain | $47.3 million | $25.5 million |
| Diluted EPS from continuing operations | $0.25 | $0.15 |
Fourth-quarter operating income was affected by approximately $18.7 million of restructuring costs, $11.2 million of facility-consolidation costs, $8.1 million of other acquisition and strategic costs, and higher depreciation, commissions, bad debt expense and charitable contributions. These pressures were partly offset by lower REIT costs. Fourth-quarter earnings benefited from a tax benefit and the absence of third-quarter debt extinguishment charges.
Guidance, outlook and unusual items
- Management expected 2014 consolidated internal revenue growth of approximately 0% to 2%.
- Management expected 2014 capital expenditures of approximately $340 million, excluding potential acquisitions and additional Conversion Plan-related expenditures; this included approximately $90 million of real estate spending and $5 million of Conversion Plan capital expenditures.
- The company expected an additional $6.9 million of severance and related costs in 2014 from its organizational realignment.
- Iron Mountain intended to operate consistently with REIT requirements beginning January 1, 2014, but conversion was not assured. IRS private-letter rulings remained outstanding, and the IRS had been “tentatively adverse” to treating the company’s racking structures as real estate for REIT purposes.
- Estimated total REIT Conversion Plan costs were $395 million to $425 million, including $210 million to $225 million of related tax payments. Operating and capital expenditures through the end of 2014 were estimated at $185 million to $200 million, with $106.3 million incurred in 2013.
- If successful, the company expected to distribute estimated accumulated earnings and profits of approximately $1.2 billion to $1.7 billion, potentially requiring additional debt or equity financing. Management targeted leverage of 4x to 5x EBITDAR but acknowledged that leverage could temporarily exceed the upper end due to conversion-related cash outlays.
- In January 2014, the company redeemed approximately $248 million of 7.25% notes using revolver borrowings and cash. It also acquired Australian and Turkish businesses for approximately $39.6 million and sold two United Kingdom facilities for net proceeds of approximately $16.5 million.
- A February 2014 fire at the company’s Buenos Aires facility was under investigation. Management believed insurance coverage was adequate and did not expect a material consolidated impact; the facility generated less than 0.5% of consolidated revenue.
Principal risks and contingencies
- Failure to obtain IRS rulings or otherwise qualify for REIT status could eliminate expected tax and financing benefits and leave the company subject to regular corporate taxation.
- High leverage, substantial fixed obligations and restrictive debt covenants could limit acquisitions, dividends, refinancing and other corporate actions. Total contractual obligations were approximately $8.49 billion, including debt, interest, leases and purchase obligations.
- Customers may shift from paper and tape storage to electronic, cloud or other lower-space technologies, reducing physical storage activity and related service revenue.
- Lower record retrieval activity, pricing pressure, higher destruction rates and volatility in recycled-paper prices may continue to pressure service revenue.
- Data-security failures, loss of customer information, privacy regulation, litigation and reputational damage could increase costs or create material liabilities.
- Real-estate, environmental, fire-safety, severe-weather, operational-disruption, foreign-currency and international-market risks remain significant.
- Management estimated that aggregate litigation losses beyond amounts accrued could be up to $46.5 million over several years, with some amounts potentially covered by insurance or indemnification. Government-contract billing matters and Massachusetts tax assessments remained unresolved.
Facts investors should verify
- Final IRS rulings, stockholder approvals and the effective date and structure of any REIT conversion.
- Actual REIT conversion costs, tax payments, accumulated earnings-and-profits distribution and any resulting equity issuance or leverage increase.
- 2014 service revenue trends, particularly retrieval activity, shredding, fulfillment and recycled-paper pricing.
- Progress toward the 4x–5x target leverage range, revolver availability and upcoming debt maturities.
- Whether acquisitions and facility-consolidation initiatives deliver expected revenue growth, synergies and margin improvement.
- Resolution or reserve changes related to government-contract billing, Massachusetts tax assessments, environmental matters and other litigation.
- Insurance recoveries, operational effects and liabilities associated with the Buenos Aires fire and prior Italy fire claims.