Iron Mountain Incorporated: Q3 2016 Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the period ended September 30, 2016. Iron Mountain provides physical records storage, data backup and information management services across North America, Europe, Latin America, Asia Pacific and Africa. The company operates as a REIT for U.S. federal income tax purposes.
The May 2, 2016 acquisition of Recall Holdings materially expanded the business and affected comparability. Recall results were consolidated from the acquisition date; management states that standalone Recall revenue and earnings cannot be separately determined after integration.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | Change |
|---|---|---|---|
| Total revenue | $942.8 million | $746.5 million | +26.3% |
| Operating income | $135.5 million | $126.8 million | +6.8% |
| Operating margin | 14.4% | 17.0% | Down 260 bps |
| Adjusted OIBDA | $294.2 million | $227.8 million | +29.1% |
| Adjusted OIBDA margin | 31.2% | 30.5% | Up 70 bps |
| Income from continuing operations | $5.8 million | $23.5 million | −75.5% |
| Net income attributable to Iron Mountain | $7.1 million | $23.1 million | −69.4% |
| Diluted EPS from continuing operations | $0.02 | $0.11 | Down $0.09 |
| FFO (Normalized) | $117.5 million | $116.6 million | +0.7% |
For the nine months ended September 30, 2016, revenue was $2.577 billion, up 14.3%; operating income was $362.1 million, down 9.7%; operating margin was 14.1% versus 17.8%; Adjusted OIBDA was $790.8 million, up 15.9%; and Adjusted OIBDA margin was 30.7% versus 30.2%.
Q3 revenue growth was primarily acquisition-driven. Storage rental revenue increased 25.3% to $576.5 million, while service revenue increased 27.9% to $366.4 million. Internal revenue growth was 1.4% in Q3 and 1.3% for the nine-month period. Internal service revenue declined 0.5% in Q3 and 0.2% year to date, reflecting lower retrieval, re-file and transportation activity.
Operating cash flow from continuing operations was $419.0 million for the first nine months, compared with $320.1 million in the prior-year period. Cash capital expenditures were $246.0 million, cash paid for acquisitions was $276.4 million, and cash paid for customer relationships and inducements was $40.9 million. Ending cash and cash equivalents were $458.1 million.
At September 30, 2016, total debt had a carrying amount of $6.459 billion, including $6.338 billion net of current maturities. The company had $1.241 billion outstanding under its revolving facility, $234.4 million under its term loan and $208.8 million under its accounts receivable securitization program. Revolver availability was $453.8 million after considering leverage, other debt and $55.4 million of letters of credit.
Material Changes Versus the Prior Comparable Period
- Recall increased scale, assets and reported revenue, but also added depreciation, amortization, rent, integration expenses and financing costs. Goodwill increased from $2.361 billion at year-end 2015 to $3.862 billion at September 30, 2016.
- Common shares outstanding increased to approximately 263.4 million from 211.3 million at December 31, 2015, primarily because 50.2 million shares were issued in the Recall transaction.
- Q3 operating income grew more slowly than revenue, while year-to-date operating income declined, reflecting higher operating costs, depreciation and amortization, and Recall-related expenses.
- Interest expense increased to $83.3 million in Q3 and $225.2 million year to date, compared with $65.1 million and $196.1 million, respectively, primarily because of additional debt used to finance Recall and related transactions.
- The effective tax rate increased to 81.2% in Q3 and 46.2% year to date, compared with 14.3% and 18.6%, respectively, in the prior-year periods. The Q3 rate was adversely affected by a $14.0 million Australia disposal charge with no associated tax benefit.
- Recall costs were $34.1 million in Q3 and $102.9 million year to date. Transformation Initiative charges were $0.2 million in Q3 and $6.0 million year to date, versus $9.1 million in each comparable 2015 period.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2016 internal revenue growth of approximately 1.5% to 2.0%.
- Expected 2016 capital expenditures are approximately $320 million, excluding potential future acquisitions and opportunistic real estate investments; up to $50 million of additional real estate investment spending is contemplated.
- Total Recall-related operating and capital expenditures are estimated at approximately $380 million through the end of 2018, comprising approximately $80 million of deal-close and divestment costs, $220 million of integration costs and $80 million of integration capital expenditures. Cumulative spending through September 30, 2016 was $156.9 million.
- Recall integration and divestment activities include required sales of assets in the United States, Australia, Canada and the United Kingdom. Assets held for sale totaled $127.9 million and liabilities held for sale totaled $19.3 million at September 30, 2016.
- The Australia Divestment Business was sold on October 31, 2016 for approximately A$70 million, subject to adjustments. The company had recorded a $14.0 million anticipated disposal loss in Q3.
- In October 2016, the company entered into a $50 million mortgage securitization program, with proceeds intended to repay revolving debt. It also expects approximately $50 million of proceeds from pending Seattle/Atlanta, Canadian and U.K. divestments, although completion and proceeds are uncertain.
- Key risks include high leverage, refinancing and interest-rate risk, covenant compliance, foreign exchange volatility, REIT qualification, technology substitution and declining service activity, integration execution, regulatory approval of divestments, litigation, privacy and information-security obligations, and the ability to offset inflationary costs.
- The company reported net total lease-adjusted leverage of 5.7 against a maximum of 6.5 and a fixed-charge coverage ratio of 2.5 against a minimum of 1.5. Dividends may be limited if the leverage ratio exceeds 6.0.
Investor Verification Checklist
- Verify the recurring earnings impact of Recall after removing temporary integration, divestment and acquisition-related costs.
- Assess whether internal storage growth remains near the 1.5%–2.0% outlook and whether declining service activity stabilizes.
- Reconcile GAAP earnings and cash flow with Adjusted OIBDA, Adjusted EPS and Normalized FFO, particularly the treatment of $102.9 million of year-to-date Recall costs.
- Monitor leverage, revolver availability, covenant headroom, debt maturities and the effect of subsequent mortgage securitization proceeds.
- Confirm completion, proceeds and any further gains or losses from the pending divestments, including the contingent consideration from the Access sale.
- Review the final purchase-price allocation for Recall, goodwill impairment indicators and the effect of acquired intangible amortization.
- Evaluate the unusually high effective tax rate and its expected normalization, including the company’s continuing REIT qualification.
- Review disclosed fire-related claims, litigation contingencies and the company’s estimate of up to $21 million of additional aggregate losses over several years.