Business Context and Reporting Period
Iron Mountain Incorporated filed an unaudited Form 10-Q for the three months ended March 31, 2018. The company provides physical records storage, information management, data protection, colocation and data center solutions globally and operates as a U.S. real estate investment trust.
Results include the January 10, 2018 acquisition of IO Data Centers, LLC (IODC), the March 2018 acquisition of data centers in London and Singapore, and other recent acquisitions. The company adopted ASC 606 revenue recognition on January 1, 2018 using the modified retrospective method, reducing opening stockholders’ equity by $29.5 million.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $938.9 million | $1,042.5 million | Up 11.0% |
| Storage rental revenue | $572.3 million | $651.1 million | Up 13.8% |
| Service revenue | $366.6 million | $391.3 million | Up 6.7% |
| Operating income | $147.8 million | $164.6 million | Up 11.4% |
| Income from continuing operations | $58.8 million | $45.6 million | Down 22.5% |
| Net income attributable to Iron Mountain | $58.1 million | $44.7 million | Down 23.1% |
| Basic and diluted EPS | $0.22 | $0.16 | Down $0.06 |
| Adjusted EBITDA | $292.6 million | $343.0 million | Up 17.2% |
| Adjusted EBITDA margin | 31.2% | 32.9% | Up 170 basis points |
| Cash flow from operating activities | $121.8 million | $91.6 million | Down $30.3 million |
| Capital expenditures | $73.2 million | $95.6 million | Up $22.4 million |
| Cash paid for acquisitions | $12.2 million | $1,429.0 million | Significant increase |
Operating margin was approximately 15.8% in Q1 2018 versus 15.7% in Q1 2017. Income from continuing operations as a percentage of revenue declined to 4.4% from 6.3%, primarily because of higher interest expense, foreign currency transaction losses and acquisition-related amortization and costs.
FFO (Nareit) was $118.1 million versus $121.5 million, while FFO (Normalized) increased to $141.2 million from $125.9 million. Dividends declared were $0.5888 per common share in Q1 2018 versus $0.5504 in Q1 2017.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $442.5 million at March 31, 2018, down from $925.7 million at December 31, 2017, primarily reflecting acquisition spending.
- Total debt had a carrying amount of $8.16 billion, including $137.2 million classified as current. Long-term debt, net of current portion, was $8.02 billion.
- Debt increased from $7.04 billion at December 31, 2017, largely because of financing for the IODC acquisition and other growth investments.
- The revolving credit facility had $800.2 million drawn and approximately $895.2 million of remaining borrowing availability, subject to covenant calculations. The company also had $54.7 million of outstanding letters of credit.
- On March 26, 2018, the company borrowed $700.0 million under a new Term Loan B, using approximately $689.9 million of net proceeds to repay revolving borrowings. The loan matures in January 2026 and bears interest at LIBOR plus 1.75%.
- Net total lease-adjusted leverage was 5.6x versus a maximum allowable 6.5x; the fixed charge coverage ratio was 2.2x versus a minimum of 1.5x. Management stated that the company was operating above its long-term targeted leverage ratio.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by acquisitions, favorable foreign currency translation and 2.8% internal revenue growth. Acquisitions contributed approximately 5.6 percentage points to consolidated revenue growth, while currency contributed approximately 3.0 points.
- Global Data Center revenue increased to $46.6 million from $6.2 million, primarily because of IODC and other data center acquisitions. Segment Adjusted EBITDA increased to $20.8 million from $1.5 million.
- Internal storage rental revenue growth was 3.7%; internal service revenue growth was 1.4%. North American Data Management service revenue declined 6.1% as customer activity became more archival.
- Adjusted EBITDA improved due to revenue growth, Recall-related synergies and lower labor costs as a percentage of revenue. This benefit was partly offset by higher facility costs, information technology spending and bad debt expense.
- Interest expense increased to $97.6 million from $86.1 million because of higher borrowings.
- Other expense changed from $6.4 million of other income to $20.2 million of expense, primarily because foreign currency transaction results changed from a $4.2 million gain to a $21.8 million loss.
- The effective tax rate declined to 2.5% from 13.5%, primarily reflecting a $14.0 million discrete tax benefit associated with resolving a tax matter and the impact of the Tax Cuts and Jobs Act.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2018 internal storage rental revenue growth of approximately 3.0% to 3.5%.
- Expected 2018 capital expenditures are approximately $155 million to $165 million for real estate and non-real-estate maintenance and investment, $185 million for data center capital expenditures, and $150 million to $160 million for real estate investment and innovation.
- Management expects approximately $395 million of total acquisition and integration expenditures related primarily to Recall and IODC, with most expected by the end of 2018. Cumulative expenditures through March 31, 2018 were $334.6 million.
- Management expects ASC 606 adoption to increase 2018 Adjusted EBITDA by approximately $15 million. The filing states that Q1 2018 revenue was $1.2 million higher and operating income was $0.8 million lower than they would have been without adoption.
- The company expects to reduce leverage over time through capital allocation and business growth, but cautions that debt service and refinancing depend on future operating cash flow, working capital, market conditions and access to financing.
- Key risks include maintaining REIT qualification, customer migration toward digital storage, data security and privacy obligations, service interruptions, data center power costs, foreign currency volatility, acquisition integration, litigation, rising interest rates and compliance with debt covenants.
- Pending or contingent matters include a potential additional $35 million payment related to future IODC customer contracts and the proposed acquisition of Beijing property, which remained subject to closing conditions.
- Aggregate reasonably possible litigation losses beyond recorded amounts were estimated at up to $21.5 million over the next several years, with some amounts potentially covered by insurance or indemnity arrangements.
- The company reported ongoing fire-related claims involving former facilities in Italy, Argentina, Brooklyn and Roye, France, and damage from Hurricane Maria at Puerto Rico facilities; management did not expect these matters to materially affect consolidated results.
Important Facts for Investors to Verify
- Reconcile reported revenue and Adjusted EBITDA growth for acquisition contributions, currency effects and ASC 606 adoption.
- Assess leverage capacity, covenant headroom and the effect of higher interest rates on cash available for dividends and investment.
- Evaluate whether IODC and other data center acquisitions generate expected occupancy, revenue growth and returns after integration and amortization costs.
- Monitor operating cash flow, capital expenditure requirements and the company’s ability to fund acquisitions while reducing leverage.
- Review the sustainability of the dividend in light of debt obligations, REIT distribution requirements and cash flow trends.
- Track service revenue declines associated with lower retrieval activity and the potential effect of continued digitization on physical records storage.
- Verify the final tax treatment of deemed repatriation, GILTI and interest deduction limitations, as well as any effect on dividend characterization.
- Review unresolved litigation, insurance coverage and the pending Beijing property transaction.