Iron Mountain Incorporated — FY2010 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2010. The filing is an annual report, not a standalone fourth-quarter filing; quarterly data are provided where relevant. Iron Mountain provides physical and digital information management, records storage, data protection and recovery, secure destruction, archiving and eDiscovery services in more than 35 countries.
Financial performance and key metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total revenue | $3,127.5 million | $3,013.6 million | 3.8% increase |
| Storage revenue | $1,731.7 million | $1,667.6 million | 3.8% increase |
| Service revenue | $1,395.9 million | $1,346.0 million | 3.7% increase |
| Operating income | $323.6 million | $548.5 million | 41.0% decrease |
| Operating margin | 10.3% | 18.2% | Down 7.9 percentage points |
| Net income attributable to Iron Mountain | $(53.9) million | $220.9 million | Loss versus profit |
| Diluted EPS | $(0.27) | $1.08 | Declined |
| Adjusted OIBDA | $945.5 million | $868.0 million | 8.9% increase |
| Adjusted OIBDA margin | 30.2% | 28.8% | Up 1.4 percentage points |
| Cash flow from operations | $625.1 million | $616.9 million | 1.3% increase |
| Free cash flow before acquisitions and discretionary investments | $373.4 million | $335.6 million | 11.3% increase |
2010 results include a $283.8 million non-cash goodwill impairment charge related to the Worldwide Digital Business. The effective tax rate was 148.6%, primarily because most of the impairment was not deductible for tax purposes.
Liquidity, capital structure and shareholder returns
- Cash and cash equivalents were $258.7 million at December 31, 2010; cash, cash equivalents and restricted cash totaled $293.8 million.
- Total long-term debt was $3.009 billion, down from $3.252 billion at December 31, 2009. Debt-to-equity was 1.53x.
- The company had no revolving credit borrowings, $396.2 million outstanding under its term loan, and approximately $762.5 million of revolver availability, subject to covenant calculations. The revolver terminates April 16, 2012; the term loan matures April 16, 2014.
- Debt covenants were in compliance at year-end. Revolving-credit and term-loan leverage was 2.9x versus a 5.5x maximum; bond leverage was 3.4x versus a 6.5x maximum.
- Capital expenditures were $277.6 million on a cash basis; accrued capital expenditures were $268 million. Management expected approximately $245 million of 2011 capital expenditures, including approximately $20 million for real estate.
- The company repurchased $111.6 million of common stock in 2010 and had $238.5 million remaining under its $350 million authorization at year-end.
- Quarterly dividends began in 2010. The quarterly dividend increased from $0.0625 to $0.1875 per share for the fourth quarter, paid in January 2011. Management estimated a potential 2011 annual payout of approximately $150 million if the higher quarterly dividend continued.
Material changes versus the prior comparable period
- Revenue increased 3.8%, supported by storage growth and higher complementary-service revenue, including a $36.8 million increase in recycled-paper revenue from higher pricing.
- Internal revenue growth was 2.3%, while management reported 2011 internal revenue growth guidance of approximately 0% to 2%. Fourth-quarter 2010 total internal growth was 1.1%, with storage growth of 2.1% and service growth of negative 0.2%.
- Adjusted OIBDA and its margin improved through productivity gains, pricing actions and cost controls, despite weaker activity-based services and higher corporate and technology costs.
- Worldwide Digital revenue increased only 0.9%, while segment Adjusted OIBDA declined 45.2% to $27.5 million and its margin fell from 21.9% to 11.9%. Management cited weaker eDiscovery demand, smaller matters, lower pricing, longer sales cycles and Mimosa integration costs.
- The company acquired Mimosa Systems for approximately $124.2 million of total consideration, including cash and options, and acquired remaining interests in its Greek operations. It also divested its domain-name management product line for approximately $11.4 million, recognizing a pretax gain of approximately $6.9 million.
- Iron Mountain redeemed $200 million of its 7.75% senior subordinated notes in 2010 and redeemed the remaining approximately $231.3 million in January 2011.
- The company changed its European subsidiary reporting year-end from October 31 to December 31, eliminating a two-month reporting lag. A $4.7 million charge was recorded in 2010; management stated the effect on 2010 revenue and operating income was not material.
Outlook, commentary, risks and unusual items
Management’s strategy emphasizes organic growth through expanded sales coverage, international growth, hybrid and digital services, and disciplined productivity initiatives. The company expects targeted acquisitions to remain part of its strategy, but expects internal growth to be the primary driver absent unusual acquisition activity.
- Key operating risks include economic weakness, slower customer activity, longer sales cycles, increased record destruction, lower pricing and customer budget constraints.
- The business remains exposed to a shift from paper storage to alternative digital technologies, although the company is investing in digital archiving, online backup and eDiscovery.
- Data-security breaches, loss or theft of customer information, privacy regulation, litigation and potentially unenforceable contractual liability limits could increase costs or damage the company’s reputation.
- International operations create foreign-exchange, political, regulatory, tax and operational risks. Approximately 31% of 2010 revenue was generated outside the United States.
- Real-estate, environmental, fire-safety, disaster, insurance and business-continuity risks are significant because of the company’s extensive facility network.
- The company faces a patent-infringement lawsuit concerning Connected backup technology seeking approximately $26 million plus future royalties. Management believes it has meritorious defenses and does not expect a material impact, but the outcome is uncertain.
- Six related Brazilian labor lawsuits purport to represent approximately 2,000 individuals and seek unspecified damages. Management does not expect a material impact.
- The company reported damage from the Chile and New Zealand earthquakes but expected insurance coverage to limit the financial impact. Chile-related insurance settlements produced approximately $10.2 million of pretax gains in 2010.
- Total contractual obligations were approximately $7.4 billion, including debt, interest, capital leases, operating leases and purchase or asset-retirement obligations. The company expects to meet near-term requirements through operating cash flow, cash, available credit and other financing sources.
- Following the January 2011 Poland transaction, the company acquired the remaining 80% interest in its Polish joint venture for an estimated $69.5 million, with an estimated additional payment of approximately $32 million and potential contingent consideration of up to $2.5 million.
Investor verification checklist
- Reconcile reported GAAP results with Adjusted OIBDA, Adjusted EPS and free cash flow, particularly the effect of the $283.8 million goodwill impairment and related tax impact.
- Assess whether Worldwide Digital can recover profitability after the impairment, Mimosa integration costs, weaker eDiscovery demand and discontinued software projects.
- Review debt maturities, covenant headroom, the April 2012 revolver termination and the effect of the January 2011 note redemption on interest expense and liquidity.
- Evaluate the sustainability of the increased dividend and share-repurchase program against projected 2011 free cash flow and planned capital expenditures.
- Monitor storage volume growth, pricing, customer destruction rates, service activity and the 2011 internal-growth outlook of 0% to 2%.
- Review unresolved litigation, tax audits, uncertain tax positions, environmental exposures and insurance recoveries for potential changes in estimated liabilities.