Iron Mountain Incorporated — Q1 2010 Form 10-Q Summary
Business context and reporting period
Iron Mountain provides physical and digital information-management services, including document and data storage, records handling, secure destruction, fulfillment, online backup, archiving and electronic discovery. This unaudited Form 10-Q covers the three months ended March 31, 2010, compared with the three months ended March 31, 2009. 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 condition
| Metric | Q1 2009 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $723.3 million | $776.5 million | +7.3% |
| Storage revenue | $409.9 million | $435.2 million | +6.2% |
| Service revenue | $313.5 million | $341.3 million | +8.9% |
| Operating income | $121.2 million | $132.7 million | +9.5% |
| Operating margin | 16.8% | 17.1% | +0.3 points |
| Adjusted OIBDA | $196.0 million | $217.4 million | +10.9% |
| Adjusted OIBDA margin | 27.1% | 28.0% | +0.9 points |
| Net income | $26.9 million | $25.8 million | -4.1% |
| Net income attributable to Iron Mountain | $28.8 million | $25.6 million | -11.2% |
| Diluted EPS | $0.14 | $0.12 | Declined |
| Cash flow from operations | $127.5 million | $131.2 million | +2.9% |
Revenue growth included approximately 4% internal growth and a 3% benefit from foreign-currency translation. Complementary services grew 22.0%, including a $12.1 million increase in recycled-paper revenue attributable primarily to higher pricing. Core service internal growth was less than 1%.
Operating leverage improved through productivity gains, pricing actions and cost controls. However, SG&A increased 11.2%, depreciation and amortization increased 12.5%, and the effective tax rate rose to 61.6% from 54.0%. Other expense increased to $8.8 million, including a $4.1 million charge related to the European reporting-year change. These items more than offset operating-income growth at the net-income level.
At March 31, 2010, total assets were $6.74 billion, cash and cash equivalents were $325.4 million, and restricted cash was $35.1 million. Total debt was $3.22 billion, including $3.18 billion of long-term debt net of current maturities. The company reported $743.1 million of remaining revolving-credit availability and compliance with its debt covenants. The revolving-credit and term-loan leverage ratio was 3.3 versus a 5.5 maximum; bond leverage was 4.0 versus a 6.5 maximum.
Investing cash outflows were $233.5 million, including $81.9 million of capital expenditures, $118.3 million for acquisitions and $35.1 million placed in restricted cash. Financing cash outflows were $17.2 million, including $19.0 million of debt repayments and $9.6 million of share repurchases. Cash declined by $121.2 million during the quarter, ending at $325.4 million.
Material changes versus the prior comparable period
- North American Physical Business revenue increased 5.7% and Adjusted OIBDA increased 13.8%; margin improved from 38.1% to 41.0%.
- International Physical Business revenue increased 14.5%, benefiting from currency translation and 6% internal growth; Adjusted OIBDA increased 17.0%.
- Worldwide Digital Business revenue increased only 2.6%, while Adjusted OIBDA declined 30.3% and margin fell from 18.5% to 12.5%, reflecting pricing pressure, longer sales cycles and Mimosa integration costs.
- The company acquired Mimosa Systems in February 2010 for approximately $112 million in cash and $2.7 million of acquisition-related options. The acquisition generated approximately $89.7 million of goodwill and contributed $1.9 million of Q1 revenue.
- General and administrative expenses increased $15.0 million, driven by compensation, headcount, legal and professional fees, and cost-saving initiatives. Bad-debt expense increased 34.7% to $4.6 million.
- The company initiated a $150 million share-repurchase authorization and adopted a quarterly dividend policy. The first dividend was $0.0625 per share, totaling $12.7 million, and was paid April 15, 2010.
- Foreign-currency translation losses reduced accumulated other comprehensive items by $19.6 million during Q1 2010.
Guidance, outlook, risks and unusual items
- Management expected 2010 internal revenue growth of 4% to 6%, excluding acquisitions and currency effects.
- Expected 2010 capital expenditures were approximately $290 million, including approximately $20 million for opportunity-driven real-estate purchases, excluding potential acquisitions.
- Management expected to fund near-term requirements through operating cash flow, existing cash, credit-facility borrowings and other financing sources. The company stated that it was highly leveraged and might not generate sufficient cash flow or obtain refinancing on acceptable terms.
- Economic conditions were constraining new sales, pricing, storage-volume growth and activity-based service revenue. Recycled-paper prices and other complementary-service revenue were identified as volatile.
- The February 2010 Chile earthquake damaged facilities and customer materials. The company recorded a $6.5 million insurance receivable and subsequently received approximately $10 million from its insurer; future recoveries may produce other income and gains on asset disposals.
- The company was defending the Pittsburgh litigation, in which plaintiffs sought $6.5 million to $53.5 million. Management did not expect a material financial impact. London fire claims also remained outstanding, but management stated that insurance coverage was adequate and no material impact was expected.
- Goodwill totaled $2.59 billion. Asia Pacific had only a 9% excess of fair value over carrying value at the October 1, 2009 impairment review, creating heightened sensitivity to deteriorating performance or missed forecasts.
- Key risks include privacy and data-protection liabilities, litigation, acquisition integration, foreign-currency movements, competition and technology requirements in digital businesses, debt service and refinancing, covenant compliance, tax-rate volatility, inflation and real-estate obligations.
Important facts for investors to verify
- Whether the projected 4%–6% 2010 internal revenue growth was achieved, particularly amid slowing storage growth and weak digital-business profitability.
- Progress integrating Mimosa and whether the Worldwide Digital Business recovered its Adjusted OIBDA margin.
- Debt maturities, refinancing plans, leverage ratios and compliance with restrictive covenants.
- Actual capital expenditures, acquisition spending, free-cash-flow generation and the sustainability of dividends and share repurchases.
- Realized insurance recoveries and accounting treatment related to the Chile earthquake.
- Potential goodwill impairment in Asia Pacific and other reporting units if operating assumptions weaken.
- Resolution and insurance coverage of the Pittsburgh, London fire and other litigation matters.
- The effect of the European reporting-year change and the $4.1 million unusual charge on period comparability.