Iron Mountain Incorporated 2018 Q3 Form 10-Q Summary
Business context and reporting period
Iron Mountain provides records and information management, storage rental, secure destruction, data protection, colocation and data center services across North America, Europe, Latin America, Asia and Africa. The filing covers the unaudited quarter and nine months ended September 30, 2018, with comparisons to the corresponding 2017 periods. Iron Mountain operates as a U.S. real estate investment trust.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $1,061.0 million | $965.7 million | $3,164.3 million | $2,854.3 million |
| Operating income | $195.7 million | $176.8 million | $563.7 million | $494.7 million |
| Income from continuing operations | $78.6 million | $25.4 million | $218.1 million | $167.4 million |
| Net income attributable to Iron Mountain | $67.1 million | $24.3 million | $205.2 million | $161.1 million |
| Diluted EPS from continuing operations | $0.27 | $0.10 | $0.76 | $0.62 |
| Adjusted EBITDA | $363.8 million | $323.0 million | $1,076.3 million | $933.7 million |
| Adjusted EBITDA margin | 34.3% | 33.5% | 34.0% | 32.7% |
| Cash flow from operations | Not separately provided | Not separately provided | $624.5 million | $518.9 million |
| Capital expenditures | Not separately provided | Not separately provided | $330.0 million | $243.7 million |
Q3 operating margin was approximately 18.4%, compared with 18.3% in the prior-year quarter. Nine-month operating margin was approximately 17.8%, compared with 17.3%. Income from discontinued operations was a loss of $11.6 million in Q3 2018 and $12.4 million for the first nine months, primarily related to post-closing adjustments associated with the Access contingent consideration.
At September 30, 2018, cash and cash equivalents were $197.7 million, down from $925.7 million at December 31, 2017. Total debt had a carrying amount of $8.23 billion, including $8.11 billion of long-term debt net of current maturities, compared with $7.04 billion and $6.90 billion, respectively, at year-end 2017. Revolving credit availability was $885.2 million. The fixed-charge coverage ratio was 2.3 versus a minimum of 1.5, and the net total lease-adjusted leverage ratio was 5.6 versus a maximum of 6.5.
Material changes versus the prior comparable period
- Revenue increased 9.9% in Q3 and 10.9% for the nine months. Nine-month internal revenue growth was 3.6%, while acquisitions and divestitures contributed 6.8% to reported growth and foreign currency contributed 0.5%.
- Storage rental revenue increased 9.3% in Q3 and 11.3% year to date; service revenue increased 10.8% and 10.1%, respectively.
- Adjusted EBITDA increased 12.6% in Q3 and 15.3% year to date, with margin expansion of 80 and 130 basis points, respectively.
- Interest expense increased 14.6% year to date to $303.6 million, primarily due to higher borrowings related to data center acquisitions.
- Cash from operations increased $103.2 million year to date, but investing cash outflows increased substantially because acquisition spending rose to $1.71 billion from $194.1 million.
- Depreciation and amortization increased to $474.6 million from $381.3 million year to date, primarily because of data center acquisitions.
- The Global Data Center Business expanded materially following the $1.35 billion IODC acquisition, the $111.4 million Credit Suisse transaction and the approximately $222.0 million EvoSwitch transaction. Nine-month data center revenue increased to $164.9 million from $24.8 million.
- Iron Mountain adopted ASC 606 on January 1, 2018 using the modified retrospective method, reducing opening equity by $30.2 million. Management estimated that adoption increased 2018 Adjusted EBITDA by approximately $6.9 million in Q3 and $18.9 million year to date.
Guidance, outlook, commentary and risks
Management expects 2018 consolidated internal storage rental revenue growth of approximately 2.5% to 2.75% and internal total revenue growth of approximately 3.5% to 3.75%. Expected 2018 capital expenditures, excluding potential acquisitions, opportunistic real estate investments and Recall integration spending, were approximately $415 million to $425 million: $145 million to $155 million for real estate and non-real-estate maintenance and investment, approximately $200 million for data centers and approximately $70 million for real estate investment, net of sales, and innovation.
Management expects ASC 606 to increase 2018 Adjusted EBITDA by approximately $20 million to $25 million. Total acquisition and integration expenditures associated with Recall and IODC were estimated at approximately $395 million, with the majority expected by the end of 2018; cumulative expenditures through September 30, 2018 were $366.7 million.
Management stated that it expects to meet near-term cash requirements through operating cash flow, cash on hand, credit facilities and other financings, including the ATM equity program. The company acknowledged that it was operating above its long-term targeted leverage ratio and expects to reduce leverage over time through capital allocation and business growth.
Key risks include substantial leverage and refinancing requirements, interest-rate exposure, compliance with debt covenants, acquisition integration and execution, data center power and service interruptions, foreign currency volatility, cybersecurity and data privacy obligations, changing customer preferences toward digital storage, REIT qualification, inflationary costs, litigation and the ability to sustain dividends. The company estimated reasonably possible additional losses for all loss contingencies of up to $17.2 million over several years, with some amounts potentially covered by insurance or indemnity arrangements.
The filing reports no material new loss contingencies since December 31, 2017 and states that disclosure controls and procedures were effective as of September 30, 2018. On October 25, 2018, the board declared a quarterly dividend of $0.6110 per share, payable January 3, 2019.
Most important facts for investors to verify
- Verify the sustainability of cash flow after $330.0 million of year-to-date capital expenditures, continued data center investment and quarterly dividends.
- Assess leverage, interest-rate sensitivity and covenant headroom after total debt increased to $8.23 billion.
- Review the operating performance, integration costs and required capital spending of IODC, Credit Suisse, EvoSwitch and other data center acquisitions.
- Reconcile reported growth with internal growth, foreign exchange effects, ASC 606 accounting changes and acquisition contributions.
- Monitor North American Data Management, where nine-month internal revenue declined 1.5%, and the continued decline in activity-based service volumes.
- Evaluate the effect of discontinued-operation losses, tax-rate variability, foreign currency movements and unusual acquisition-related costs on recurring earnings.
- Confirm the company’s ability to remain qualified as a REIT and comply with debt covenants while maintaining dividend payments.