Iron Mountain Incorporated — Q3 2019 Form 10-Q Summary
Business Context and Reporting Period
Iron Mountain provides physical records storage, information management, data backup media storage, information destruction, and enterprise-class colocation and wholesale data center services across North America, Europe, Latin America, Asia, and Africa. The filing covers the unaudited three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Iron Mountain operates as a U.S. real estate investment trust.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $1,062.2 million | $1,061.0 million | $3,183.0 million | $3,164.3 million |
| Storage rental revenue | $673.3 million | $657.0 million | $2,005.6 million | $1,963.6 million |
| Service revenue | $388.9 million | $404.0 million | $1,177.4 million | $1,200.7 million |
| Operating income | $223.5 million | $195.6 million | $575.3 million | $554.2 million |
| Operating margin | 21.0% | 18.4% | 18.1% | 17.5% |
| Income from continuing operations | $108.3 million | $77.3 million | $231.1 million | $209.0 million |
| Net income attributable to Iron Mountain | $107.7 million | $65.9 million | $229.7 million | $196.1 million |
| Diluted EPS | $0.37 | $0.23 | $0.80 | $0.68 |
| Adjusted EBITDA | $375.7 million | $362.3 million | $1,051.1 million | $1,065.5 million |
| Adjusted EBITDA margin | 35.4% | 34.2% | 33.0% | 33.7% |
For the nine months, cash flow from operating activities was $648.1 million, compared with $624.5 million in 2018. Capital expenditures were $533.6 million, up from $330.0 million, driven particularly by data center growth investment. Investing cash flow was an outflow of $635.6 million, while financing cash flow was an inflow of $19.9 million. Ending cash and cash equivalents were $186.8 million.
Total debt had a carrying amount of $8.615 billion at September 30, 2019, including $394.8 million classified as current. Long-term debt, net of the current portion, was $8.220 billion. The company also reported $1.844 billion of operating lease liabilities and $366.1 million of financing lease liabilities. Revolving credit availability was $1.378 billion, before considering other constraints, and outstanding letters of credit totaled $35.2 million.
Debt covenant ratios remained within stated limits: net total lease-adjusted leverage was 5.8x versus a 6.5x maximum, net secured debt lease-adjusted leverage was 2.3x versus a 4.0x maximum, bond leverage was 6.1x versus a 6.5x–7.0x maximum, and fixed-charge coverage was 2.1x versus a 1.5x minimum.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue was essentially flat, increasing 0.1%; nine-month revenue increased 0.6%.
- Storage rental revenue grew 2.5% in Q3 and 2.1% for the nine months, while service revenue declined 3.7% and 1.9%, respectively.
- Nine-month organic storage rental revenue growth was 2.5%, while organic total revenue growth was 1.1%. Management attributed weaker service revenue to declining retrieval activity, archival trends in data management, lower destruction activity, and lower recycled paper prices.
- Q3 operating income increased 14.2%, and nine-month operating income increased 3.8%, aided by lower selling, general and administrative expense, cost management, and gains on asset dispositions.
- Q3 net income attributable to Iron Mountain increased 63.5%; nine-month net income increased 17.1%. The comparison benefited from the absence of the $11.6 million after-tax loss from discontinued operations reported in Q3 2018 and the $12.4 million loss reported for the first nine months of 2018.
- Q3 Adjusted EBITDA increased 3.7%, but nine-month Adjusted EBITDA decreased 1.3%, with the nine-month margin declining 70 basis points to 33.0%.
- Global Data Center revenue increased 14.2% for the nine months, primarily due to acquisitions, while its Adjusted EBITDA increased 17.7%. Corporate and Other Adjusted EBITDA declined $7.4 million.
- Capital expenditures increased substantially, including data center capital expenditures of approximately $321.9 million on an accrual basis, compared with $112.7 million in the prior-year period.
- In September 2019, the company issued $1.0 billion of 4 7/8% senior notes due 2029 and used approximately $987.5 million of net proceeds to repay revolving credit borrowings.
- The company adopted the new lease standard, ASU 2016-02, on January 1, 2019. The adoption added significant right-of-use assets and lease liabilities and resulted in an approximately $5.8 million increase to opening stockholders’ equity.
- The 2018 comparative information was immaterially restated for a Netherlands VAT matter. The restatement reduced 2018 nine-month net income by approximately $9.1 million and reduced December 31, 2018 stockholders’ equity by approximately $23.1 million.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management expected 2019 consolidated organic storage rental revenue growth of approximately 2.5% and organic total revenue growth of approximately 1.0%. Management also expected 2019 capital expenditures, excluding potential acquisitions, opportunistic real estate investments, and certain integration costs, to include approximately $350 million of data center growth investment, $175 million of growth investment in real estate and innovation, and $145 million to $155 million of recurring and non-data-center growth investment spending.
Management expected service revenue trends to remain pressured into 2020 because of reduced retrieval and re-file activity, declining tape volumes, lower destruction activity, and weaker recycled paper prices. The company also stated that it was operating above its long-term targeted leverage ratio and expected to reduce leverage over time through business growth and capital allocation.
In October 2019, Iron Mountain announced Project Summit, a global restructuring and operating-model program. The company expects to reduce vice-president-level and above positions by approximately 45% and managerial and administrative headcount by approximately 700 positions over two years. Management estimated total restructuring charges, including operating and capital expenditures, of approximately $240 million, including approximately $60 million in the fourth quarter of 2019. Expected Adjusted EBITDA improvement was approximately $80 million in 2020 and approximately $200 million by the end of 2022, with the program substantially complete by the end of 2021 and benefits fully realized by the end of 2022.
Other unusual items included approximately $17.1 million of net gains on disposal or write-down of property and equipment for the first nine months, including gains from facility sales that partially offset approximately $24.8 million of impairment and loss on sale associated with selected Iron Cloud offerings. The company entered into an outsourcing agreement for those Iron Cloud offerings on September 30, 2019.
Key risks include high leverage and refinancing requirements, covenant compliance, the ability to fund substantial capital expenditures and dividends, foreign currency volatility, declining service activity, data security and privacy obligations, technology substitution away from physical records, data center power and service interruption risks, acquisition integration, litigation, REIT qualification, and the execution risk and potential workforce disruption associated with Project Summit.
The company reported a reasonably possible additional aggregate loss exposure of up to $17 million over several years for loss contingencies, before considering potential insurance or indemnification. The Netherlands VAT assessment was approximately €16.8 million, excluding possible interest and penalties; the company has recorded a reserve based on its estimate of probable and estimable loss and is pursuing potential recoveries.
Most Important Facts for Investors to Verify
- Whether organic storage rental growth remains near the approximately 2.5% 2019 expectation while service revenue continues to decline.
- Whether Project Summit delivers the projected $80 million of 2020 and $200 million of cumulative Adjusted EBITDA improvement without exceeding the estimated $240 million implementation cost.
- Whether high capital spending, dividend commitments, and lease obligations are consistent with the company’s ability to reduce leverage.
- Upcoming debt maturities and refinancing requirements, including the $271.4 million Accounts Receivable Securitization Program classified as current and terminating in July 2020.
- Progress in data center growth, utilization, acquisition integration, and the sustainability of the reported data center revenue and margin gains.
- The final resolution and total cost of the Netherlands VAT matter, including interest, penalties, insurance, and third-party recoveries.
- The impact of foreign currency movements and weakening service activity on reported revenue, margins, and Adjusted EBITDA.
- The reconciliation of non-GAAP Adjusted EBITDA, Adjusted EPS, and FFO measures to GAAP results when assessing underlying performance.