Iron Mountain Incorporated — Q3 2017 Form 10-Q Summary
Business context and reporting period
Iron Mountain provides physical records and data storage, information management, secure shredding, data center, digital and related services across North America, Europe, Latin America, Asia and Africa. The unaudited filing covers the three and nine months ended September 30, 2017, compared with the prior-year periods. Iron Mountain has operated as a U.S. REIT since 2014. Results include the May 2016 Recall acquisition and subsequent integration activities.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $965.7 million | $942.8 million | $2.854 billion | $2.577 billion |
| Operating income | $176.8 million | $135.5 million | $494.7 million | $362.1 million |
| Income from continuing operations | $25.4 million | $5.8 million | $167.4 million | $54.1 million |
| Net income attributable to Iron Mountain | $24.3 million | $7.1 million | $161.1 million | $55.9 million |
| Adjusted EBITDA | $323.0 million | $294.2 million | $933.7 million | $790.8 million |
| Adjusted EBITDA margin | 33.5% | 31.2% | 32.7% | 30.7% |
| Cash flow from operating activities | Not separately provided | Not separately provided | $518.9 million | $422.6 million |
| Cash flow from continuing operations | Not separately provided | Not separately provided | $522.3 million | $419.0 million |
Q3 revenue increased 2.4%, while nine-month revenue increased 10.8%, primarily reflecting the Recall acquisition, other acquisitions and foreign-exchange effects. Storage rental revenue grew 4.3% in Q3 and 11.9% year to date; service revenue declined 0.5% in Q3 but increased 9.0% year to date. Nine-month internal revenue growth was 2.2%, including 3.8% internal storage rental growth and negative 0.3% internal service growth.
At September 30, 2017, cash and cash equivalents were $337.9 million, compared with $236.5 million at December 31, 2016. Total debt had a carrying amount of $6.880 billion, including $180.4 million classified as current. Net property, plant and equipment was $3.344 billion, goodwill was $4.071 billion and total assets were $10.260 billion.
Capital expenditures were $243.7 million, cash paid for acquisitions was $194.1 million, and acquisitions of customer relationships and inducements were $43.6 million during the first nine months. Parent cash dividends paid were $293.0 million. Dividends declared per share were $0.5500 for each of the first three 2017 quarters; a $0.5875 per-share fourth-quarter dividend was declared in October 2017.
Material changes versus the prior comparable period
- Operating income increased 30.5% in Q3 and 36.6% for the first nine months, as operating expenses declined 2.3% in Q3 relative to revenue growth and grew 6.5% year to date versus 10.8% revenue growth.
- Adjusted EBITDA increased 9.8% in Q3 and 18.1% year to date. Margin expansion reflected Recall synergies, the Transformation Initiative and lower Recall-related selling, general and administrative costs.
- Recall Costs declined to $18.0 million in Q3 and $58.6 million year to date, versus $34.1 million and $102.9 million, respectively, in the prior-year periods. Cumulative Recall acquisition and integration expenditures reached $279.9 million, against an estimated total of approximately $380.0 million.
- Interest expense increased to $89.0 million in Q3 and $265.0 million year to date, primarily because of higher average debt outstanding.
- The effective tax rate was 8.0% in Q3 and 15.1% year to date, versus 81.2% and 46.2% in the prior-year periods. The 2017 rates benefited from valuation allowance releases related to foreign net operating losses.
- Discontinued operations produced a $1.1 million loss in Q3 and a $3.4 million loss year to date, compared with income of $2.0 million and $3.6 million in the prior-year periods.
- Adjusted EBITDA margin for North American Records and Information Management improved to 42.8% year to date from 39.6%; North American Data Management declined to 52.9% from 55.4%.
Financing, acquisitions and unusual items
- In August 2017, Iron Mountain entered into a new credit agreement with a $1.750 billion revolving facility and an original $250.0 million term loan, maturing in August 2022. Revolver availability at September 30 was $530.8 million, subject to leverage-based limitations.
- Iron Mountain issued €300.0 million of 3% senior notes in May and $1.0 billion of 4 7/8% senior notes in September. Proceeds helped refinance debt and fund redemption of the $1.0 billion 6% notes due 2020.
- The company redeemed the CAD notes due 2021 and the 6% notes due 2020, recording $48.3 million of debt-extinguishment expense, including call premiums and deferred financing cost write-offs.
- 2017 acquisitions included Fortrust, Bonded Services, Fileminders, the 2017 Santa Fe transactions, Ransa and Depositos, and other smaller transactions. The Fortrust acquisition included approximately $54.5 million of cash and 2.2 million shares of common stock.
- Iron Mountain recorded a $38.9 million gain on the May 2017 Russia and Ukraine divestment and received a 25% equity interest in OSG, carried at approximately $18.0 million at September 30.
- The company recorded $3.5 million of costs associated with natural disasters, primarily Hurricane Maria, which damaged two Puerto Rico facilities. Puerto Rico represented less than 0.5% of consolidated revenue, and management believed insurance coverage was adequate.
Guidance, outlook and risks
Management expected 2017 internal storage rental revenue growth of approximately 3.0% to 3.5%. Excluding potential acquisitions, opportunistic real estate investments and Recall integration spending, 2017 capital expenditures were expected to be approximately $290 million to $330 million.
Management expected to fund near-term and long-term requirements through operating cash flow, existing cash, borrowings, the Credit Agreement, the ATM equity program and other debt or equity financings. Management stated that the company was operating above its long-term targeted leverage ratio and expected its REIT capital allocation strategy to move toward lower leverage.
Key operating risks include declining service activity as stored records become more archival, adoption of alternative data-storage technologies, data security and privacy obligations, litigation related to customer information, foreign-exchange volatility, international political and economic conditions, acquisition execution and integration, rising debt costs, capital expenditure requirements, REIT qualification and inflationary pressure on wages, insurance, facilities and equipment.
In October 2017, the company announced a potential $100.0 million acquisition of two Credit Suisse data centers, expected to close in the first quarter of 2018 subject to closing conditions. It also established an ATM program permitting sales of up to $500.0 million of common stock, intended for general corporate purposes, acquisitions and debt repayment.
The company planned to adopt the new revenue standard on January 1, 2018 using the modified retrospective method. Management expected notable effects from capitalization and amortization of certain commissions and revised accounting for initial physical-storage moves, but the filing did not provide a quantified adoption impact.
Most important facts to verify
- Debt carrying value of $6.880 billion, revolver availability of $530.8 million and compliance with leverage and fixed-charge coverage covenants.
- Progress and remaining cost of Recall integration, including the estimated $100.1 million of additional expenditures implied by the $380.0 million total estimate.
- Sustainability of reported earnings growth given the $48.3 million debt-extinguishment charge, $38.9 million divestment gain and unusually low tax rate.
- Whether internal storage rental growth remains within the 3.0%–3.5% 2017 expectation and whether service revenue continues to decline.
- Capital expenditure requirements, acquisition spending and the effect of the planned Credit Suisse data center transaction and ATM equity issuance on leverage and per-share results.
- Potential claims from historical fires and other litigation; management estimated reasonably possible aggregate additional losses of up to $19.5 million over several years, with some amounts potentially insured or indemnified.