Iron Mountain Incorporated — Q1 2013 Form 10-Q Summary
Business context and reporting period
Iron Mountain provides records storage, data protection, information management, document destruction, scanning and related services across North America, Europe, Latin America and Asia Pacific. This unaudited Form 10-Q covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012. The Digital Business and Italian operations are presented as discontinued operations.
Key financial metrics
| Metric | Q1 2012 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $746.5 million | $747.0 million | 0.1% |
| Storage rental revenue | $425.3 million | $442.5 million | 4.0% |
| Service revenue | $321.2 million | $304.6 million | (5.2)% |
| Operating income | $141.8 million | $122.8 million | (13.4)% |
| Operating margin | 19.0% | 16.4% | Down 2.6 points |
| Adjusted OIBDA | $222.6 million | $227.5 million | 2.2% |
| Adjusted OIBDA margin | 29.8% | 30.5% | Up 0.7 points |
| Income from continuing operations | $61.1 million | $18.4 million | (70.0)% |
| Net income attributable to Iron Mountain | $55.4 million | $19.4 million | (65.0)% |
| Diluted EPS from continuing operations | $0.35 | $0.10 | Down $0.25 |
| Cash flow from operating activities | $74.9 million | $106.6 million | Up $31.7 million |
| Cash flow from continuing operations | $79.1 million | $105.7 million | Up 33.7% |
| Capital expenditures | $55.9 million | $95.4 million | Up $39.5 million |
At March 31, 2013, cash and cash equivalents were $230.0 million, and cash plus restricted cash was $263.6 million. Total long-term debt was $3.85 billion, including $91.9 million classified as current. Revolving credit availability was $612.3 million against $110.4 million of borrowings. The revolving credit and term-loan leverage ratio was 3.95 versus a 5.50 maximum; the bond leverage ratio was 5.15 versus a 6.50 maximum.
Material changes versus the prior comparable period
- Storage rental growth was offset by weaker service revenue. Internal growth was 2.5% for storage rental revenue but negative 6.5% for service revenue and negative 1.4% for total revenue.
- Core service revenue declined 5.9%, primarily because of reduced retrieval and re-file activity, lower transportation activity and weaker international shredding revenue. Complementary services declined 3.0%.
- North American revenue declined 1.8%, while International revenue increased 5.3%; International Adjusted OIBDA margin improved from 22.4% to 23.4%.
- Operating expenses increased 3.2%, led by higher cost of sales and SG&A. SG&A rose 6.1%, including $25.0 million of REIT-related and other special costs versus $2.0 million in the prior-year quarter.
- Interest expense increased from $58.8 million to $63.2 million, primarily following issuance of $1.0 billion of 5.75% senior subordinated notes in August 2012, partly offset by early debt retirements.
- The effective tax rate increased from 29.3% to 67.8%, reflecting the geographic mix of foreign-exchange gains and losses. The 2013 tax provision included a $4.0 million benefit from the American Taxpayer Relief Act.
- Operating cash flow improved despite lower net income, primarily because of more favorable working-capital movements and lower tax payments. Capital expenditures increased substantially, resulting in approximately $10.3 million of operating cash flow remaining after continuing-operations capital expenditures, before other investing items.
- Cash dividends declared increased to $0.27 per share from $0.25 per share. No share repurchases occurred during the quarter.
Guidance, outlook, risks and unusual items
- Management expected 2013 consolidated internal revenue growth of approximately negative 1% to 2%. Service revenue was expected to remain pressured by lower customer activity, technology-related changes in records usage and discretionary service volatility.
- Management expected approximately $325 million of 2013 capital expenditures, including approximately $75 million for real estate and $35 million associated with the proposed REIT conversion.
- The proposed REIT conversion remained subject to IRS private-letter rulings, internal reorganizations, systems changes, stockholder approvals and other conditions. Estimated total conversion-related costs were $375 million to $475 million, including $225 million to $275 million of related tax payments. Incremental operating and capital expenditures through 2014 were estimated at $150 million to $200 million.
- Management targeted leverage of approximately 3x to 4x EBITDA but noted that leverage could temporarily exceed the upper end because of REIT conversion cash requirements.
- Material risks include high leverage and refinancing requirements, debt covenant compliance, foreign-currency volatility, service-volume declines, changing customer technology preferences, privacy and information-security liabilities, acquisition integration, tax audits and the uncertainty of the REIT conversion.
- The company disclosed a government-contract billing matter involving potential noncompliance with GSA price-reduction requirements and a separate False Claims Act inquiry. The company stated that aggregate losses for all litigation matters could exceed accrued amounts by up to $34 million over several years, excluding any amount that may arise from the government matters if not estimable.
- The company is contesting Massachusetts corporate excise tax assessments totaling $8.2 million for 2004–2006 and is subject to additional audits for later years. Claims related to an Italian facility fire remain subject to insurance and indemnification arrangements.
Most important facts for investors to verify
- Whether the proposed REIT conversion received required IRS, stockholder and regulatory approvals and whether estimated costs and tax payments changed.
- Current leverage, covenant headroom, debt maturities and the company’s ability to refinance or reduce approximately $3.85 billion of debt.
- Whether service-revenue declines and negative internal revenue growth persisted beyond Q1 2013.
- Actual 2013 capital expenditures versus the $325 million estimate and the resulting free-cash-flow profile after dividends.
- Developments, reserves and potential exposure related to the GSA billing matter, False Claims Act inquiry and Massachusetts tax assessments.
- Changes in effective tax rates caused by foreign exchange, tax-law changes, audits and REIT-related restructuring.