Iron Mountain Incorporated — Form 10-Q Summary
Business Context and Reporting Period
Unaudited results for the three months ended March 31, 2019, filed April 25, 2019. Iron Mountain provides physical records storage, information management, data backup, information destruction, and enterprise data center services globally. The company operates as a U.S. real estate investment trust.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $1,053.9 million | $1,042.5 million | 1.1% |
| Storage rental revenue | $663.0 million | $651.1 million | 1.8% |
| Service revenue | $390.9 million | $391.3 million | (0.1%) |
| Operating income | $158.7 million | $164.6 million | (3.6%) |
| Operating margin | 15.0% | 15.8% | Down 70 bps |
| Income from continuing operations | $30.5 million | $45.6 million | (33.2%) |
| Net income attributable to Iron Mountain | $29.6 million | $44.7 million | (33.8%) |
| Diluted EPS | $0.10 | $0.16 | Down $0.06 |
| Adjusted EBITDA | $324.5 million | $343.0 million | (5.4%) |
| Adjusted EBITDA margin | 30.8% | 32.9% | Down 210 bps |
| Operating cash flow | $117.1 million | $91.6 million | Up $25.5 million |
| Capital expenditures | $184.8 million | $95.6 million | Up $89.2 million |
Amounts are stated in U.S. dollars; balance-sheet amounts are as of March 31, 2019. The filing reports approximately $137.5 million of FFO (Normalized), compared with $152.1 million in the prior-year quarter.
Liquidity, Debt, and Capital Structure
- Cash and cash equivalents were $161.5 million, compared with $165.5 million at December 31, 2018.
- Total long-term debt had a carrying amount of $8.49 billion, including $125.1 million classified as current. Debt increased from $8.14 billion at December 31, 2018.
- The revolving credit facility had $1.14 billion outstanding, with $573.2 million of remaining borrowing availability and $37.3 million of letters of credit.
- Lease accounting adoption added $1.79 billion of operating lease right-of-use assets and $1.86 billion of present-value operating lease obligations to the balance sheet.
- Net total lease-adjusted leverage was 5.8x versus a maximum covenant level of 6.5x; fixed-charge coverage was 2.2x versus a minimum of 1.5x. Management stated that the company was operating above its long-term targeted leverage ratio and expected to reduce leverage over time.
- The company paid $178.0 million in common-stock dividends during the quarter. The quarterly dividend declared was $0.611 per share. Future dividends remain subject to board approval and legal requirements.
Material Changes Versus the Prior Comparable Period
- Revenue increased modestly, but operating expenses grew faster than revenue, reducing operating income and operating margin.
- Adjusted EBITDA declined primarily because of higher labor costs in secure shredding, increased information-security and technology spending, higher data center overhead, and increased corporate support costs.
- Interest expense increased 4.9% to $102.4 million because of higher average debt and a higher weighted-average interest rate.
- The effective tax rate rose to 25.7% from 2.5%. The prior-year rate benefited from an approximately $14.0 million discrete tax benefit related to resolution of a tax matter.
- Organic total revenue growth was 1.9%; organic storage rental growth was 2.0% and organic service revenue growth was 1.8%. Foreign currency movements reduced reported total revenue growth by approximately 3.4%.
- Global Data Center revenue increased 32.0% to $61.5 million, primarily from acquisitions, while its Adjusted EBITDA margin decreased 230 basis points to 42.3%.
- North American Data Management revenue declined 3.2% and its Adjusted EBITDA margin fell 160 basis points, reflecting declining tape volumes and a more archival customer mix.
- Cash flow from operations improved, but substantially higher capital expenditures, acquisitions, customer-related investments, and the Makespace investment resulted in a $4.0 million decrease in cash during the quarter.
Guidance, Outlook, Risks, and Unusual Items
- Management expected 2019 organic storage rental revenue growth of approximately 1.75% to 2.5% and organic total revenue growth of approximately 2.0% to 2.5%.
- Expected 2019 capital expenditures, excluding potential acquisitions, opportunistic real estate investments, and Recall/IODC integration spending, were approximately $175.0 million for growth real estate and innovation, $145.0 million to $155.0 million for recurring and non-real-estate growth spending, and $250.0 million for data centers.
- Management expected service-revenue trends to remain affected by lower retrieval activity, declining tape volumes, moderation in destruction activity, and recycled-paper price volatility.
- Q1 2019 included a $4.2 million gain from contributing the U.S. and Canadian consumer storage business to Makespace LLC. Iron Mountain received an approximately 34% equity interest and contributed approximately $20.0 million in cash.
- The company completed four storage and records-management acquisitions and one art-storage acquisition for total consideration of approximately $35.2 million, including $16.1 million of preliminary goodwill.
- Iron Mountain estimated total acquisition and integration expenditures related to the Recall and IODC transactions of approximately $405.0 million; $392.0 million had been incurred through March 31, 2019.
- The company adopted ASC 842 lease accounting on January 1, 2019 using a modified retrospective method. Comparative balance-sheet amounts were not restated.
- Risks include high leverage and refinancing requirements, debt covenant compliance, foreign currency volatility, data security and privacy incidents, service interruptions, technology substitution, acquisition integration, international operating conditions, REIT qualification, inflation, and the ability to fund dividends and capital expenditures.
- Management disclosed no new material loss contingencies. Aggregate additional losses of up to $17.5 million were considered reasonably possible over the next several years, with some amounts potentially covered by insurance or indemnity arrangements.
- In April 2019, after quarter-end, the company completed the sale of two United Kingdom facilities for approximately $43.0 million.
Important Facts for Investors to Verify
- Reconcile GAAP earnings and cash flow with Adjusted EBITDA, Adjusted EPS, and FFO (Normalized), including all exclusions and tax effects.
- Assess whether organic revenue growth and data center expansion can offset declining North American data-management volumes and pressure on service activity.
- Monitor leverage, interest expense, covenant headroom, refinancing maturities, and management's plan to reduce leverage.
- Evaluate whether the substantially higher capital-spending program generates sufficient incremental revenue and cash flow.
- Review the effect of ASC 842 on reported assets, liabilities, leverage metrics, and comparability with prior periods.
- Track acquisition integration costs, preliminary purchase-price allocations, and the performance of acquired data center assets.
- Assess dividend sustainability relative to operating cash flow, capital expenditures, debt service, and REIT distribution requirements.
- Verify the financial and strategic impact of the Makespace transaction and the post-quarter-end U.K. facility sale.