Iron Mountain Incorporated: 2010 Q3 Form 10-Q Summary
Business context and reporting period
Iron Mountain provides physical and digital information-management services, including records storage, data protection, destruction, fulfillment, eDiscovery and digital archiving. The unaudited filing covers the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods. Effective January 1, 2010, the company aligned its European subsidiary reporting year-end with the parent company, eliminating a two-month reporting lag.
Financial performance and key metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Revenue | $782.6 million | $764.9 million | $2.339 billion | $2.234 billion |
| Operating income (loss) | $(84.0) million | $142.6 million | $199.2 million | $401.9 million |
| Net income (loss) | $(150.8) million | $43.2 million | $(83.2) million | $157.6 million |
| Net income (loss) attributable to Iron Mountain | $(153.8) million | $43.2 million | $(86.9) million | $159.6 million |
| Adjusted OIBDA | $253.8 million | $224.8 million | $706.9 million | $638.2 million |
| Adjusted OIBDA margin | 32.4% | 29.4% | 30.2% | 28.6% |
| Operating margin | (10.7)% | 18.6% | 8.5% | 18.0% |
| Net margin | (19.3)% | 5.6% | (3.6)% | 7.1% |
Storage revenue increased 2.2% in the quarter and 4.3% year to date. Service revenue increased 2.5% and 5.1%, respectively. Complementary services were strong, aided by higher recycled-paper pricing, while core services and eDiscovery remained under pressure.
Operating results included a provisional, non-cash goodwill impairment charge of $255.0 million related to the Worldwide Digital Business. Excluding this charge and other items reflected in Adjusted OIBDA, underlying operating performance improved. Interest expense declined to $55.7 million in the quarter and $168.5 million year to date.
Cash flow, debt and liquidity
- Cash provided by operating activities was $445.0 million for the first nine months, compared with $433.9 million in 2009.
- Capital expenditures were $201.8 million; cash paid for acquisitions was $123.6 million; and additions to customer relationship and acquisition costs were $10.1 million.
- Cash and cash equivalents declined to $184.2 million at September 30, 2010, from $446.7 million at December 31, 2009. Including restricted cash of $35.1 million, total cash and restricted cash was approximately $219.3 million.
- Total debt was $3.010 billion, including $397.2 million under the term loan facility; no revolving credit borrowings were outstanding. Revolving credit availability was $762.5 million, subject to covenant and other limitations.
- The company repaid $91.3 million of debt, redeemed $202.6 million of senior subordinated notes, repurchased $93.7 million of common stock and paid $25.4 million of dividends during the first nine months.
- Leverage ratios were within applicable limits: 3.0 versus a maximum of 5.5 under the revolving credit and term-loan provisions, and 3.5 versus a maximum of 6.5 under the bond indentures.
Material changes versus the prior comparable period
- Revenue grew 2.3% in the quarter and 4.7% year to date, but operating income and net income declined substantially because of the goodwill impairment and higher taxes.
- Adjusted OIBDA increased 12.9% in the quarter and 10.8% year to date, with margin expansion driven primarily by productivity and cost management.
- North American Physical Business revenue increased 2.4% in the quarter and 3.9% year to date; its Adjusted OIBDA margin increased to 47.1% in the quarter and 44.2% year to date.
- International Physical Business revenue increased 3.2% in the quarter and 7.9% year to date, while its year-to-date Adjusted OIBDA margin declined to 18.3% from 18.8%.
- Worldwide Digital Business revenue declined 1.0% in the quarter on negative internal growth, and its Adjusted OIBDA margin fell to 10.6% from 21.8%. Year-to-date Adjusted OIBDA declined 44.4%.
- The company acquired Mimosa Systems for approximately $112 million in cash and acquired the remaining interest in its Greek joint venture for approximately $4.7 million.
- The company redeemed $200 million principal amount of its 7.75% senior subordinated notes due 2015 and recorded a $1.8 million extinguishment charge.
- The company divested its domain-name-management product line for approximately $11.4 million and recorded an estimated pretax gain of approximately $6.9 million.
Guidance, outlook, risks and unusual items
- Management expected 2010 consolidated internal revenue growth of approximately 2% to 3% and full-year capital expenditures of approximately $270 million, including approximately $15 million for opportunity-driven real estate purchases.
- Management expected to fund near-term requirements through operating cash flow, existing cash, available credit facilities and other potential financings.
- The Worldwide Digital Business impairment was triggered by reduced revenue and operating forecasts, lower eDiscovery matter sizes and pricing, discontinued software projects and the product-line divestiture. The impairment estimate was provisional, with remaining Worldwide Digital goodwill of $65.2 million subject to fourth-quarter refinement.
- The company recorded a $4.9 million write-off of discontinued internal-use software projects and a $9.4 million gain related to insurance proceeds from the Chilean earthquake.
- The effective tax rate was unusually high at 408.1% for the first nine months and negative 15.6% for the quarter, primarily because most of the goodwill impairment was not tax deductible and because of other tax-position and foreign-tax-credit items.
- Risks include high leverage, refinancing and covenant compliance, economic pressure on pricing and demand, volatility in recycled-paper prices, foreign-exchange movements, digital-business competition and execution, acquisitions and integration, data privacy and security liabilities, litigation, and international operating conditions.
- The filing discusses insurance claims and litigation related to the London facility fire, Chile and New Zealand earthquakes, and a Brazilian labor-classification lawsuit involving approximately 1,700 individuals. Management did not expect these matters to have a material consolidated impact, but the Brazilian lawsuit's outcome was not predictable.
- The company authorized an additional $200 million of share repurchases in October 2010, increasing total authorization to $350 million. Future dividends remained subject to board approval.
Most important facts for investors to verify
- Whether the provisional $255 million Worldwide Digital goodwill impairment requires additional adjustments in the fourth quarter.
- Whether digital-business revenue, eDiscovery pricing and margins stabilize following the reduced forecasts and restructuring actions.
- Progress toward the stated 2% to 3% internal revenue-growth outlook and approximately $270 million capital-expenditure plan.
- Debt maturity, refinancing capacity, leverage ratios and continued compliance with restrictive covenants.
- Cash generation after capital expenditures, acquisitions, share repurchases and dividends.
- Potential exposure from the Brazilian labor litigation, London fire claims, earthquake-related insurance recoveries and other contingencies.
- The sustainability of reported Adjusted OIBDA improvements relative to GAAP operating income, which was materially affected by impairment and other unusual items.