Business Context and Reporting Period
Iron Mountain Incorporated filed an unaudited Form 10-Q for the three months ended March 31, 2011. The company provides physical and digital information management services, including recurring storage, records handling, data protection, destruction, fulfillment, eDiscovery and related digital services. Reportable businesses were North American Physical, International Physical and Worldwide Digital.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $799.0 million | $776.5 million | Up 2.9% |
| Storage revenue | $450.1 million | $428.2 million | Up 5.1% |
| Service revenue | $348.8 million | $348.3 million | Up 0.1% |
| Operating income | $131.7 million | $132.7 million | Down 0.8% |
| Operating margin | 16.5% | 17.1% | Down 0.6 percentage points |
| Adjusted OIBDA | $221.6 million | $217.4 million | Up 1.9% |
| Adjusted OIBDA margin | 27.7% | 28.0% | Down 0.3 percentage points |
| Net income | $74.6 million | $25.8 million | Up 188.8% |
| Net income attributable to Iron Mountain | $73.5 million | $25.6 million | Up 187.3% |
| Diluted EPS | $0.37 | $0.12 | Up $0.25 |
| Cash flow from operations | $119.3 million | $131.2 million | Down 9.0% |
| Free cash flow before acquisitions and discretionary investments | $58.0 million | $54.1 million | Up 7.2% |
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $189.8 million at March 31, 2011, compared with $258.7 million at December 31, 2010. Cash plus restricted cash was $224.9 million.
- Total debt was $3.006 billion, including $44.8 million classified as current debt. Long-term debt, net of current portion, was $2.961 billion.
- Revolving credit borrowings were $192.0 million, with reported remaining availability of $570.5 million under the $765.0 million revolving facilities. Letters of credit totaled $2.5 million.
- The revolving credit and term-loan leverage ratio was 3.0 versus a maximum of 5.5; bond leverage was 3.6 versus a maximum of 6.5.
- Total assets were $6.470 billion and total equity was $2.028 billion at March 31, 2011.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by storage, with internal storage growth of 3.4%. Total internal revenue growth was 1.0%, while foreign currency and acquisitions contributed to reported growth.
- Service revenue was essentially flat. Complementary services declined because of lower eDiscovery revenue, smaller average matter sizes, lower pricing and reduced special-project activity. Recycled-paper revenue increased by approximately $3.0 million because of higher paper prices.
- Operating expenses increased 3.6%, faster than revenue. Selling, general and administrative expense increased 5.0%, including approximately $3.7 million of proxy-contest advisory and related costs. Transportation expense also increased because of higher subcontractor and fuel costs.
- Adjusted OIBDA increased, but its margin declined modestly. Operating income decreased because expense growth and a $0.7 million net disposal/writedown loss offset revenue growth.
- Net income benefited materially from the effective tax rate falling to 17.3% from 61.6%, lower interest expense, foreign-currency gains, a $0.9 million debt-extinguishment gain and a $4.7 million gain from remeasuring the previously held interest in the Polish joint venture.
- Operating cash flow declined because of working-capital uses, higher income-tax payments and lower realized foreign-exchange gains. Capital expenditures declined to $61.5 million from $81.9 million, and acquisition spending declined to $34.7 million from $118.3 million.
- In January 2011, the company acquired the remaining 80% of its Polish joint venture for estimated total consideration of $84.9 million, including estimated contingent consideration, and now owns 100% of the Polish operations.
- The company redeemed the remaining $231.3 million of 7.75% senior subordinated notes in January 2011. Net debt was refinanced through borrowings under the revolving and term-loan facilities and other debt.
- Quarterly dividends increased to $0.1875 per share from $0.0625 per share in the comparable 2010 period.
Guidance, Outlook, Management Commentary and Risks
- Management expected 2011 capital expenditures of approximately $235.0 million, including approximately $15.0 million of real-estate purchases, excluding potential acquisitions.
- The company expected to refinance its credit agreement during 2011 and stated that near-term cash needs would be funded through operating cash flow, existing cash, credit-facility borrowings and other potential financings.
- Management targeted operating around the midpoint of a 3x–4x EBITDA leverage range and stated that the company would remain highly leveraged for the foreseeable future.
- The company announced an intention to return approximately $2.2 billion to stockholders through 2013, including approximately $1.2 billion within the following 12 months through repurchases, dividends and potentially one-time dividends. In May 2011, the repurchase authorization was increased by $850.0 million to $1.2 billion, and the company entered prepaid variable share-repurchase agreements totaling $250.0 million funded by revolving-credit borrowings.
- Key operating risks include weak economic conditions, pricing and demand pressure, volatility in discretionary service and recycled-paper revenue, foreign-exchange movements, inflation, technological change and competition in digital services, acquisition integration, privacy and information-security liabilities, intellectual-property claims and real-estate costs.
- Goodwill totaled $2.379 billion at March 31, 2011. No additional impairment indicators were identified after the October 1, 2010 review, but future impairment remains sensitive to forecasts, discount rates, cash flows and market conditions. The Worldwide Digital Business goodwill balance had previously been reduced by a total impairment charge of $283.8 million in 2010.
- Pending matters included Brazilian labor litigation involving approximately 2,000 alleged service providers and a U.S. patent-infringement lawsuit seeking approximately $26 million plus future royalties. Management did not expect either matter to materially affect consolidated results, but outcomes were uncertain.
- The London fire and Chile earthquake remained disclosed contingencies; management reported adequate insurance and did not expect material financial impact. Chile insurance proceeds of $5.9 million were received in the first quarter.
- The company stated that disclosure controls and procedures were effective as of March 31, 2011 and that no material changes had occurred in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether storage growth and weak service revenue trends persist, particularly in eDiscovery, special projects and activity-based services.
- The sustainability of the unusually low 17.3% effective tax rate and the extent to which foreign-exchange gains and discrete tax benefits affected Q1 earnings.
- Availability and refinancing terms for the credit agreement, future interest costs and compliance with leverage covenants.
- Whether planned stockholder payouts and the $250.0 million prepaid repurchase agreements increase leverage or constrain investment and liquidity.
- Actual 2011 capital expenditures, acquisition spending and free cash flow relative to management expectations.
- Potential changes in goodwill valuations, especially for the Worldwide Digital Business, and the performance of the digital segment.
- Developments in the Brazilian labor matter, patent litigation, London fire claims and other legal or insurance contingencies.