Iron Mountain Incorporated — 2018 Form 10-K Summary
Business context and reporting period
Iron Mountain provides records and information management, physical and digital data protection, secure destruction, information governance, and enterprise data-center colocation services. The company operates in approximately 50 countries, serves approximately 225,000 customers, and has operated as a U.S. REIT since 2014.
This Form 10-K covers the fiscal year ended December 31, 2018, with quarterly information including the fourth quarter. 2018 results include IO Data Centers, LLC (IODC) from January 10, 2018. The company adopted ASC 606 revenue recognition on January 1, 2018 using the modified retrospective method.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $4.226 billion | $3.846 billion | Up 9.9% |
| Storage rental revenue | $2.622 billion | $2.378 billion | Up 10.3% |
| Service revenue | $1.603 billion | $1.468 billion | Up 9.2% |
| Operating income | $755.5 million | $649.1 million | Up 16.4% |
| Income from continuing operations | $377.0 million | $191.7 million | Up 96.6% |
| Net income attributable to Iron Mountain | $363.4 million | $183.8 million | Up 97.7% |
| Diluted EPS attributable to Iron Mountain | $1.27 | $0.69 | Up from $0.69 |
| Adjusted EBITDA | $1.436 billion | $1.260 billion | Up 13.9% |
| Adjusted EBITDA margin | 34.0% | 32.8% | Up 120 basis points |
| FFO (Normalized) | $658.1 million | $568.4 million | Up 15.8% |
| Dividends declared per share | $2.3753 | $2.2706 | Up 4.6% |
Fourth-quarter 2018 revenue was $1.061 billion, operating income was $191.8 million, income from continuing operations was $158.8 million, and diluted EPS attributable to Iron Mountain was $0.55. Fourth-quarter results benefited materially from a $55.3 million after-tax gain on real-estate sales, an approximately $8.8 million gain from Argentina fire-insurance proceeds, foreign-exchange gains, and lower tax expense.
Cash flow from continuing operations was $936.5 million, compared with $724.3 million in 2017. Cash paid for capital expenditures was $460.1 million, and cash paid for acquisitions was $1.759 billion. Cash and cash equivalents declined to $165.5 million from $925.7 million at year-end 2017, primarily reflecting acquisition spending, capital expenditures, dividends, and related financing activity.
Total debt, including the current portion, was $8.143 billion at December 31, 2018, compared with $7.043 billion at year-end 2017. Interest expense increased to $409.3 million from $353.6 million. Approximately 74% of total debt was fixed-rate; a 1% increase in the weighted-average variable interest rate would have reduced 2018 net income by approximately $18.7 million. Revolver availability was approximately $912.9 million.
Material changes versus the prior comparable period
- IODC and other data-center acquisitions substantially expanded the Global Data Center Business. Global Data Center revenue increased to $229.0 million from $37.7 million, and segment Adjusted EBITDA increased to $99.6 million from $11.3 million.
- Data-center capacity increased to 324.9 megawatts of potential capacity, with 91.4% leased as of December 31, 2018.
- 2018 acquisitions consumed $1.759 billion of cash, including IODC, Credit Suisse data centers, and EvoSwitch. Total acquisition and integration expenditures related to Recall and IODC were estimated at approximately $405 million, with $388.1 million incurred cumulatively through year-end 2018.
- Internal revenue growth moderated to 3.6% from 2017 levels. Internal storage rental growth declined to 2.4% from 3.9%, while service revenue growth improved to 5.4% from negative 0.3%.
- North American Records and Information Management revenue increased 4.3% and its Adjusted EBITDA margin expanded to 44.8% from 43.1%. North American Data Management revenue declined 1.9% and its margin fell to 54.3% from 55.6%.
- Cost discipline and Recall synergies helped reduce labor and selling, general and administrative costs as percentages of revenue, although facility expenses increased due primarily to data-center expansion.
- ASC 606 reduced opening stockholders’ equity by $30.2 million. The standard increased 2018 Adjusted EBITDA by approximately $25.3 million and reclassified approximately $14.2 million of revenue from storage rental to service revenue.
Guidance, outlook, commentary, risks, and unusual items
Management expected 2019 internal storage rental revenue growth of approximately 1.75% to 2.5% and internal total revenue growth of approximately 2.0% to 2.5%. Planned 2019 capital expenditures were approximately $570 million to $580 million based on the disclosed categories and excluding potential future acquisitions, opportunistic real-estate investments, and certain integration expenditures.
Management expected to reduce leverage over time through capital allocation and business growth, but stated that the company was operating above its long-term targeted leverage ratio. The company expects to fund near-term liquidity needs through operating cash flow, cash on hand, revolver borrowings, and other financing, including potential ATM equity sales.
- Primary structural risk: customers may shift from physical records and backup tapes to digital, cloud, or other technologies. The company reported slight 2018 volume declines in its North American records and data-management businesses.
- Service revenue is exposed to declining retrieval and tape-rotation activity, while shredding revenue benefits from destruction volumes and recycled-paper prices that may not recur.
- Data-center expansion requires substantial capital, power, connectivity, and customer demand commitments and may not achieve expected returns.
- Leverage, debt covenants, refinancing needs, interest rates, and restrictions on dividends or acquisitions remain significant financial risks. The 2018 net total lease-adjusted leverage ratio was 5.6 versus a maximum allowable ratio of 6.5.
- REIT qualification and required distributions are material contingencies. Failure to qualify as a REIT could subject the company to corporate income tax and materially reduce cash available for distributions.
- Data security, privacy, cyberattacks, service interruptions, fire and safety requirements, environmental liabilities, foreign-exchange movements, and international operating risks could materially affect results.
- Reported 2018 earnings included a $55.3 million after-tax real-estate gain, an $8.8 million Argentina insurance-related gain, a $15.6 million foreign-currency transaction gain, and a $12.4 million loss from discontinued operations.
- Contractual obligations totaled approximately $13.677 billion, including debt, interest, operating leases, capital leases, and purchase obligations. The filing disclosed no material pending legal proceedings, but estimated reasonably possible additional litigation losses of up to $16.8 million beyond amounts accrued.
Important facts for investors to verify
- Reconcile reported growth with acquisition-driven growth, particularly the contribution and integration performance of IODC and other data-center assets.
- Assess whether internal storage rental growth can remain within management’s 2019 outlook as physical-record volumes and data-management activity decline.
- Review debt maturities, covenant headroom, variable-rate exposure, refinancing requirements, and the company’s stated plan to reduce leverage.
- Evaluate recurring free cash flow after capital expenditures, acquisition spending, dividends, and required debt service; year-end cash fell sharply despite higher operating cash flow.
- Separate recurring operating performance from the 2018 real-estate, insurance, foreign-exchange, tax, discontinued-operation, and ASC 606 effects.
- Monitor data-center utilization, lease expirations, power costs, required expansion capital, and the sensitivity of goodwill valuations; Global Data Center goodwill had less than a 20% valuation cushion at the October 1, 2018 test date.
- Verify continued REIT qualification, distribution capacity, tax reserves, and the impact of the 2019 lease-accounting adoption, which management estimated would add approximately $1.75 billion to $1.95 billion of lease liabilities.