Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
____________________________________________________________________________
FORM 10-K
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(Mark One) |
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2016 |
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission File Number 1-13045
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IRON MOUNTAIN INCORPORATED
(Exact name of Registrant as Specified in Its Charter)
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Delaware (State or other jurisdiction of incorporation) One Federal Street, Boston, Massachusetts (Address of principal executive offices) | 23-2588479 (I.R.S. Employer Identification No.) 02110 (Zip Code) |
617-535-4766 (Registrant's telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | | Name of Exchange on Which Registered |
Common Stock, $.01 par value per share | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer ý | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
As of June 30, 2016, the aggregate market value of the Common Stock of the registrant held by non-affiliates of the registrant was approximately $10.4 billion based on the closing price on the New York Stock Exchange on such date.
Number of shares of the registrant's Common Stock at February 17, 2017: 263,724,213
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required in Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K (the "Annual Report") is incorporated by reference from our definitive Proxy Statement for our 2017 Annual Meeting of Stockholders (our "Proxy Statement") to be filed with the Securities and Exchange Commission (the "SEC") within 120 days after the close of the fiscal year ended December 31, 2016.
IRON MOUNTAIN INCORPORATED
2016 FORM 10-K ANNUAL REPORT
Table of Contents
References in this Annual Report to "the Company," "IMI," "Iron Mountain," "we," "us" or "our" include Iron Mountain Incorporated, a Delaware corporation, and its predecessor, as applicable, and its consolidated subsidiaries, unless the context indicates otherwise.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements in this Annual Report that constitute "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements concern our operations, economic performance, financial condition, goals, beliefs, future growth strategies, investment objectives, plans and current expectations, such as our (1) commitment to future dividend payments, (2) expected growth of retention of records stored with us from existing customers, (3) expected 2017 consolidated internal storage rental revenue growth rate and capital expenditures, (4) expected target leverage ratio, (5) statements made in relation to our acquisition of Recall Holdings Limited ("Recall") pursuant to the Scheme Implementation Deed, as amended, with Recall (the "Recall Transaction") including the total cost to integrate the combined companies, and (6) expected cost savings associated with the Transformation Initiative (as defined herein). These forward-looking statements are subject to various known and unknown risks, uncertainties and other factors. When we use words such as "believes," "expects," "anticipates," "estimates" or similar expressions, we are making forward-looking statements. Although we believe that our forward-looking statements are based on reasonable assumptions, our expected results may not be achieved, and actual results may differ materially from our expectations. In addition, important factors that could cause actual results to differ from expectations include, among others:
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• | our ability to remain qualified for taxation as a real estate investment trust for United States federal income tax purposes ("REIT"); |
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• | the adoption of alternative technologies and shifts by our customers to storage of data through non-paper based technologies; |
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• | changes in customer preferences and demand for our storage and information management services; |
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• | the cost to comply with current and future laws, regulations and customer demands relating to privacy issues, as well as fire and safety standards; |
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• | the impact of litigation or disputes that may arise in connection with incidents in which we fail to protect our customers' information; |
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• | changes in the price for our storage and information management services relative to the cost of providing such storage and information management services; |
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• | changes in the political and economic environments in the countries in which our international subsidiaries operate; |
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• | our ability or inability to complete acquisitions on satisfactory terms and to integrate acquired companies efficiently; |
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• | changes in the amount of our capital expenditures; |
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• | changes in the cost of our debt; |
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• | the impact of alternative, more attractive investments on dividends; |
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• | the cost or potential liabilities associated with real estate necessary for our business; |
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• | the performance of business partners upon whom we depend for technical assistance or management expertise outside the United States; and |
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• | other trends in competitive or economic conditions affecting our financial condition or results of operations not presently contemplated. |
Other risks may adversely impact us, as described more fully under "Item 1A. Risk Factors" of this Annual Report.
You should not rely upon forward-looking statements except as statements of our present intentions and of our present expectations, which may or may not occur. You should read these cautionary statements as being applicable to all forward-looking statements wherever they appear. Except as required by law, we undertake no obligation to release publicly the result of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are also urged to carefully review and consider the various disclosures we have made in this document, as well as our other periodic reports filed with the SEC.
Item 1. Business.
Business Overview
We store records, primarily physical records and data backup media, and provide information management services that help organizations around the world protect their information, lower storage rental costs, comply with regulations, enable corporate disaster recovery, and better use their information for business advantages, regardless of its format, location or life cycle stage. We offer comprehensive records and information management services and data management services, along with the expertise and experience to address complex storage and information management challenges such as rising storage rental costs, and increased litigation, regulatory compliance and disaster recovery requirements. Founded in an underground facility near Hudson, New York in 1951, Iron Mountain Incorporated, a Delaware corporation, has more than 230,000 customers in a variety of industries in 45 countries around the world as of December 31, 2016. We currently provide storage and information management services to commercial, legal, financial, healthcare, insurance, life sciences, energy, businesses services, entertainment and government organizations, including approximately 95% of the Fortune 1000. As of December 31, 2016, we employed more than 24,000 people.
Now in our 66th year, we have experienced tremendous growth, particularly since successfully completing the initial public offering of our common stock in February 1996, at which time we operated fewer than 85 facilities (6 million square feet) with limited storage and information management service offerings and annual revenues of approximately $104.0 million. We are now a global enterprise providing storage and a broad range of related records and information management services to customers in markets around the world with over 1,400 facilities (86.2 million square feet) and total revenues of more than $3.5 billion for the year ended December 31, 2016. We are listed on the New York Stock Exchange (the "NYSE") and on the Australian Stock Exchange ("ASX"). We are a constituent of the Standard & Poor's 500 Index and the MSCI REIT index and, as of December 31, 2016, we were number 730 on the Fortune 1000.
We have been organized and operating as a REIT effective for our taxable year beginning January 1, 2014.
Our financial model is based on the recurring nature of our storage rental revenues and resulting storage net operating income. Supported by consistent and predictable storage rental revenues, we generate durable, low-volatility growth. This fundamental financial characteristic provides stability throughout economic cycles. Since May 2012, we have returned $3.0 billion of capital to stockholders including $1.9 billion in cash and $1.1 billion in our common stock.
Recall Acquisition
On May 2, 2016 (Sydney, Australia time), we completed the Recall Transaction. At the closing of the Recall Transaction, we paid approximately $331.8 million in cash and issued approximately 50.2 million shares of our common stock which, based on the closing price of our common stock as of April 29, 2016 (the last day of trading on the NYSE prior to the closing of the Recall Transaction) of $36.53 per share, resulted in a total purchase price to Recall shareholders of approximately $2,166.9 million.
The Durability of Our Business
A significant amount of activity generated in the information management industry is the result of legislative requirements. To varying degrees across the world, organizations are required by law to create certain records and to retain them for a specified period of time. These laws may also impose more stringent requirements on personal information regarded as being sensitive, such as financial and medical information. As a third party provider, we assist customers to improve data security and establish programs to ensure compliance with their regulatory obligations. Storage of information can be performed in-house by businesses (unvended) or outsourced, in whole or in part, to a third party provider (vended). We believe the in-house portion still represents a majority of the total global information management market, offering a substantial unvended opportunity even in developed geographic markets with lower rates of economic growth.
We believe that the creation of document-based information will be sustained, as "paperless" technologies have prompted the creation of hard copies and have also led to increased demand for electronic records services, such as the storage and off-site rotation of computer backup media. In addition, we believe that the proliferation of digital information technologies and distributed data networks has created a growing need for efficient, cost-effective, high quality technology solutions for electronic data protection and the management of electronic documents. Ultimately, we expect that the volume of stored physical and electronic records will continue to increase on a global basis for a number of reasons, including: (1) regulatory requirements; (2) concerns over possible future litigation and the resulting increases in volume and holding periods of records; (3) the continued growth in data as a result of enhanced data processing technologies; (4) inexpensive document producing technologies; (5) the high cost of reviewing records and deciding whether to retain or destroy them; (6) the failure of many entities to adopt or follow policies on records destruction; and (7) the need to keep backup copies of certain records in off-site locations for business continuity purposes in the event of disaster.
Business Strategy
Overview
We have transitioned from a growth strategy driven primarily by acquisitions of storage and information management services companies to a strategy that targets multiple sources of revenue growth. Our current strategy is focused on: (1) increasing revenues in developed markets such as the United States, Canada, Australia and western Europe, primarily through improved sales and marketing efforts and attractive fold-in acquisitions; (2) establishing and enhancing leadership positions in high-growth emerging markets such as central and eastern Europe, Latin America and Asia, primarily through acquisitions; and (3) continuing to identify, incubate and scale adjacent business opportunities ("ABOs") to support our long-term growth objectives and drive solid returns on invested capital. In our developed markets, we expect continuous improvement initiatives will generate modest profit growth. In our existing emerging markets, we expect profits will grow as the local businesses scale, and we will look to reinvest a portion of that improvement to support the growth of these businesses.
Storage rental is the key driver of our economics and allows us to expand our relationships with our customers through value-added services that flow from storage rental. Consistent with our overall strategy, we are focused on increasing incoming volumes on a global basis. There are multiple sources of new volumes available to us, and these sources inform our growth investment strategy. Our investments in sales and marketing support sales to new customers that do not currently outsource some or all of their storage and information management needs, as well as increased volumes from existing customers. We also expect to invest in acquisitions of customer relationships and storage and information management services businesses. In our developed markets, we expect that these acquisitions will primarily be fold-in acquisitions designed to optimize the utilization of existing assets, expand our presence and better serve customers. We also expect to use acquisitions to expand our presence in attractive, higher growth emerging markets. Finally, we continue to pursue new rental streams through ABOs.
We offer our customers an integrated value proposition by providing them with secure storage and comprehensive service offerings, including records and information management services and data management services. We have the expertise and experience to address complex storage and information management challenges, such as rising storage rental costs, increased litigation, regulatory compliance and disaster recovery requirements. Our objective is to continue to capitalize on our brand, our expertise in the storage and information management industry and our global network to enhance our customers' experience, thereby maintaining our strong customer retention rates and attracting new customers. Our overall growth strategy will focus on growing our business organically, making strategic customer acquisitions, pursuing acquisitions of storage and information management businesses, developing adjacent businesses (organically and through acquisitions) and optimizing our real estate portfolio. We continue to expand our portfolio of products and services, based on our customers' evolving requirements. Adding new products and services allows us to strengthen our existing customer relationships and attract new customers in previously untapped markets.
Growth from Existing and New Customers
Our existing customers' storage of physical records contributes to the growth of storage rental and certain records and information management services revenues because, on average, our existing customers generate additional records at a faster rate than old records are destroyed or permanently removed. The absolute number of new document storage cartons from our existing customers has been consistent in the past five years, and we anticipate that this level will be sustained, although the rate of growth from existing customers is slightly declining, given the continued growth in our total records volume. In order to maximize growth opportunities from existing customers, we seek to maintain high levels of customer retention by providing premium customer service.
Our sales coverage model is designed to identify and capitalize on incremental revenue opportunities by strategically allocating our sales resources to our customer base and selling additional storage, records and information management services and products in new and existing markets. Our sales force is dedicated to three primary objectives: (1) establishing new customer account relationships; (2) generating additional revenue by expanding existing customer relationships globally; and (3) expanding new and existing customer relationships by effectively selling a wide array of related services and products. In order to accomplish these objectives, our sales forces draw on our United States and international marketing organizations and senior management. We have developed tailored marketing strategies to target customers in the healthcare, financial, insurance, legal, life sciences, energy, business services and federal vertical market segments.
Growth through Acquisitions
The storage and information management services industry is highly fragmented with thousands of competitors in North America and around the world. Between 1995 and 2004 there was significant consolidation in the industry. Acquisitions were a fast and efficient way to achieve scale, expand geographically and broaden service offerings. After 2004, our acquisition activity was reduced as we focused on integrating these recent transactions and diversifying the business. Beginning again in 2012, we saw opportunities for attractive acquisitions in emerging markets and consolidation opportunities in more developed markets, and resumed acquisition activity. We believe this ongoing acquisition activity is due to opportunities for large providers to achieve economies of scale and meet customer demands for sophisticated, technology-based solutions. Attractive acquisition opportunities, in North America and internationally, continue to exist, and we expect to continue to pursue acquisition of these businesses where we believe they present good returns and good opportunities to create value for our stockholders. Lastly, we have a successful record of acquiring and integrating these businesses.
We have acquired, and we continue to seek to acquire, storage and information management services businesses in developed markets including the United States, Canada, Australia and western Europe. Given the relatively small size of most attractive acquisition targets in these markets, future acquisitions are expected to be less significant to our overall revenue growth in these markets than in the past.
On May 2, 2016, we completed the acquisition of Recall for approximately $2,166.9 million. In connection with the Recall Transaction, we acquired the entirety of Recall's global operations, including all facilities, vehicles, employees and customer assets (excluding certain operations of Recall that we were required to divest subsequent to the closing of the Recall Transaction in accordance with agreements with regulatory authorities in the United States, Canada, Australia and the United Kingdom). We believe the acquisition of Recall accelerates our already successful growth strategy. After the Recall Transaction, with our broader footprint, stronger infrastructure, increased exposure to high growth emerging markets and small to mid-size enterprise customers, and increased economies of scale, we believe we will be well suited to address unmet document storage and information management needs around the globe.
We expect to continue to make acquisitions and investments in storage and information management services businesses in targeted emerging markets outside the United States, Canada, Australia and western Europe. We have acquired and invested in, and seek to acquire and invest in, storage and information management services companies in certain countries, and, more specifically, certain markets within such countries, where we believe there is potential for significant growth. We expect that future acquisitions and investments in our emerging markets will focus primarily on expanding priority markets in central and eastern Europe, Latin America and Asia.
The experience, depth and strength of local management are particularly important to our emerging market acquisition strategy. Since beginning our international expansion program in January 1999, we have, directly and through joint ventures, expanded our operations such that, as of December 31, 2016, we operated in 45 countries. These transactions have taken, and may continue to take, the form of acquisitions of an entire business or controlling or minority investments with a long-term goal of full ownership. We believe a joint venture strategy, rather than an outright acquisition, may, in certain markets, better position us to expand the existing business. Our local partners benefit from our expertise in the storage and information management services industry, our multinational customer relationships, our access to capital and our technology, while we benefit from our local partners' knowledge of the market, relationships with local customers and their presence in the community. In addition to the criteria we use to evaluate developed market acquisition candidates, when looking at an emerging market acquisition, we also evaluate risks uniquely associated with an international investment, including those risks described below. Our long-term goal is generally to acquire full ownership of each business in which we make a joint venture investment. We now own more than 98% of our international operations, measured as a percentage of consolidated revenues.
Our emerging market investments are subject to risks and uncertainties relating to the indigenous political, social, regulatory, tax and economic structures of other countries, as well as fluctuations in currency valuation, exchange controls, expropriation and governmental policies limiting returns to foreign investors.
Growth through ABOs
ABOs, such as our data center and fine art storage businesses, are prospective business lines that we consider investing in to grow and diversify our business. We are seeking businesses with long-term, recurring revenue, preferably with storage rental attributes, which are consistent with, and will enhance, our REIT structure. A dedicated team is focused on identifying and evaluating these opportunities. We have developed an innovation process that enables us to cautiously and effectively develop these ABOs to leverage our capabilities. If we are able to demonstrate success and meet return thresholds, we may acquire businesses to further accelerate our growth in the relevant ABO. Importantly, the ABO process includes financial hurdles and decision gates to help us evaluate whether we scale or discontinue investments in these opportunities, consistent with our disciplined approach to capital allocation.
With respect to our data center business, we believe that the growth rate of critical digital information is accelerating, driven in part by the use of the Internet as a distribution and transaction medium. The rising cost and increasing importance of storing and managing digital information, coupled with the increasing availability of telecommunications bandwidth at lower costs, may create meaningful opportunities for us to provide solutions to our customers with respect to their digital records storage and management challenges.
On December 1, 2015 we completed the acquisition of Crozier Fine Arts ("Crozier"), a storage, logistics and transportation business for high-value paintings, photographs and other types of art belonging to individual collectors, galleries and art museums. Crozier is a leader in art storage and an industry advocate for worldwide standards. This acquisition builds upon our expertise in storing, protecting and managing high-value items and supports our strategy to leverage our real estate network to accelerate growth. In addition, in June 2016, we acquired the assets of Fairfield Fine Arts (“Fairfield”), an art storage and handling company. In connection with the Fairfield acquisition, we acquired all of Fairfield’s customer relationships and its state-of-the-art 10,000 square foot storage facility in Ridgefield, Connecticut.
The fine art storage industry is a growing, but fragmented, industry marked by increasing international interest and changes in purchasing habits by collectors and museums. The increase in contemporary art as a focus for collectors has caused a spike in storage needs, while the increase in auction “turnover” - the rate at which catalogs, collections and individual pieces are made available for auction - has heightened the need for transportation, shipping, and related services. Taken together, we believe these factors have the fine art storage industry poised for significant growth.
Business Characteristics
We generate our revenues by renting storage space to a large and diverse customer base around the globe and providing an expanding menu of related and ancillary products and services. Providing outsourced storage is the mainstay of our customer relationships and serves as the foundation for the majority of our revenue growth. Services are a complementary part of a comprehensive records management program and consist primarily of the handling and transportation of stored records and information, shredding, the scanning, imaging and document conversion services of active and inactive records ("Information Governance and Digital Solutions ") (formerly referred to as Document Management Solutions), data restoration projects, the storage, assembly, reporting and delivery of customer marketing literature, or fulfillment services, consulting services, product sales (including specially designed storage containers and related supplies), technology escrow services, and recurring project revenues.
Secure Storage
Our storage operations, our largest source of revenue, consist of providing non-dedicated storage rental space to our customers. Non-dedicated space allows our customers to increase or decrease the volume of their physical storage over the life of the contract based on their storage needs, while also reducing their risk of loss in the event of natural disaster. Given this non-dedicated space dynamic, the large portfolio of customer contracts, and the fact that no customer accounted for more than 1% of our consolidated revenues for the year ended December 31, 2016, we assess the performance of our storage rental business predominantly by analyzing trends in segment-level storage rental volume and storage rental revenue. Additionally, our storage operations include technology escrow services.
Records storage consists primarily of the archival storage of records for long periods of time according to applicable laws, regulations and industry best practices. The secure off-site storage of data backup media is a key component of a company's disaster recovery and business continuity programs. Storage rental charges are generally billed monthly on a per storage unit basis and include the provision of space, racking systems, computerized inventory and activity tracking, and physical security.
Physical Records Storage
Physical records may be broadly divided into two categories: active and inactive. Active records relate to ongoing and recently completed activities or contain information that is frequently referenced. Active records are usually stored and managed on-site by their owners to ensure ready availability. Inactive physical records are the principal focus of the storage and information management services industry and consist of those records that are not needed for immediate access but which must be retained for legal, regulatory and compliance reasons or for occasional reference in support of ongoing business operations. Inactive physical records are typically stored in cartons packed by the customer for long periods of time with limited activity. For some customers, we store individual files on an open shelf basis as these files are typically more active.
Physical records may also include critical or irreplaceable data such as master audio and video recordings, film, fine art and other highly proprietary information, such as energy data. We continue to identify additional areas of physical storage that fit with our core competencies in security and transportation, seeking to provide enterprise storage to businesses in much the same manner that self-storage companies serve consumers. Physical records may require special facilities, either because of the data they contain or the media on which they are recorded. Accordingly, our charges for providing enhanced security and special climate-controlled environments for these vital records are higher than for typical storage rental.
Electronic Records Storage
Electronic records management focuses on the storage of, and related services for, computer media that is either a backup copy of recently processed data or archival in nature. Computer tapes, cartridges and disk packs are transported off-site by our courier operations on a scheduled basis to secure, climate-controlled facilities, where they are available to customers 24 hours a day, 365 days a year, to facilitate data recovery in the event of a disaster. Frequently, backup tapes are rotated from our facilities back to our customers' data centers. We also manage tape library relocations and support disaster recovery testing and execution. Electronic storage consists of (i) storage and rotation of backup computer media as part of corporate disaster recovery plans; (ii) server and computer backup services; (iii) digital content repository systems to house, distribute, and archive key media assets; and (iv) storage, safeguarding and electronic or physical delivery of physical media of all types, primarily for entertainment and media industry clients.
We believe the issues encountered by customers trying to manage their electronic records are similar to the ones they face in their physical records management programs and consist primarily of: (1) storage capacity and the preservation of data; (2) access to and control over the data in a secure environment; and (3) the need to retain electronic records due to regulatory requirements or for litigation support. Customer needs for data backup and recovery and archiving are distinctively different from the storage of physical records. Backup data exists because of the need of many businesses to be able to recover their data in the event of a system failure, casualty loss or other disaster. It is customary (and a best practice) for data processing groups to rotate backup tapes to offsite locations on a regular basis and to store multiple copies of such information at multiple sites. We expect continued increase in demand for computer media backup, as it provides off-line storage or storage that is not connected to the Internet and provides superior protection against data breaches and hacks. In addition to the physical storage and rotation of backup data that we provide, we offer online backup services through partnerships as an alternative way for businesses to store and access data. Online backup is an Internet-based service that automatically backs up computer data from servers or directly from desktop and laptop computers over the Internet and stores it in secure data centers.
Service Offerings
Complementary to any records management program is the handling and transportation and the eventual destruction of records upon the expiration of retention periods. These activities are accomplished through our complementary service and courier operations. Service charges are generally assessed for each activity on a per unit basis. Courier operations consist primarily of the pickup and delivery of records upon customer request. Charges for courier services are based on urgency of delivery, volume and location and are billed monthly. As of December 31, 2016, our courier fleet consisted of approximately 4,500 owned or leased vehicles. Our other services include information destruction services (primarily secure shredding)("Destruction"), Information Governance and Digital Solutions, Compliant Records Management and Consulting Services, and other ancillary services.
Information Destruction Services
Our Destruction services consist primarily of (1) secure shredding operations which typically include the scheduled pick-up of loose office records that customers accumulate in specially designed secure containers we provide and (2) secure information technology asset destruction. In addition, secure shredding is a natural extension of our hard copy records management services by completing the lifecycle of a record and involves the shredding of sensitive documents for customers that, in many cases, store their records with us. Complementary to our shredding operations is the sale of the resultant waste paper to third-party recyclers. Through a combination of plant-based shredding operations and mobile shredding units consisting of custom built trucks, we are able to offer secure shredding services to our customers throughout the United States, Canada, Australia, and Latin America.
Information Governance and Digital Solutions
The focus of our Information Governance and Digital Solutions business is to develop, implement and support comprehensive storage and information management solutions for the complete lifecycle of our customers' information. We seek to develop solutions that solve our customers' document management challenges by integrating the management of physical records, document conversion and digital storage. Our Information Governance and Digital Solutions services complement our service offerings and enhance our existing customer relationships. We differentiate our offerings from our competitors by providing solutions that complement and expand our existing portfolio of products and services. The trend towards increased usage of Electronic Document Management ("EDM") systems represents another opportunity for us to manage active records. Our Information Governance and Digital Solutions services provide the bridge between customers' physical documents and their EDM solutions.
Industry Tailored Services
We offer records and information management services that have been tailored for specific industries, such as healthcare, or to address the needs of customers with more specific requirements based on the critical nature of their records. For example, medical records tend to be more active in nature and are typically stored on specialized open shelving systems that provide easier access to individual files. In addition to storing medical records, we provide health care information services, which include the handling, filing, processing and retrieval of medical records used by hospitals, private practitioners and other medical institutions, as well as recurring project work and ancillary services. Our industry tailored services include Health Information Management Solutions, Entertainment Services and Energy Data Services.
Other Ancillary Services
Other services we provide include recurring project work, which involves the on-site removal of aged patient files and related computerized file indexing. Ancillary healthcare information services include release of information (medical record copying and delivery), temporary staffing, contract coding, facilities management and imaging. We offer a variety of additional services which customers may request or contract for on an individual basis. These services include conducting records inventories, packing records into cartons or other containers, and creating computerized indices of files and individual documents. We also provide services for the management of active records programs. We can provide these services, which generally include document and file processing and storage, both offsite at our own facilities and by supplying our own personnel to perform management functions on-site at a customer's premises. Other services that we provide include fulfillment services and Compliant Records Management and Consulting Services.
Business Segments
Our North American Records and Information Management Business, North American Data Management Business, Western European Business and our Other International Business segments offer storage and the information management services discussed above, in their respective geographies. The amount of revenues derived from our North American Records and Information Management Business, North American Data Management Business, Western European Business, Other International Business and Corporate and Other Business segments and other relevant data, including financial information about geographic areas and product and service lines, for the years ended December 31, 2014, 2015 and 2016, are set forth in Note 9 to Notes to Consolidated Financial Statements included in this Annual Report.
North American Records and Information Management Business
Our North American Records and Information Management Business segment provides records and information management services, including the storage of physical records, including media such as microfilm and microfiche, master audio and videotapes, film, X-rays and blueprints, including healthcare information services, vital records services, service and courier operations, and the collection, handling and disposal of sensitive documents for corporate customers (“Records Management”); Destruction; and Information Governance and Digital Solutions throughout the United States and Canada; as well as fulfillment services and technology escrow services in the United States.
North American Data Management Business
Our North American Data Management Business segment provides storage and rotation of backup computer media as part of corporate disaster recovery plans, including service and courier operations (“Data Protection & Recovery”); server and computer backup services; digital content repository systems to house, distribute, and archive key media assets; and storage, safeguarding and electronic or physical delivery of physical media of all types, primarily for entertainment and media industry clients, throughout the United States and Canada.
Western European Business
Our Western European Business segment provides records and information management services, including Records Management, Data Protection & Recovery and Information Governance and Digital Solutions throughout Austria, Belgium, France, Germany, Ireland, the Netherlands, Spain, Switzerland and the United Kingdom (consisting of our operations in England, Northern Ireland and Scotland), as well as Information Governance and Digital Solutions in Sweden (the remainder of our business in Sweden is included in the Other International Business segment described below).
Other International Business
Our Other International Business segment provides records and information management services throughout the remaining European countries in which we operate, Latin America, Asia Pacific and Africa. Our European operations included in this segment provide records and information management services, including Records Management, Data Protection & Recovery and Information Governance and Digital Solutions throughout the Czech Republic, Denmark, Finland, Greece, Hungary, Norway, Poland, Romania, Russia, Serbia, Slovakia, Turkey and Ukraine; Records Management and Information Governance and Digital Solutions in Estonia, Latvia and Lithuania; and Records Management in Sweden. Our Latin America operations provide records and information management services, including Records Management, Data Protection & Recovery, Destruction and Information Governance and Digital Solutions throughout Argentina, Brazil, Chile, Colombia, Mexico and Peru. Our Asia Pacific operations provide records and information management services, including Records Management, Data Protection & Recovery, Destruction and Information Governance and Digital Solutions throughout Australia and New Zealand, with Records Management and Data Protection & Recovery also provided in certain markets in China (including Taiwan), Hong Kong-SAR, India, Malaysia, Singapore and Thailand. Our African operations provide Records Management, Data Protection & Recovery and Information Governance and Digital Solutions in South Africa.
Corporate and Other Business
Our Corporate and Other Business segment primarily consists of our data center and fine art storage businesses in the United States, the primary product offerings of our Adjacent Businesses operating segment, as well as costs related to executive and staff functions, including finance, human resources and information technology, which benefit the enterprise as a whole. These costs are primarily related to the general management of these functions on a corporate level and the design and development of programs, policies and procedures that are then implemented in the individual segments, with each segment bearing its own cost of implementation. Our Corporate and Other Business segment also includes stock-based employee compensation expense associated with all stock options, restricted stock units, performance units and shares of stock issued under our employee stock purchase plan.
Our Business Fundamentals
Our business fundamentals are based on the recurring nature of our various revenue streams. We generate attractive returns from our differentiated storage rental business model because our occupancy costs, whether in a leased or owned building, are incurred per square foot while our storage revenue is generally earned per cubic foot. The historical predictability of our revenues and the resulting profitability allows us to operate with a high degree of financial leverage. Our business fundamentals consist of:
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• | Recurring Revenues. We derive a majority of our consolidated revenues from fixed periodic, usually monthly, storage rental fees charged to customers based on the volume of their records stored. Once a customer places physical records in storage with us, and until those records are destroyed or permanently removed (for which we typically receive a service fee), we receive recurring payments for storage rental without incurring additional labor or marketing expenses or significant capital costs. Similarly, contracts for the storage of electronic backup media involve primarily fixed monthly rental payments. This stable and growing storage rental revenue base also provides the foundation for increases in service revenues and profitability. |
A customer is allocated a certain amount of storage space in our storage facilities but is not allocated a dedicated building or space in a particular building. In practice, we can, and sometimes will, for a variety of reasons, move records from one facility and into another facility. In order to track net move-in and move-out activity of customer materials, as well as to assess the optimization of our real estate portfolio, we regularly assess the utilization of our overall real estate portfolio. On a per building basis, we compare the amount of racking that is being used to store customer materials to the capacity of the entire building assuming it was fully racked ("Total Building Utilization"). Additionally, we compare the amount of racking that is being used to store customer materials to the capacity of the racking that has been installed ("Total Racking Utilization"). As of December 31, 2016, our Total Building Utilization and Total Racking Utilization were approximately 92% and 85%, respectively, for our records management business and our Total Building Utilization and Total Racking Utilization, excluding the impact of the Recall Transaction, were approximately 82% and 71%, respectively, for our data management business. The Total Building Utilization and Total Racking Utilization for our data management business as of December 31, 2016 excludes the impact of the Recall Transaction, as Recall's unit of measurement for computer media is not consistent with ours. As part of the integration of Recall, we are in the process of converting Recall's unit of measurement for computer media to be consistent with ours to enable us to report both Total Building Utilization and Total Racking Utilization, including Recall, for our data management business.
We occasionally offer inducements to our customers in order to generate new business opportunities. Such inducements most commonly come in the form of providing free intake costs to transport a customer's records to one of our facilities, including labor and transportation costs ("Move Costs"), or payments that are made to a customer's current records management vendor in order to terminate the customer's existing contract with that vendor, or direct payments to a customer ("Permanent Withdrawal Fees"). We capitalize Move Costs and Permanent Withdrawal Fees (collectively, "Customer Inducements") as customer acquisition costs.
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• | Historically Non-Cyclical Storage Rental Business. Historically, we have not experienced significant reductions in our storage rental business as a result of economic downturns. We believe the durability of our storage rental business is driven by a number of factors, including the trend toward increased records retention, albeit at a lower rate of growth, as well as customer satisfaction with our services and contractual net price increases. The absolute number of new document storage cartons from our existing customers has been consistent in the past five years, and we anticipate this level will be sustained, although the rate of growth is slightly declining, given the continued growth in the total records volume. Total net volume growth, including acquisitions, was approximately 4%, 2% and 26% on a global basis for 2014, 2015 and 2016, respectively. The total net volume growth in 2016 was primarily driven by the impact of the Recall Transaction. |
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• | Diversified and Stable Customer Base. As of December 31, 2016, we had more than 230,000 customers in a variety of industries in 45 countries around the world. We currently provide storage and information management services to commercial, legal, financial, healthcare, insurance, life sciences, energy, businesses services, entertainment and government organizations, including approximately 95% of the Fortune 1000. No single customer accounted for more than 1% of our consolidated revenues in any of the years ended December 31, 2014, 2015 and 2016. For each of the three years 2014 through 2016, the average annual volume reduction due to customers terminating their relationship with us was approximately 2%. |
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• | Capital Allocation. All the characteristics of our business noted above support the durability of our cash flows, which in turn support our dividends and a portion of our investments. Absent a large acquisition or significant investments in real estate, we typically generate cash flows to support our dividends, maintain our operations and infrastructure and invest in core growth opportunities. We plan on funding acquisitions, ABO investments and real estate investments primarily through incremental borrowings, proceeds from real estate sales and/or proceeds from the issuance of debt or equity securities, dependent on market conditions. Below are descriptions of the major types of investments and other capital expenditures that we have made in recent years or that we are likely to consider in 2017: |
Real Estate:
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• | Real estate assets that support core business growth primarily related to investments in land, buildings, building improvements, leasehold improvements and racking structures that expand our revenue capacity in existing or new geographies, replace a long-term operational obligation or create operational efficiencies, or Real Estate Investment. |
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• | Real estate assets necessary to maintain ongoing business operations primarily related to the repair or replacement of real estate assets such as buildings, building improvements, leasehold improvements and racking structures, or Real Estate Maintenance. |
Non-Real Estate:
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• | Non-real estate assets that either (i) support the growth of our business, and/or increase our profitability, such as customer-inventory technology systems, and technology service storage and processing capacity, or (ii) are directly related to the development of core products or services in support of our integrated value proposition and enhance our leadership position in the industry, including items such as increased feature functionality, security upgrades or system enhancements, or Non-Real Estate Investment. |
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• | Non-real estate assets necessary to maintain ongoing business operations primarily related to the repair or replacement of customer-facing assets such as containers and shred bins, warehouse equipment, fixtures, computer hardware, or third-party or internally-developed software assets. This category also includes operational support initiatives such as sales and marketing and information technology projects to support infrastructure requirements, or Non-Real Estate Maintenance. |
The following table presents our capital spend for 2014, 2015 and 2016 organized by the type of the spending as described above:
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| Year Ended December 31, |
Nature of Capital Spend (in thousands) | 2014 | | 2015 | | 2016 |
Real Estate: | |
| | |
| | |
|
Investment | $ | 199,663 |
| | $ | 170,742 |
| | $ | 203,778 |
|
Maintenance | 57,574 |
| | 52,826 |
| | 63,543 |
|
Total Real Estate Capital Spend | 257,237 |
| | 223,568 |
| | 267,321 |
|
Non-Real Estate: | |
| | |
| | |
|
Investment | 55,991 |
| | 47,964 |
| | 50,954 |
|
Maintenance | 19,527 |
| | 23,396 |
| | 20,799 |
|
Total Non-Real Estate Capital Spend | 75,518 |
| | 71,360 |
| | 71,753 |
|
| | | | | |
Total Capital Spend (on accrual basis) | 332,755 |
| | 294,928 |
| | 339,074 |
|
Net (decrease)/increase in prepaid capital expenditures | (2,455 | ) | | (362 | ) | | 374 |
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Net decrease/(increase) accrued capital expenditures | 31,624 |
| | (4,317 | ) | | (10,845 | ) |
Total Capital Spend (on cash basis) | $ | 361,924 |
| | $ | 290,249 |
| | $ | 328,603 |
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Competition
We are a global leader in the physical storage and information management services industry with operations in 45 countries as of December 31, 2016. We compete with our current and potential customers' internal storage and information management services capabilities.
We also compete with numerous storage and information management services providers in every geographic area where we operate. The physical storage and information management services industry is highly competitive and includes thousands of competitors in North America and around the world. We believe that competition for customers is based on price, reputation for reliability, quality and security of storage, quality of service and scope and scale of technology, and we believe we generally compete effectively in each of these areas.
Alternative Technologies
We derive most of our revenues from rental fees for the storage of physical records and computer backup tapes and from storage related services. Alternative storage technologies exist, many of which require significantly less space than physical documents and tapes, and as alternative technologies are adopted, storage related services may decline as the physical records or tapes we store become less active and more archived. To date, none of the alternative technologies has replaced physical documents as the primary means for storing information. We continue to provide, primarily through partnerships, additional services such as online backup, designed to address our customers' need for efficient, cost-effective, high-quality solutions for electronic records and storage and information management.
Employees
As of December 31, 2016, we employed more than 8,500 employees in the United States and more than 15,500 employees outside of the United States. At December 31, 2016, approximately 700 employees were represented by unions in North America (in California, Illinois, Georgia, New Jersey and Pennsylvania and three provinces in Canada) and approximately 3,800 employees were represented by unions in Latin America (in Argentina, Brazil and Chile).
All union and non-union employees are generally eligible to participate in our benefit programs, which include medical, dental, life, short and long-term disability, retirement/401(k) and accidental death and dismemberment plans. Certain unionized employees in California receive these types of benefits through their unions and are not eligible to participate in our benefit programs. In addition to base compensation and other usual benefits, a significant portion of full-time employees participate in some form of incentive-based compensation program that provides payments based on revenues, profits or attainment of specified objectives for the unit in which they work. Management believes that we have good relationships with our employees and unions. All union employees are currently under renewed labor agreements or operating under an extension agreement.
Insurance and Contractual Limitations on Liability
For strategic risk transfer purposes, we maintain a comprehensive insurance program with insurers that we believe to be reputable and that have adequate capitalization in amounts that we believe to be appropriate. Property insurance is purchased on a comprehensive basis, including flood and earthquake (including excess coverage), subject to certain policy conditions, sublimits and deductibles. Property is insured based upon the replacement cost of real and personal property, including leasehold improvements, business income loss and extra expense. Other types of insurance that we carry, which are also subject to certain policy conditions, sublimits and deductibles, include medical, workers' compensation, general liability, umbrella, automobile, professional, warehouse legal liability and directors' and officers' liability policies.
Our customer contracts typically contain provisions limiting our liability for damages regarding the loss or destruction of, or damage to, records or information stored with us. Our liability for physical storage is often limited to a nominal fixed amount per item or unit of storage, such as per cubic foot, and our liability for Information Governance and Digital Solutions, Destruction and other services unrelated to records stored with us is often limited to a percentage of annual revenue under the contract; however, some of our contracts with large volume accounts and some of the contracts assumed in our acquisitions contain no such limits or higher limits. We can provide no assurance that our limitation of liability provisions will be enforceable in all instances or, if enforceable, that they would otherwise protect us from liability. In addition to provisions limiting our liability, our customer contracts generally include a schedule setting forth the majority of the customer-specific terms, including storage rental and service pricing and service delivery terms. Our customers may dispute the interpretation of various provisions in their contracts. In the past, we have had relatively few disputes with our customers regarding the terms of their customer contracts, and most disputes to date have not been material, but we can provide no assurance that we will not have material disputes in the future. Moreover, as a larger percentage of our growth is driven by acquisitions and customer contracts assumed in acquisitions (including the customer contracts assumed in the Recall Transaction) make up a commensurately larger percentage of our customer contracts, our exposure to contracts with higher or no limitations of liability and disputes with customers over the interpretation of their contracts may increase. Although we maintain a comprehensive insurance program, we can provide no assurance that we will be able to maintain insurance policies on acceptable terms in order to cover losses to us in connection with customer contract disputes.
Environmental Matters
Some of our current and formerly owned or leased properties were previously used by entities other than us for industrial or other purposes, or were affected by waste generated from nearby properties, that involved the use, storage, generation and/or disposal of hazardous substances and wastes, including petroleum products. In some instances, this prior use involved the operation of underground storage tanks or the presence of asbestos-containing materials. Where we are aware of environmental conditions that require remediation, we undertake appropriate activity, in accordance with all legal requirements. Although we have from time to time conducted limited environmental investigations and remedial activities at some of our former and current facilities, we have not undertaken an in-depth environmental review of all of our properties, including those acquired in the Recall Transaction and other acquisitions we have completed. We therefore may be potentially liable for environmental cost and may be unable to sell, rent, mortgage or use contaminated real estate owned or leased by us. Under various federal, state and local environmental laws, we may be liable for environmental compliance and remediation costs to address contamination, if any, located at owned and leased properties as well as damages arising from such contamination, whether or not we know of, or were responsible for, the contamination, or the contamination occurred while we owned or leased the property. Environmental conditions for which we might be liable may also exist at properties that we may acquire in the future. In addition, future regulatory action and environmental laws may impose costs for environmental compliance that do not exist today.
We transfer a portion of our risk of financial loss due to currently undetected environmental matters by purchasing an environmental impairment liability insurance policy, which covers all owned and leased locations. Coverage is provided for both liability and remediation costs.
Corporate Responsibility
We are committed to transparent reporting on sustainability and corporate responsibility efforts in accordance with the guidelines of the Global Reporting Initiative. Our corporate responsibility report highlights our progress against key measures of success for our efforts in the community, our environment, and for our people. We are a trusted partner to approximately 95% of the Fortune 1000. Iron Mountain is a member of the FTSE4 Good Index, Dow Jones Sustainability Index, MSCI World ESG Index, MSCI ACWI ESG Index and MSCI USA IMI ESG Index, each of which include companies that meet globally recognized corporate responsibility standards. A copy of our corporate responsibility report is available on the "About Us" section of our website, www.ironmountain.com, under the heading "Corporate Social Responsibility."
Internet Website
Our Internet address is www.ironmountain.com. Under the "About Us" section on our Internet website, under the heading "Investors", we make available, free of charge, our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") as soon as reasonably practicable after such forms are filed with or furnished to the SEC. We are not including the information contained on or available through our website as a part of, or incorporating such information by reference into, this Annual Report. Copies of our corporate governance guidelines, code of ethics and the charters of our audit, compensation, finance, nominating and governance, and risk and safety committees are available on the "Investors" section of our website, www.ironmountain.com, under the heading "Corporate Governance."
Item 1A. Risk Factors.
We face many risks. If any of the events or circumstances described below actually occur, we and our businesses, financial condition or results of operations could suffer, and the trading price of our debt or equity securities could decline. Our current and potential investors should consider the following risks and the information contained under the heading "Cautionary Note Regarding Forward-Looking Statements" before deciding to invest in our securities.
Risks Related to Our Taxation as a REIT
If we fail to remain qualified for taxation as a REIT, we will be subject to tax at corporate income tax rates and will not be able to deduct distributions to stockholders when computing our taxable income.
We have elected to be taxed as a REIT since our 2014 taxable year; however, we can provide no assurance that we will remain qualified for taxation as a REIT. If we fail to remain qualified as a REIT, we will be taxed at corporate income tax rates unless certain relief provisions apply.
Qualification for taxation as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code of 1986, as amended (the "Code"), which provisions may change from time to time, to our operations as well as various factual determinations concerning matters and circumstances not entirely within our control. There are limited judicial or administrative interpretations of these provisions.
If, in any taxable year, we fail to remain qualified for taxation as a REIT and are not entitled to relief under the Code:
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• | we will not be allowed a deduction for distributions to stockholders in computing our taxable income; |
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• | we will be subject to federal and state income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate tax rates; and |
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• | we would not be eligible to elect REIT status again until the fifth taxable year that begins after the first year for which we failed to qualify as a REIT. |
Any such corporate tax liability could be substantial and would reduce the amount of cash available for other purposes.
If we fail to remain qualified for taxation as a REIT, we may need to borrow additional funds or liquidate some investments to pay any additional tax liability. Accordingly, funds available for investment and distributions to stockholders could be reduced.
As a REIT, failure to make required distributions would subject us to federal corporate income tax.
We expect to continue paying regular quarterly distributions, and, to achieve maximum tax efficiency and retain cash to allow us to make selective discretionary investments, we currently anticipate our typical regular quarterly distributions will be based on a payment of approximately 100% of our REIT taxable income; however, the amount, timing and form of our regular quarterly distributions will be determined, and will be subject to adjustment, by our board of directors. To remain qualified for taxation as a REIT, we are generally required to distribute at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding net capital gain) each year to our stockholders. Generally, we expect to distribute all or substantially all of our REIT taxable income. If our cash available for distribution falls short of our estimates, we may be unable to maintain distributions that approximate our REIT taxable income and may fail to remain qualified for taxation as a REIT. In addition, our cash flows from operations may be insufficient to fund required distributions as a result of differences in timing between the actual receipt of income and the recognition of income for federal income tax purposes, or the effect of nondeductible expenditures, such as capital expenditures, payments of compensation for which Section 162(m) of the Code denies a deduction, the creation of reserves or required debt service or amortization payments.
To the extent that we satisfy the 90% distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our stockholders for a calendar year is less than the minimum amount specified under the Code.
We may be required to borrow funds, sell assets or raise equity to satisfy REIT distribution requirements, to comply with asset ownership tests or to fund capital expenditures, future growth and expansion initiatives.
In order to meet the REIT distribution requirements and maintain our qualification and taxation as a REIT, or to fund capital expenditures, future growth and expansion initiatives, we may need to borrow funds, sell assets or raise equity, even if the then-prevailing market conditions are not favorable for these borrowings, sales or offerings. Any insufficiency of our cash flows to cover our REIT distribution requirements could adversely impact our ability to raise short- and long-term debt, to sell assets, or to offer equity securities in order to fund distributions required to maintain our qualification and taxation as a REIT. Furthermore, the REIT distribution requirements may increase the financing we need to fund capital expenditures, future growth and expansion initiatives, which would increase our indebtedness. An increase in our outstanding debt could lead to a downgrade of our credit rating, which could negatively impact our ability to access credit markets. Further, certain of our current debt instruments limit the amount of indebtedness we and our subsidiaries may incur. Additional financing, therefore, may be unavailable, more expensive or restricted by the terms of our outstanding indebtedness. For a discussion of risks related to our substantial level of indebtedness, see "Risks Relating to Our Indebtedness."
Whether we issue equity, at what price and the amount and other terms of any such issuances will depend on many factors, including alternative sources of capital, our then-existing leverage, our need for additional capital, market conditions and other factors beyond our control. If we raise additional funds through the issuance of equity securities or debt convertible into equity securities, the percentage of stock ownership by our existing stockholders may be reduced. In addition, new equity securities or convertible debt securities could have rights, preferences and privileges senior to those of our current stockholders, which could substantially decrease the value of our securities owned by them. Depending upon the market price of our common stock at the time of any potential issuances of equity securities, we may have to sell a significant number of shares in order to raise the capital we deem necessary to execute our long-term strategy, and our stockholders may experience dilution in the value of their shares as a result.
In addition, if we fail to comply with specified asset ownership tests applicable to REITs as measured at the end of any calendar quarter, we must correct such failure within 30 days after the end of the applicable calendar quarter or qualify for statutory relief provisions to avoid losing our qualification for taxation as a REIT. As a result, we may be required to liquidate or to forego our pursuit of otherwise attractive investments. These actions may reduce our income and amounts available for distribution to our stockholders.
Legislative or other actions affecting REITs could have a negative effect on us or our stockholders.
At any time, the federal income tax laws governing REITs, or the administrative interpretations of those laws, may be amended. Federal and state tax laws are constantly under review by persons involved in the legislative process, the United States Internal Revenue Service (the "IRS"), the United States Department of the Treasury and state taxing authorities. Changes to the tax laws, regulations and administrative interpretations, which may have retroactive application, could adversely affect us. In addition, some of these changes could have a more significant impact on us as compared to other REITs due to the nature of our business and our substantial use of taxable REIT subsidiaries ("TRSs"). We cannot predict with certainty whether, when, in what forms, or with what effective dates, the tax laws, regulations and administrative interpretations applicable to us may be changed.
Complying with REIT requirements may limit our flexibility or cause us to forgo otherwise attractive opportunities.
To remain qualified for taxation as a REIT, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets and the amounts we distribute to our stockholders. Thus, compliance with these tests may require us to refrain from certain activities and may hinder our ability to make certain attractive investments, including the purchase of non-REIT qualifying operations or assets, the expansion of non-real estate activities, and investments in the businesses to be conducted by our TRSs, and to that extent limit our opportunities and our flexibility to change our business strategy. Furthermore, acquisition opportunities in domestic and international markets may be adversely affected if we need or require the target company to comply with some REIT requirements prior to closing.
We conduct a significant portion of our business activities, including our information management services businesses and several of our international operations, through domestic and foreign TRSs. Under the Code, no more than 25% of the value of the assets of a REIT may be represented by securities of one or more TRSs and other nonqualifying assets. Beginning in our 2018 taxable year, no more than 20% of the value of the assets of a REIT may be represented by securities of one or more TRSs within the overall 25% nonqualifying assets limitation. These limitations may affect our ability to make additional investments in non-REIT qualifying operations or assets or in international operations through TRSs.
As a REIT, we are limited in our ability to fund distribution payments using cash generated through our TRSs.
Our ability to receive distributions from our TRSs is limited by the rules with which we must comply to maintain our qualification for taxation as a REIT. In particular, at least 75% of our gross income for each taxable year as a REIT must be derived from real estate, which principally includes gross income from providing customers with secure storage space. Consequently, no more than 25% of our gross income may consist of dividend income from our TRSs and other nonqualifying types of income. Thus, our ability to receive distributions from our TRSs may be limited, and may impact our ability to fund distributions to our stockholders using cash flows from our TRSs. Specifically, if our TRSs become highly profitable, we might become limited in our ability to receive net income from our TRSs in an amount required to fund distributions to our stockholders commensurate with that profitability.
In addition, a significant amount of our income and cash flows from our TRSs is generated from our international operations. In many cases, there are local withholding taxes and currency controls that may impact our ability or willingness to repatriate funds to the United States to help satisfy REIT distribution requirements.
Our extensive use of TRSs, including for certain of our international operations, may cause us to fail to remain qualified for taxation as a REIT.
Our operations include an extensive use of TRSs, which has increased since our acquisition of Recall. The net income of our TRSs is not required to be distributed to us, and income that is not distributed to us generally is not subject to the REIT income distribution requirement. However, there may be limitations on our ability to accumulate earnings in our TRSs and the accumulation or reinvestment of significant earnings in our TRSs could result in adverse tax treatment. In particular, if the accumulation of cash in our TRSs causes the fair market value of our securities in our TRSs and other nonqualifying assets to exceed 25% of the fair market value of our assets, then we will fail to remain qualified for taxation as a REIT. Beginning with our 2018 taxable year, if the accumulation of cash in our TRSs causes (1) the fair market value of our securities in our TRSs to exceed 20% of the fair market value of our assets or (2) the fair market value of our securities in our TRSs and other nonqualifying assets to exceed 25% of the fair market value of our assets, then we will fail to remain qualified for taxation as a REIT.
Our cash distributions are not guaranteed and may fluctuate.
A REIT generally is required to distribute at least 90% of its REIT taxable income to its stockholders.
Our board of directors, in its sole discretion, will determine, on a quarterly basis, the amount of cash to be distributed to our stockholders based on a number of factors including, but not limited to, our results of operations, cash flow and capital requirements, economic conditions, tax considerations, borrowing capacity and other factors, including debt covenant restrictions that may impose limitations on cash payments, future acquisitions and divestitures, any stock repurchase program and general market demand for our space and services. Consequently, our distribution levels may fluctuate.
Even if we remain qualified for taxation as a REIT, some of our business activities are subject to corporate level income tax and foreign taxes, which will continue to reduce our cash flows, and we will have potential deferred and contingent tax liabilities.
Even if we remain qualified for taxation as a REIT, we may be subject to some federal, state, local and foreign taxes on our income and assets, including alternative minimum taxes, taxes on any undistributed income, and state, local or foreign income, franchise, property and transfer taxes. In addition, we could in certain circumstances be required to pay an excise or penalty tax, which could be significant in amount, in order to utilize one or more relief provisions under the Code to maintain qualification for taxation as a REIT.
Our information management services businesses and several of our international operations are conducted through wholly owned TRSs because these activities could generate nonqualifying REIT income as currently structured and operated. The income of our domestic TRSs will continue to be subject to federal and state corporate income taxes. In addition, we and our subsidiaries continue to be subject to foreign income taxes in jurisdictions in which we have business operations or a taxable presence, regardless of whether assets are held or operations are conducted through subsidiaries disregarded for federal income tax purposes or TRSs. Any of these taxes would decrease our earnings and our available cash.
We will also be subject to a federal corporate level tax at the highest regular corporate tax rate (currently 35%) on gain recognized from a sale of a REIT asset where our basis in the asset is determined by reference to the basis of the asset in the hands of a C corporation (such as (i) an asset that we held as of the effective date of our REIT election, that is, January 1, 2014, or (ii) an asset that we hold in one of our qualified REIT subsidiaries ("QRSs") following the liquidation or other conversion of a former TRS). This 35% tax is generally applicable to any disposition of such an asset during the five-year period after the date we first owned the asset as a REIT asset (e.g., January 1, 2014 in the case of REIT assets we held at the time of our REIT conversion), to the extent of the built-in-gain based on the fair market value of such asset on the date we first held the asset as a REIT asset. In addition, depreciation recapture income that we expect to recognize in connection with the Recall Transaction as a result of accounting method changes that we will make will be fully subject to this 35% tax.
In addition, the IRS and any state or local tax authority may successfully assert liabilities against us for corporate income taxes for taxable periods prior to January 1, 2014 (our "pre-REIT period"), in which case we will owe these taxes plus applicable interest and penalties, if any. Moreover, any increase in taxable income during our pre-REIT period will likely result in an increase in pre-REIT accumulated earnings and profits, which could cause us to pay an additional taxable distribution to our stockholders after the relevant determination.
Complying with REIT requirements may limit our ability to hedge effectively and increase the cost of our hedging and may cause us to incur tax liabilities.
The REIT provisions of the Code limit our ability to hedge assets, liabilities, revenues and expenses. Generally, income from hedging transactions that we enter into to manage risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets and income from certain currency hedging transactions related to our non-United States operations, as well as income from qualifying counteracting hedges do not constitute "gross income" for purposes of the REIT gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as nonqualifying income for purposes of the REIT gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through our TRSs. This could increase the cost of our hedging activities because our TRSs would be subject to tax on income or gains resulting from hedges entered into by them or expose us to greater risks associated with changes in interest rates or exchange rates than we would otherwise want to bear. In addition, hedging losses in any of our TRSs generally will not provide any tax benefit, except for being carried forward for possible use against future taxable income in the TRSs.
Distributions payable by REITs generally do not qualify for preferential tax rates.
Qualifying distributions payable by corporations to individuals, trusts and estates that are United States stockholders are currently eligible for preferential federal income tax rates. Distributions payable by REITs, in contrast, generally do not qualify for these preferential rates. The preferential rates applicable to regular corporate distributions could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stock of non-REIT corporations that pay distributions, which could adversely affect the value of the stock of REITs, including our common stock.
The ownership and transfer restrictions contained in our certificate of incorporation may not protect our qualification for taxation as a REIT, could have unintended antitakeover effects and may prevent our stockholders from receiving a takeover premium.
In order for us to remain qualified for taxation as a REIT, no more than 50% of the value of outstanding shares of our capital stock may be owned, beneficially or constructively, by five or fewer individuals at any time during the last half of each taxable year other than the first year for which we elect to be taxed as a REIT. In addition, rents from "affiliated tenants" will not qualify as qualifying REIT income if we own 10% or more by vote or value of the customer, whether directly or after application of attribution rules under the Code. Subject to certain exceptions, our certificate of incorporation prohibits any stockholder from owning, beneficially or constructively, more than (i) 9.8% in value of the outstanding shares of all classes or series of our capital stock or (ii) 9.8% in value or number, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock. We refer to these restrictions collectively as the "ownership limits" and we included them in our certificate of incorporation to facilitate our compliance with REIT tax rules. The constructive ownership rules under the Code are complex and may cause the outstanding stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than 9.8% of our outstanding common stock (or the outstanding shares of any class or series of our capital stock) by an individual or entity could cause that individual or entity or another individual or entity to own constructively in excess of the relevant ownership limits. Any attempt to own or transfer shares of our common stock or of any of our other capital stock in violation of these restrictions may result in the shares being automatically transferred to a charitable trust or may be void. Even though our certificate of incorporation contains the ownership limits, there can be no assurance that these provisions will be effective to prevent our qualification for taxation as a REIT from being jeopardized, including under the affiliated tenant rule. Furthermore, there can be no assurance that we will be able to monitor and enforce the ownership limits. If the restrictions in our certificate of incorporation are not effective and as a result we fail to satisfy the REIT tax rules described above, then absent an applicable relief provision, we will fail to remain qualified for taxation as a REIT.
In addition, the ownership and transfer restrictions could delay, defer or prevent a transaction or a change in control that might involve a premium price for our stock or otherwise be in the best interest of our stockholders. As a result, the overall effect of the ownership and transfer restrictions may be to render more difficult or discourage any attempt to acquire us, even if such acquisition may be favorable to the interests of our stockholders.
The ability of our board of directors to change our major policies without the consent of stockholders may not be in the interest of our stockholders.
Our board of directors determines our major policies, including policies and guidelines relating to our investments, acquisitions, leverage, financing, growth, operations and distributions to our stockholders. Our board of directors may amend or revise these and other policies and guidelines from time to time without the vote or consent of our stockholders. Accordingly, our stockholders will have limited control over changes in our policies, and any such changes could adversely affect our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders.
Operational Risks
Our customers may shift from paper and tape storage to alternative technologies that require less physical space.
We derive most of our revenues from rental fees for the storage of physical records and computer backup tapes and from storage related services. Alternative storage technologies exist, many of which require significantly less space than physical records and tapes, and as alternative technologies are adopted, storage related services may decline as the paper documents or tapes we store become less active and more archival. We can provide no assurance that our customers will continue to store most or a portion of their records as paper documents or as tapes, or that the paper documents or tapes they do store with us will require our storage related services at the same levels as they have in the past. A significant shift by our customers to storage of data through non-paper or tape-based technologies, whether now existing or developed in the future, could adversely affect our businesses.
As stored records and tapes become less active our service revenue growth and profitability may decline.
Our records management and data protection service revenue growth is being negatively impacted by declining activity rates as stored records and tapes are becoming less active. The amount of information available to customers through the Internet or their own information systems has been steadily increasing in recent years, and we believe this trend has been accelerating. As a result, while we continue to experience growth in storage rental, our customers are less likely than they have been in the past to retrieve records and rotate tapes, thereby reducing their service activity levels. At the same time many of our costs related to records and tape related services remain fixed. In addition, our reputation for providing secure information storage is critical to our success, and actions to manage cost structure, such as outsourcing certain transportation, security or other functions, could negatively impact our reputation and adversely affect our business. Ultimately, if we are unable to appropriately align our cost structure with decreased levels of service activity, our operating results could be adversely affected.
Changes in customer behavior with respect to document destruction and pricing could adversely affect our business, financial condition and results of operations.
We have experienced pricing pressure in recent years as some customers have become more cost conscious with respect to their information management expenditures. Some customers have taken actions designed to reduce costs associated with the retention of documents, including reducing the volume of documents they store and adopting more aggressive destruction practices. If we are unable to increase pricing over time, or if rates of destruction of documents stored with us increase substantially, particularly in our developed and slower growing markets, our financial condition and results of operations would be adversely affected.
Governmental and customer focus on data security could increase our costs of operations. We may not be able to fully offset these costs through increases in our rates. Incidents in which we fail to protect our customers' information against security breaches could result in monetary damages against us and could otherwise damage our reputation, harm our businesses and adversely impact our results of operations. In addition, if we fail to protect our own information, including information about our employees, we could experience significant costs and expenses as well as damage to our reputation.
In reaction to publicized incidents in which electronically stored information has been lost, illegally accessed or stolen, almost all states in the United States have adopted breach of data security statutes or regulations that require notification to consumers if the security of their personal information is breached, and, over the past few years, many states expanded the scope of their data breach notifications laws and shortened notification timelines. Some states in the United States have adopted regulations requiring every company that maintains or stores personal information to adopt a comprehensive written information security program. In addition, certain United States federal laws and regulations affecting financial institutions, health care providers and plans and others impose requirements regarding the privacy and security of information maintained by those institutions as well as notification to persons whose personal information is accessed by an unauthorized third party. Some of these laws and regulations provide for civil fines in certain circumstances and require the adoption and maintenance of privacy and information security programs; our failure to comply with any such programs may adversely affect our business. Continued governmental focus on data security may lead to additional legislative action in the United States. For example, Congress has considered, and will likely consider again, legislation that would expand the federal data breach notification requirement beyond the financial and medical fields.
Also, an increasing number of countries have introduced and/or increased enforcement of comprehensive privacy laws, or are expected to do so. In Europe, a new data protection regulation will likely come into effect in May 2018 and will supersede Directive 95/46/EC, which has governed the processing of personal data since 1995. The new regulation will enhance the security and privacy obligations of entities, such as us, that process data of residents of members of the European Economic Area and substantially increase penalties for violations. In addition, the European Court of Justice has invalidated a decision of the European Commission that permitted our European affiliates and our European customers to transfer personal data to entities in the United States that are certified under the European Union - United States safe harbor framework. This decision, a failure of the European Union and the United States to agree on a new safe-harbor framework and the new regulation and laws in other countries that restrict the export of personal data may result in more customers demanding local solutions, which would increase our information technology infrastructure, maintenance and support costs.
The continued emphasis on information security as well as increasing concerns about government surveillance may lead customers to request that we take additional measures to enhance security and assume higher liability under our contracts. We have experienced incidents in which customers' backup tapes or other records have been lost, and we have been informed by customers that some of the incidents involved the loss of personal information, resulting in monetary costs to those customers for which we have provided reimbursement. As a result of legislative initiatives and client demands, we may have to modify our operations with the goal of further improving data security. Any such modifications may result in increased expenses and operating complexity, and we may be unable to increase the rates we charge for our services sufficiently to offset any increased expenses.
In addition to increases in the costs of operations or potential liability that may result from a heightened focus on data security or losses of information, our reputation may be damaged by any compromise of security, accidental loss or theft of our own records, or information that we maintain with respect to our employees, as well as customer data in our possession. We believe that establishing and maintaining a good reputation is critical to attracting and retaining customers. If our reputation is damaged, we may become less competitive, which could negatively impact our businesses, financial condition or results of operations.
Attacks on our internal information technology systems could damage our reputation, harm our businesses and adversely impact our results of operations.
Our reputation for providing secure information storage to customers is critical to the success of our business. We have previously faced attempts by unauthorized users to gain access to our information technology systems and expect to continue to face such attempts. Although we seek to prevent, detect and investigate these security incidents and have taken steps to prevent such security breaches, our information technology and network infrastructure may be vulnerable to attacks by hackers or breaches due to employee error or other disruptions. Moreover, our ability to integrate Recall’s business and other businesses we acquire may challenge our ability to prevent such security breaches. From time to time, we may also outsource certain information technology and back office support services to third parties, which may subject our information technology and other sensitive information to additional risk. A successful breach of the security of our information technology systems could lead to theft or misuse of our customers' proprietary or confidential information and result in third party claims against us and reputational harm. If our reputation is damaged, we may become less competitive, which could negatively impact our businesses, financial condition or results of operations.
Changing fire and safety standards may result in significant expense in certain jurisdictions.
As of December 31, 2016, we operated 1,290 records management, off-site data protection and fine art storage facilities worldwide, including 615 in the United States. Many of these facilities were built and outfitted by third parties and added to our real estate portfolio as part of acquisitions. Some of these facilities contain fire suppression and safety features that are different from our current specifications and current standards for new facilities, although we believe all of our facilities were constructed, in all material respects, in compliance with laws and regulations in effect at the time of their construction or outfitting. In some instances local authorities having jurisdiction may take the position that our fire suppression and safety features in a particular facility are insufficient and require additional measures that may involve considerable expense to us. In addition, where we determine that the fire suppression and safety features of a facility require improvement, we will develop and implement a plan to remediate the issue, although implementation may require an extended period to complete. A significant aspect of the integration of Recall with our business is the process of making certain investments in the acquired Recall facilities to conform such facilities to our standards of operations. This process is complex and time-consuming. If additional fire safety and suppression measures beyond our current operating plan were required at a large number of our facilities, the expense required for compliance could negatively impact our business, financial condition or results of operations.
Our customer contracts may not always limit our liability and may sometimes contain terms that could lead to disputes in contract interpretation.
Our customer contracts typically contain provisions limiting our liability regarding the loss or destruction of, or damage to, records or information stored with us. Our liability for physical storage is often limited to a nominal fixed amount per item or unit of storage (such as per cubic foot) and our liability for Information Governance and Digital Solutions, Destruction and other services unrelated to records stored with us is often limited to a percentage of annual revenue under the contract; however, some of our contracts with large volume accounts and some of the contracts assumed in our acquisitions contain no such limits or contain higher limits. We can provide no assurance that our limitation of liability provisions will be enforceable in all instances or, if enforceable, that they would otherwise protect us from liability. In addition to provisions limiting our liability, our customer contracts generally include a schedule setting forth the majority of the customer-specific terms, including storage rental and service pricing and service delivery terms. Our customers may dispute the interpretation of various provisions in their contracts. In the past, we have had relatively few disputes with our customers regarding the terms of their customer contracts, and most disputes to date have not been material, but we can provide no assurance that we will not have material disputes in the future. Moreover, as a large percentage of our growth is driven by acquisitions and customer contracts assumed in acquisitions (including the customer contracts assumed in the Recall Transaction) make up a commensurately larger percentage of our customer contracts, our exposure to contracts with higher or no limitations of liability and disputes with customers over the interpretation of their contracts may increase. Although we maintain a comprehensive insurance program, we can provide no assurance that we will be able to maintain insurance policies on acceptable terms in order to cover losses to us in connection with customer contract disputes.
International operations may pose unique risks.
As of December 31, 2016, we provided services in 44 countries outside the United States. As part of our growth strategy, we expect to continue to acquire or invest in storage and information management services businesses in select foreign markets, including countries where we do not currently operate. International operations are subject to numerous risks, including:
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• | the impact of foreign government regulations and United States regulations that apply to us wherever we operate; in particular, we are subject to United States and foreign anticorruption laws, such as the Foreign Corrupt Practices Act and the United Kingdom Bribery Act, and, although we have implemented internal controls, policies and procedures and training to deter prohibited practices, our employees, partners, contractors or agents may violate or circumvent such policies and the law; |
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• | the volatility of certain foreign economies in which we operate; |
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• | political uncertainties and changes in the global political climate which may impose restrictions on global operations; |
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• | unforeseen liabilities, particularly within acquired businesses; |
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• | costs and difficulties associated with managing international operations of varying sizes and scale; |
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• | the risk that business partners upon whom we depend for technical assistance or management and acquisition expertise in some markets outside of the United States will not perform as expected; |
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• | difficulties attracting and retaining local management and key employees to operate our business in certain countries; |
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• | cultural differences and differences in business practices and operating standards; and |
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• | foreign currency fluctuations. |
In particular, our net income, debt balances or leverage can be significantly affected by fluctuations in currencies.
Our exposure to the risk from international operations was increased by the Recall acquisition, as Recall’s foreign operations made up a more significant portion of its worldwide revenue than our foreign operations did prior to the Recall Transaction. Consequently, our international operations now account for a more significant portion of our overall operations than they did before the Recall acquisition.
We have operations in numerous foreign countries and, as a result, are subject to foreign exchange translation risk, which could have an adverse effect on our financial results.
We conduct business operations in numerous foreign countries through our foreign subsidiaries or affiliates, which operate in their respective local currencies. Those local currencies are translated into United States dollars at the applicable exchange rates for inclusion in our consolidated financial statements. The results of operations of, and certain of our debt balances (including intercompany debt balances) associated with, our international storage and information management services businesses are exposed to foreign exchange rate fluctuations, and as we have expanded our international operations, our exposure to exchange rate fluctuations has increased. Upon translation, operating results may differ materially from expectations, and significant shifts in foreign currencies can impact our short-term results, as well as our long-term forecasts and targets. In addition, because we intend to distribute 100% of our REIT taxable income to our stockholders, and any exchange rate fluctuations may negatively impact our REIT taxable income, our distribution amounts (including the classification of our distributions as nonqualified ordinary dividends, qualified ordinary dividends or return of capital, as described more fully in "Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" included in this Annual Report) may fluctuate as a result of exchange rate fluctuations.
Failure to comply with certain regulatory and contractual requirements under our United States Government contracts could adversely affect our revenues, operating results and financial position.
Selling our services to the United States Government subjects us to certain regulatory and contractual requirements. Failure to comply with these requirements could subject us to investigations, price reductions, up to treble damages, and civil penalties. Noncompliance with certain regulatory and contractual requirements could also result in us being suspended or barred from future United States Government contracting. We may also face private derivative securities claims as a result of adverse government actions. Any of these outcomes could have a material adverse effect on our revenues, operating results, financial position and reputation.
We may be subject to certain costs and potential liabilities associated with the real estate required for our business.
Because our business is heavily dependent on real estate, we face special risks attributable to the real estate we own or lease. Such risks include:
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• | acquisition and occupancy costs that make it difficult to meet anticipated margins and difficulty locating suitable facilities due to a relatively small number of available buildings having the desired characteristics in some real estate markets; |
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• | uninsured losses or damage to our storage facilities due to an inability to obtain full coverage on a cost-effective basis for some casualties, such as fires, earthquakes, or any coverage for certain losses, such as losses from riots or terrorist activities; |
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• | inability to use our real estate holdings effectively and costs associated with vacating or consolidating facilities if the demand for physical storage were to diminish; and |
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• | liability under environmental laws for the costs of investigation and cleanup of contaminated real estate owned or leased by us, whether or not (i) we know of, or were responsible for, the contamination, or (ii) the contamination occurred while we owned or leased the property. |
Some of our current and formerly owned or leased properties were previously used by entities other than us for industrial or other purposes, or were affected by waste generated from nearby properties, that involved the use, storage, generation and/or disposal of hazardous substances and wastes, including petroleum products. In some instances this prior use involved the operation of underground storage tanks or the presence of asbestos-containing materials. Where we are aware of environmental conditions that require remediation, we undertake appropriate activity, in accordance with all legal requirements. Although we have from time to time conducted limited environmental investigations and remedial activities at some of our former and current facilities, we have not undertaken an in-depth environmental review of all of our properties, including those acquired in the Recall Transaction and other acquisitions we have completed. We therefore may be potentially liable for environmental costs like those discussed above and may be unable to sell, rent, mortgage or use contaminated real estate owned or leased by us. Environmental conditions for which we might be liable may also exist at properties that we may acquire in the future. In addition, future regulatory action and environmental laws may impose costs for environmental compliance that do not exist today.
Unexpected events could disrupt our operations and adversely affect our reputation and results of operations.
Unexpected events, including fires or explosions at our facilities, natural disasters such as hurricanes and earthquakes, war or terrorist activities, unplanned power outages, supply disruptions and failure of equipment or systems, could adversely affect our reputation and results of operations. Our customers rely on us to securely store and timely retrieve their critical information, and these events could result in customer service disruption, physical damage to one or more key operating facilities and the information stored in those facilities, the temporary closure of one or more key operating facilities or the temporary disruption of information systems, each of which could negatively impact our reputation and results of operations. During the past several years we have seen an increase in severe weather events and our key facilities worldwide are subject to this inherent risk.
Damage to our reputation could adversely affect our business, financial condition and results of operations.
Our reputation for providing highly secure information storage to customers is critical to the success of our business. Our reputation or brand, and specifically, the trust our customers place in us, could be negatively impacted in the event of perceived or actual failures by us to store information securely. For example, events such as fires, natural disasters, attacks on our information technology systems or security breaches involving us could negatively impact our reputation, particularly if such incidents result in adverse publicity, governmental investigations or litigation. Damage to our reputation could make us less competitive, which could negatively impact our business, financial condition and results of operations.
Fluctuations in commodity prices may affect our operating revenues and results of operations.
Our operating revenues and results of operations are impacted by significant changes in commodity prices. In particular, our secure shredding operations generate revenue from the sale of shredded paper to recyclers. As a result, significant declines in the cost of paper may negatively impact our revenues and results of operations, and increases in other commodity prices, including steel, may negatively impact our results of operations.
We may be subject to claims that our technology violates the intellectual property rights of a third party.
Third parties may have legal rights (including ownership of patents, trade secrets, trademarks and copyrights) to ideas, materials, processes, names or original works that are the same or similar to those we use. Third parties have in the past, and may in the future, bring claims, or threaten to bring claims, against us that allege that their intellectual property rights are being infringed or violated by our use of intellectual property. Litigation or threatened litigation could be costly and distract our senior management from operating our business. Further, if we cannot establish our right or obtain the right to use the intellectual property on reasonable terms, we may be required to develop alternative intellectual property at our expense to mitigate potential harm.
We face competition for customers.
We compete with multiple storage and information management services providers in all geographic areas where we operate; our current or potential customers may choose to use those competitors instead of us. We also compete, in some of our business lines, with our current and potential customers' internal storage and information management services capabilities and their cloud-based alternatives. These organizations may not begin or continue to use us for their future storage and information management service needs.
Risks Related to Our Indebtedness
Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under our various debt instruments.
We have a significant amount of indebtedness. As of December 31, 2016, our total long-term debt was approximately $6.3 billion. Our substantial indebtedness could have important consequences to our current and potential investors. These risks include:
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• | inability to satisfy our obligations with respect to our various debt instruments; |
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• | inability to adjust to adverse economic conditions; |
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• | inability to fund future working capital, capital expenditures, and other general corporate requirements, including possible required repurchases of our various indebtedness; |
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• | inability to pursue strategic opportunities, including acquisitions and expansion into adjacent businesses; |
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• | limits on our distributions to stockholders; in this regard if these limits prevented us from satisfying our REIT distribution requirements, we could fail to remain qualified for taxation as a REIT or, if these limits do not jeopardize our qualification for taxation as a REIT but do nevertheless prevent us from distributing 100% of our REIT taxable income, we will be subject to federal corporate income tax, and potentially a nondeductible excise tax, on the retained amounts; |
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• | limits on our flexibility in planning for, or reacting to, changes in our business and the information management services industry; |
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• | limits on future borrowings under our existing or future credit arrangements, which could affect our ability to pay our indebtedness or to fund our other liquidity needs; |
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• | inability to generate sufficient funds to cover required interest payments; and |
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• | restrictions on our ability to refinance our indebtedness on commercially reasonable terms. |
Restrictive debt covenants may limit our ability to pursue our growth strategy.
Our Credit Agreement (as defined in Note 4 to Notes to Consolidated Financial Statements included in this Annual Report) and our indentures contain covenants restricting or limiting our ability to, among other things:
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• | incur additional indebtedness; |
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• | pay dividends or make other restricted payments; |
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• | make asset dispositions; |
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• | create or permit liens; and |
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• | make acquisitions and other investments. |
These restrictions may adversely affect our ability to pursue our acquisition and other growth strategies.
We may not have the ability to raise the funds necessary to finance the repurchase of outstanding senior or senior subordinated notes upon a change of control event as required by our indentures.
Upon the occurrence of a "change of control", we will be required to offer to repurchase all outstanding senior or senior subordinated notes. However, it is possible that we will not have sufficient funds at the time of the change of control to make the required repurchase of the notes or that restrictions in our Credit Agreement will not allow such repurchases. Certain important corporate events, however, such as leveraged recapitalizations that would increase the level of our indebtedness, would not constitute a "change of control" under our indentures.
Iron Mountain is a holding company, and, therefore, our ability to make payments on our various debt obligations depends in part on the operations of our subsidiaries.
Iron Mountain is a holding company; substantially all of our assets consist of the stock of our subsidiaries, and substantially all of our operations are conducted by our direct and indirect 100% owned subsidiaries. As a result, our ability to make payments on our various debt obligations will be dependent upon the receipt of sufficient funds from our subsidiaries. However, our various debt obligations are guaranteed, on a joint and several and full and unconditional basis, by our direct and indirect 100% owned United States subsidiaries, that represent the substantial majority of our United States operations.
Acquisition and Expansion Risks
Elements of our strategic growth plan involve inherent risks.
As part of our strategic growth plan, we expect to invest in new business strategies, products, services, technologies and geographies, including ABOs, and we may selectively divest certain businesses. These initiatives may involve significant risks and uncertainties, including distraction of management from current operations, insufficient revenues to offset expenses and liabilities associated with new investments, inadequate return of capital on these investments and the inability to attract, develop and retain skilled employees to lead and support new initiatives. For example, in recent years, we have expanded our entry into the data center and fine art storage businesses. Our data center expansion in particular requires significant capital commitments and includes other costs associated with the development of real estate to support this business. Many of these new ventures are inherently risky and we can provide no assurance that such strategies and offerings will be successful in achieving the desired returns within a reasonable timeframe, if at all, and that they will not adversely affect our business, reputation, financial condition, and operating results. We also face competition from other companies in our efforts to grow our adjacent businesses, some of which possess substantial financial and other resources. As a result, we may be unable to acquire, or may pay a significant purchase price for, adjacent businesses that support our strategic growth plan.
Failure to manage our growth may impact operating results.
If we succeed in expanding our existing businesses, or in moving into new areas of business, that expansion may place increased demands on our management, operating systems, internal controls and financial and physical resources. If not managed effectively, these increased demands may adversely affect the services we provide to customers. In addition, our personnel, systems, procedures and controls may be inadequate to support future operations, particularly with respect to operations in countries outside of the United States or in new lines of business. Consequently, in order to manage growth effectively, we may be required to increase expenditures to increase our physical resources, expand, train and manage our employee base, improve management, financial and information systems and controls, or make other capital expenditures. Our results of operations and financial condition could be harmed if we encounter difficulties in effectively managing the budgeting, forecasting and other process control issues presented by future growth.
Failure to successfully integrate acquired businesses could negatively impact our balance sheet and results of operations.
Strategic acquisitions are an important element of our growth strategy and the success of any acquisition we make depends in part on our ability to integrate the acquired business and realize anticipated synergies. The process of integrating acquired businesses, particularly in new markets, may involve unforeseen difficulties and may require a disproportionate amount of our management's attention and our financial and other resources.
For example, the success of our acquisition of Recall will depend, in large part, on our ability to realize the anticipated benefits, including cost savings from combining Recall’s businesses with ours. To realize these anticipated benefits, we must be able to successfully integrate our business and Recall’s and this integration is complex and time-consuming. While we are progressing with the integration, we still may encounter challenges in the integration process including the following:
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• | challenges and difficulties associated with managing our larger, more complex, company; |
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• | conforming standards, controls, procedures and policies, business cultures and compensation structures between the two businesses; |
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• | consolidating corporate and administrative infrastructures; |
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• | coordinating geographically dispersed organizations; and |
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• | performance shortfalls as a result of the diversion of management's attention caused by integrating the entities' operations. |
In addition, our integration with Recall may pose special risks, including asset write-offs or restructuring charges and unanticipated costs. Further, our integration with Recall will subject us to liabilities (including tax liabilities) that may exist at Recall or may arise in connection with the consummation of the Recall Transaction, some of which may be unknown. Although we and our advisors conducted due diligence on the operations of Recall, there can be no guarantee that we are aware of all liabilities of Recall. These liabilities, and any additional risks and uncertainties related to the Recall Transaction not currently known to us or that we may currently deem immaterial or unlikely to occur, could negatively impact our future business, financial condition and results of operations.
We can give no assurance that we will ultimately be able to effectively integrate and manage the operations of any acquired business or realize anticipated synergies, including Recall. The failure to successfully integrate the cultures, operating systems, procedures and information technologies of an acquired business could have a material adverse effect on our balance sheet and results of operations.
Our net proceeds from the Divestments may be lower than expected and we may be subject to liabilities as a result of provisions in the sale agreements governing the Divestments.
The terms of the sale agreements governing the Divestments (as defined in Note 6 to Notes to Consolidated Financial Statements included in this Annual Report) in the United States, Canada and Australia provide for post-closing adjustments to the purchase prices. In addition, we have agreed to provide certain transition services to the buyers following the completion of the Divestments. As a result, the purchase prices for the Divestments may be adjusted in accordance with the terms of the sale agreements and the costs we will incur providing post-closing transition services as required under our sale agreements may exceed the amounts we have estimated. As such, the expected net proceeds of the Divestments are uncertain and the actual net proceeds we receive from the Divestments may be less than the net proceeds expected by us and the transition services costs may exceed our estimates. Furthermore, in the sale agreements governing the Divestments, we have made certain representations and warranties and are bound by certain covenants following the closings. Any breach of such terms may subject us to liabilities in accordance with the terms of the sale agreements.
We may be unable to continue our international expansion.
An important part of our growth strategy involves expanding operations in international markets, including in markets where we currently do not operate, and we expect to continue this expansion. Europe, Latin America and Australia have been our primary areas of focus for international expansion, and we have expanded into the Asia Pacific region, Africa and the Middle East to a lesser extent. We have entered into joint ventures and have acquired all or a majority of the equity in storage and information management services businesses operating in these areas and may acquire other storage and information management services businesses in the future, including in new countries/markets where we currently do not operate. A changing global political climate may impose restrictions on our ability to expand internationally.
This growth strategy involves risks. We may be unable to pursue this strategy in the future at the desired pace or at all. For example, we may be unable to:
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• | identify suitable companies to acquire or invest in; |
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• | complete acquisitions on satisfactory terms; |
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• | successfully expand our infrastructure and sales force to support growth; |
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• | achieve satisfactory returns on acquired companies, particularly in countries where we do not currently operate; |
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• | incur additional debt necessary to acquire suitable companies if we are unable to pay the purchase price out of working capital, common stock or other equity securities; or |
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• | enter into successful business arrangements for technical assistance or management expertise outside of the United States. |
We also compete with other storage and information management services providers as well as other entities for companies to acquire. Some of our competitors may possess substantial financial and other resources. If any such competitor were to devote additional resources to pursue such acquisition candidates or focus its strategy on our international markets, the purchase price for potential acquisitions or investments could rise, competition in international markets could increase and our results of operations could be adversely affected.
We have guaranteed certain obligations of Recall to Brambles relating to Brambles' prior demerger transaction.
On December 18, 2013, Brambles Limited, an Australian corporation ("Brambles"), implemented a demerger transaction by way of a distribution of shares of Recall to Brambles’ shareholders (the “Demerger”). Prior to and in connection with the Demerger, Brambles spun off certain of its United States and Canadian subsidiaries, directly or indirectly, to Recall. Such spin-offs were intended to be tax-free or tax-deferred under United States and Canadian tax laws, respectively, and Brambles obtained rulings from the IRS (with respect to the United States spin-off) and the Canada Revenue Agency (with respect to the Canadian spin-off), as well as opinions of its tax advisors, to such effect. However, the tax-free status of the spin-off of such United States subsidiaries could be adversely affected under certain circumstances if a 50% or greater interest in such United States subsidiaries were acquired as part of a plan or series of related transactions that included such spin-off. Similarly, the tax-deferred status of the spin-off of the Canadian subsidiaries could be adversely affected under certain circumstances if control of such subsidiaries were acquired as part of a series of transactions or events that included such spin-off.
In connection with the Demerger, Recall agreed to indemnify Brambles and certain of its affiliates for taxes to the extent that actions by Recall (e.g., an acquisition of Recall shares) resulted in the United States spin-off or the Canadian spin-off described above failing to qualify as tax-free or tax-deferred for United States or Canadian tax purposes, respectively. In addition, Recall agreed, among other things, that it would not, within two years of the 2013 spin-offs, enter into a proposed acquisition transaction, merger or consolidation (with respect to the United States spin-off) or take any action that could reasonably be expected to jeopardize, directly or indirectly, any of the conclusions reached in the Canadian tax ruling or opinion, without obtaining either a supplemental tax ruling from the relevant taxing authority, the consent of Brambles or an opinion of a tax advisor, acceptable to Brambles in its reasonable discretion, that such transaction should not result in the spin-offs failing to be tax-free under United States federal income tax law or Canadian tax law, respectively. Recall has obtained such tax opinions, based on, among other things, representations and warranties made by Recall and us. Such opinions do not affect Recall’s obligation to indemnify Brambles for an adverse impact on the tax-free status of such prior spin-offs.
We have guaranteed the foregoing indemnification obligations of Recall. Consistent with the foregoing tax opinions, we believe that the Recall Transaction is not part of a plan or series of related transactions, or part of a series of transactions or events, that included the United States spin-off or the Canadian spin-off, respectively. However, if the IRS or the Canadian Revenue Agency were to prevail in asserting a contrary view, we would be liable for the resulting taxes, which could be material.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
As of December 31, 2016, we conducted operations through 1,146 leased facilities and 297 owned facilities. Our facilities are divided among our reportable operating segments as follows: North American Records and Information Management Business (668), North American Data Management Business (69), Western European Business (218), Other International Business (473) and Corporate and Other Business (15). These facilities contain a total of 86.2 million square feet of space. A breakdown of owned and leased facilities by country (and by state within the United States) is listed below:
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| | | | | | | | | | | | | | | | | |
| Leased | | Owned | | Total |
Country/State | Number | | Square Feet | | Number | | Square Feet | | Number | | Square Feet |
North America | |
| | |
| | |
| | |
| | |
| | |
|
United States (Including Puerto Rico) | |
| | |
| | |
| | |
| | |
| | |
|
Alabama | 4 |
| | 323,473 |
| | 1 |
| | 12,621 |
| | 5 |
| | 336,094 |
|
Arizona | 12 |
| | 555,701 |
| | 4 |
| | 239,110 |
| | 16 |
| | 794,811 |
|
Arkansas | 2 |
| | 63,604 |
| | — |
| | — |
| | 2 |
| | 63,604 |
|
California | 61 |
| | 4,234,220 |
| | 15 |
| | 1,964,572 |
| | 76 |
| | 6,198,792 |
|
Colorado | 12 |
| | 544,731 |
| | 5 |
| | 338,009 |
| | 17 |
| | 882,740 |
|
Connecticut | 6 |
| | 252,474 |
| | 6 |
| | 665,013 |
| | 12 |
| | 917,487 |
|
Delaware | 5 |
| | 310,236 |
| | 1 |
| | 120,921 |
| | 6 |
| | 431,157 |
|
District of Columbia | 1 |
| | 40,812 |
| | — |
| | — |
| | 1 |
| | 40,812 |
|
Florida | 35 |
| | 2,460,808 |
| | 4 |
| | 194,090 |
| | 39 |
| | 2,654,898 |
|
Georgia | 17 |
| | 1,259,276 |
| | 4 |
| | 229,719 |
| | 21 |
| | 1,488,995 |
|
Illinois | 19 |
| | 1,457,324 |
| | 7 |
| | 1,309,975 |
| | 26 |
| | 2,767,299 |
|
Indiana | 5 |
| | 213,010 |
| | 1 |
| | 131,506 |
| | 6 |
| | 344,516 |
|
Iowa | 2 |
| | 145,138 |
| | 1 |
| | 14,200 |
| | 3 |
| | 159,338 |
|
Kansas | 2 |
| | 141,600 |
| | — |
| | — |
| | 2 |
| | 141,600 |
|
Kentucky | 2 |
| | 64,000 |
| | 4 |
| | 418,760 |
| | 6 |
| | 482,760 |
|
Louisiana | 3 |
| | 210,350 |
| | 2 |
| | 214,625 |
| | 5 |
| | 424,975 |
|
Maine | — |
| | — |
| | 1 |
| | 95,000 |
| | 1 |
| | 95,000 |
|
Maryland | 17 |
| | 1,670,431 |
| | 3 |
| | 327,258 |
| | 20 |
| | 1,997,689 |
|
Massachusetts (including Corporate Headquarters) | 8 |
| | 598,281 |
| | 8 |
| | 1,173,503 |
| | 16 |
| | 1,771,784 |
|
Michigan | 16 |
| | 864,883 |
| | 6 |
| | 345,736 |
| | 22 |
| | 1,210,619 |
|
Minnesota | 15 |
| | 1,055,935 |
| | — |
| | — |
| | 15 |
| | 1,055,935 |
|
Mississippi | 2 |
| | 157,386 |
| | — |
| | — |
| | 2 |
| | 157,386 |
|
Missouri | 11 |
| | 1,036,323 |
| | 4 |
| | 373,120 |
| | 15 |
| | 1,409,443 |
|
Nebraska | 1 |
| | 34,560 |
| | 3 |
| | 316,970 |
| | 4 |
| | 351,530 |
|
Nevada | 7 |
| | 276,520 |
| | 1 |
| | 107,041 |
| | 8 |
| | 383,561 |
|
New Hampshire | — |
| | — |
| | 1 |
| | 146,467 |
| | 1 |
| | 146,467 |
|
New Jersey | 35 |
| | 2,875,561 |
| | 10 |
| | 2,099,003 |
| | 45 |
| | 4,974,564 |
|
New Mexico | 1 |
| | 22,500 |
| | 2 |
| | 109,473 |
| | 3 |
| | 131,973 |
|
New York | 20 |
| | 1,001,046 |
| | 13 |
| | 1,186,266 |
| | 33 |
| | 2,187,312 |
|
North Carolina | 22 |
| | 1,124,393 |
| | 2 |
| | 53,624 |
| | 24 |
| | 1,178,017 |
|
North Dakota | 1 |
| | 5,361 |
| | — |
| | — |
| | 1 |
| | 5,361 |
|
Ohio | 12 |
| | 763,405 |
| | 7 |
| | 660,778 |
| | 19 |
| | 1,424,183 |
|
Oklahoma | 5 |
| | 255,753 |
| | 3 |
| | 145,000 |
| | 8 |
| | 400,753 |
|
Oregon | 11 |
| | 396,984 |
| | 1 |
| | 55,621 |
| | 12 |
| | 452,605 |
|
Pennsylvania | 24 |
| | 1,854,685 |
| | 8 |
| | 2,577,883 |
| | 32 |
| | 4,432,568 |
|
Puerto Rico | 3 |
| | 178,449 |
| | 1 |
| | 54,352 |
| | 4 |
| | 232,801 |
|
Rhode Island | 1 |
| | 70,159 |
| | 1 |
| | 12,748 |
| | 2 |
| | 82,907 |
|
South Carolina | 8 |
| | 508,035 |
| | 2 |
| | 214,238 |
| | 10 |
| | 722,273 |
|
Tennessee | 4 |
| | 166,993 |
| | 5 |
| | 153,659 |
| | 9 |
| | 320,652 |
|
Texas | 49 |
| | 2,423,861 |
| | 29 |
| | 2,395,607 |
| | 78 |
| | 4,819,468 |
|
Utah | 2 |
| | 78,148 |
| | 1 |
| | 90,553 |
| | 3 |
| | 168,701 |
|
Vermont | 2 |
| | 55,200 |
| | — |
| | — |
| | 2 |
| | 55,200 |
|
Virginia | 14 |
| | 581,390 |
| | 7 |
| | 605,566 |
| | 21 |
| | 1,186,956 |
|
Washington | 8 |
| | 342,275 |
| | 6 |
| | 472,896 |
| | 14 |
| | 815,171 |
|
West Virginia | 3 |
| | 234,902 |
| | — |
| | — |
| | 3 |
| | 234,902 |
|
Wisconsin | 6 |
| | 306,395 |
| | 1 |
| | 10,655 |
| | 7 |
| | 317,050 |
|
| 496 |
| | 31,216,571 |
| | 181 |
| | 19,636,138 |
| | 677 |
| | 50,852,709 |
|
Canada | 60 |
| | 3,524,875 |
| | 15 |
| | 1,722,991 |
| | 75 |
| | 5,247,866 |
|
| 556 |
| | 34,741,446 |
| | 196 |
| | 21,359,129 |
| | 752 |
| | 56,100,575 |
|
|
| | | | | | | | | | | | | | | | | |
| Leased | | Owned | | Total |
Country/State | Number | | Square Feet | | Number | | Square Feet | | Number | | Square Feet |
International | |
| | |
| | |
| | |
| | |
| | |
|
Argentina | 2 |
| | 90,581 |
| | 5 |
| | 469,748 |
| | 7 |
| | 560,329 |
|
Australia | 55 |
| | 3,271,565 |
| | 2 |
| | 33,845 |
| | 57 |
| | 3,305,410 |
|
Austria | 1 |
| | 3,300 |
| | 1 |
| | 30,000 |
| | 2 |
| | 33,300 |
|
Belgium | 4 |
| | 145,929 |
| | 1 |
| | 104,391 |
| | 5 |
| | 250,320 |
|
Brazil | 47 |
| | 3,072,026 |
| | 7 |
| | 324,655 |
| | 54 |
| | 3,396,681 |
|
Chile | 11 |
| | 420,084 |
| | 6 |
| | 232,314 |
| | 17 |
| | 652,398 |
|
China (including Taiwan) | 27 |
| | 363,649 |
| | 1 |
| | 20,518 |
| | 28 |
| | 384,167 |
|
Columbia | 20 |
| | 602,678 |
| | — |
| | — |
| | 20 |
| | 602,678 |
|
Czech Republic | 10 |
| | 230,422 |
| | — |
| | — |
| | 10 |
| | 230,422 |
|
Denmark | 4 |
| | 179,865 |
| | — |
| | — |
| | 4 |
| | 179,865 |
|
England | 48 |
| | 2,245,985 |
| | 26 |
| | 1,525,848 |
| | 74 |
| | 3,771,833 |
|
Estonia | 1 |
| | 38,861 |
| | — |
| | — |
| | 1 |
| | 38,861 |
|
Finland | 3 |
| | 85,280 |
| | — |
| | — |
| | 3 |
| | 85,280 |
|
France | 31 |
| | 2,083,140 |
| | 12 |
| | 936,486 |
| | 43 |
| | 3,019,626 |
|
Germany | 17 |
| | 757,328 |
| | 2 |
| | 93,226 |
| | 19 |
| | 850,554 |
|
Greece | 3 |
| | 79,327 |
| | — |
| | — |
| | 3 |
| | 79,327 |
|
Hong Kong | 8 |
| | 805,839 |
| | — |
| | — |
| | 8 |
| | 805,839 |
|
Hungary | 7 |
| | 350,898 |
| | — |
| | — |
| | 7 |
| | 350,898 |
|
India | 89 |
| | 1,859,151 |
| | — |
| | — |
| | 89 |
| | 1,859,151 |
|
Ireland | 6 |
| | 50,908 |
| | 3 |
| | 158,558 |
| | 9 |
| | 209,466 |
|
Latvia | 1 |
| | 15,145 |
| | — |
| | — |
| | 1 |
| | 15,145 |
|
Lithuania | 3 |
| | 67,487 |
| | — |
| | — |
| | 3 |
| | 67,487 |
|
Malaysia | 8 |
| | 365,740 |
| | — |
| | — |
| | 8 |
| | 365,740 |
|
Mexico | 12 |
| | 502,010 |
| | 8 |
| | 585,931 |
| | 20 |
| | 1,087,941 |
|
The Netherlands | 4 |
| | 331,186 |
| | 3 |
| | 102,199 |
| | 7 |
| | 433,385 |
|
New Zealand | 6 |
| | 413,959 |
| | — |
| | — |
| | 6 |
| | 413,959 |
|
Northern Ireland | 2 |
| | 55,310 |
| | — |
| | — |
| | 2 |
| | 55,310 |
|
Norway | 5 |
| | 199,219 |
| | — |
| | — |
| | 5 |
| | 199,219 |
|
Peru | — |
| | — |
| | 10 |
| | 301,781 |
| | 10 |
| | 301,781 |
|
Poland | 23 |
| | 802,462 |
| | — |
| | — |
| | 23 |
| | 802,462 |
|
Romania | 10 |
| | 394,462 |
| | — |
| | — |
| | 10 |
| | 394,462 |
|
Russia | 22 |
| | 611,610 |
| | — |
| | — |
| | 22 |
| | 611,610 |
|
Scotland | 7 |
| | 191,298 |
| | 4 |
| | 375,294 |
| | 11 |
| | 566,592 |
|
Serbia | 1 |
| | 32,401 |
| | — |
| | — |
| | 1 |
| | 32,401 |
|
Singapore | 6 |
| | 304,588 |
| | 2 |
| | 274,100 |
| | 8 |
| | 578,688 |
|
Slovakia | 5 |
| | 124,816 |
| | — |
| | — |
| | 5 |
| | 124,816 |
|
South Africa | 10 |
| | 333,778 |
| | — |
| | — |
| | 10 |
| | 333,778 |
|
Spain | 37 |
| | 837,625 |
| | 6 |
| | 203,000 |
| | 43 |
| | 1,040,625 |
|
Sweden | 7 |
| | 828,176 |
| | — |
| | — |
| | 7 |
| | 828,176 |
|
Switzerland | 14 |
| | 310,560 |
| | — |
| | — |
| | 14 |
| | 310,560 |
|
Thailand | 1 |
| | 91,191 |
| | 2 |
| | 105,487 |
| | 3 |
| | 196,678 |
|
Turkey | 8 |
| | 552,560 |
| | — |
| | — |
| | 8 |
| | 552,560 |
|
Ukraine | 4 |
| | 115,624 |
| | — |
| | — |
| | 4 |
| | 115,624 |
|
| 590 |
| | 24,218,023 |
| | 101 |
| | 5,877,381 |
| | 691 |
| | 30,095,404 |
|
Total | 1,146 |
| | 58,959,469 |
| | 297 |
| | 27,236,510 |
| | 1,443 |
| | 86,195,979 |
|
The leased facilities typically have initial lease terms of five to ten years with one or more five-year renewal options. In addition, some of the leases contain either a purchase option or a right of first refusal upon the sale of the property. We believe that the space available in our facilities is adequate to meet our current needs, although future growth may require that we lease or purchase additional real property.
See Note 10 to Notes to Consolidated Financial Statements included in this Annual Report for information regarding our minimum annual lease commitments.
See Schedule III—Schedule of Real Estate and Accumulated Depreciation in this Annual Report for information regarding the cost, accumulated depreciation and encumbrances associated with our owned real estate.
Item 3. Legal Proceedings.
We are involved in litigation from time to time in the ordinary course of business. A portion of the defense and/or settlement costs associated with such litigation is covered by various commercial liability insurance policies purchased by us and, in limited cases, indemnification from third parties. In the opinion of management, no material legal proceedings are pending to which we, or any of our properties, are subject.
Item 4. Mine Safety Disclosures.
None.
PART II
Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is traded on the NYSE under the symbol "IRM". Our shares of common stock also trade on the ASX in the form of CHESS Depository Interests ("CDIs") representing a beneficial interest in one share of our common stock. The following table sets forth the high and low sale prices on the NYSE, for the years 2015 and 2016:
|
| | | | | | | |
| Sale Prices |
| High | | Low |
2015 | |
| | |
|
First Quarter | $ | 41.53 |
| | $ | 35.60 |
|
Second Quarter | 38.49 |
| | 30.95 |
|
Third Quarter | 32.25 |
| | 26.49 |
|
Fourth Quarter | 32.35 |
| | 25.99 |
|
2016 | |
| | |
|
First Quarter | $ | 34.15 |
| | $ | 23.64 |
|
Second Quarter | 39.84 |
| | 32.12 |
|
Third Quarter | 41.50 |
| | 35.42 |
|
Fourth Quarter | 37.51 |
| | 30.75 |
|
The closing price of our common stock on the NYSE on February 17, 2017 was $37.15. As of February 17, 2017, there were 1,580 holders of record of our common stock, including CHESS Depository Nominees Pty Limited, which held shares of our common stock on behalf of our CDI holders.
Our board of directors has adopted a dividend policy under which we have paid, and in the future intend to pay, quarterly cash dividends on our common stock. The amount and timing of future dividends will continue to be subject to the approval of our board of directors, in its sole discretion, and to applicable legal requirements.
In 2015 and 2016, our board of directors declared the following dividends:
|
| | | | | | | | | | | | |
Declaration Date | | Dividend Per Share | | Record Date | | Total Amount (in thousands) | | Payment Date |
February 19, 2015 | | $ | 0.4750 |
| | March 6, 2015 | | $ | 99,795 |
| | March 20, 2015 |
May 28, 2015 | | 0.4750 |
| | June 12, 2015 | | 100,119 |
| | June 26, 2015 |
August 27, 2015 | | 0.4750 |
| | September 11, 2015 | | 100,213 |
| | September 30, 2015 |
October 29, 2015 | | 0.4850 |
| | December 1, 2015 | | 102,438 |
| | December 15, 2015 |
February 17, 2016 | | 0.4850 |
| | March 7, 2016 | | 102,651 |
| | March 21, 2016 |
May 25, 2016 | | 0.4850 |
| | June 6, 2016 | | 127,469 |
| | June 24, 2016 |
July 27, 2016 | | 0.4850 |
| | September 12, 2016 | | 127,737 |
| | September 30, 2016 |
October 31, 2016 | | 0.5500 |
| | December 15, 2016 | | 145,006 |
| | December 30, 2016 |
During the years ended December 31, 2014, 2015 and 2016, we declared distributions to our stockholders of $1,048.9 million, $402.6 million, and $502.9 million, respectively. These distributions represent approximately $5.37 per share, $1.91 per share and $2.04 per share for the years ended December 31, 2014, 2015 and 2016, respectively, based on the weighted average number of common shares outstanding during each respective year. For 2014, total amounts distributed included a special distribution declared by our board of directors of $700.0 million, or $3.61 per share, associated with our conversion to a REIT, of which $560.0 million was paid in the form of our common stock and $140.0 million was paid in cash.
On February 15, 2017, we declared a dividend to our stockholders of record as of March 15, 2017 of $0.55 per share, payable on April 3, 2017.
For federal income tax purposes, distributions to our stockholders are generally treated as nonqualified ordinary dividends, qualified ordinary dividends or return of capital. The IRS requires historical C corporation earnings and profits to be distributed prior to any REIT distributions, which may affect the character of each distribution to our stockholders, including whether and to what extent each distribution is characterized as a qualified or nonqualified ordinary dividend. For the years ended December 31, 2014, 2015 and 2016, the dividends we paid on our common shares were classified as follows:
|
| | | | | | | | |
| Year Ended December 31, |
| 2014 | | 2015 | | 2016 |
Nonqualified ordinary dividends | 26.4 | % | | 49.3 | % | | 45.5 | % |
Qualified ordinary dividends | 56.4 | % | | 39.1 | % | | 21.0 | % |
Return of capital | 17.2 | % | | 11.6 | % | | 33.5 | % |
| 100.0 | % | | 100.0 | % | | 100.0 | % |
Dividends paid during the years ended December 31, 2014, 2015 and 2016 which were classified as qualified ordinary dividends for federal income tax purposes primarily related to (i) the distribution of certain of our historical C corporation earnings and profits following our conversion to a REIT (with respect to dividends paid during the year ended December 31, 2014) and (ii) the distribution of historical C corporation earnings and profits related to certain acquisitions completed during the years ended December 31, 2015 and 2016 (with respect to dividends paid during the years ended December 31, 2015 and 2016).
Unregistered Sales of Equity Securities and Use of Proceeds
We did not sell any unregistered equity securities during the three months ended December 31, 2016, nor did we repurchase any shares of our common stock during the three months ended December 31, 2016.
Item 6. Selected Financial Data.
The following selected consolidated statements of operations, balance sheet and other data have been derived from our audited consolidated financial statements. The selected consolidated financial and operating information set forth below should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements and the Notes thereto included elsewhere in this Annual Report.
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2012 | | 2013 | | 2014 | | 2015 | | 2016(1) |
| (In thousands) |
Consolidated Statements of Operations Data: | |
| | |
| | |
| | |
| | |
|
Revenues: | |
| | |
| | |
| | |
| | |
|
Storage rental | $ | 1,733,138 |
| | $ | 1,784,721 |
| | $ | 1,860,243 |
| | $ | 1,837,897 |
| | $ | 2,142,905 |
|
Service | 1,270,817 |
| | 1,239,902 |
| | 1,257,450 |
| | 1,170,079 |
| | 1,368,548 |
|
Total Revenues | 3,003,955 |
| | 3,024,623 |
| | 3,117,693 |
| | 3,007,976 |
| | 3,511,453 |
|
Operating Expenses: | |
| | |
| | |
| | |
| | |
|
Cost of sales (excluding depreciation and amortization) | 1,277,113 |
| | 1,288,878 |
| | 1,344,636 |
| | 1,290,025 |
| | 1,567,777 |
|
Selling, general and administrative | 850,371 |
| | 924,031 |
| | 869,572 |
| | 844,960 |
| | 988,332 |
|
Depreciation and amortization | 316,344 |
| | 322,037 |
| | 353,143 |
| | 345,464 |
| | 452,326 |
|
Loss on disposal/write-down of property, plant and equipment (excluding real estate), net | 4,661 |
| | 430 |
| | 1,065 |
| | 3,000 |
| | 1,412 |
|
Total Operating Expenses | 2,448,489 |
| | 2,535,376 |
| | 2,568,416 |
| | 2,483,449 |
| | 3,009,847 |
|
Operating Income | 555,466 |
| | 489,247 |
| | 549,277 |
| | 524,527 |
| | 501,606 |
|
Interest Expense, Net | 242,599 |
| | 254,174 |
| | 260,717 |
| | 263,871 |
| | 310,662 |
|
Other Expense, Net | 16,062 |
| | 75,202 |
| | 65,187 |
| | 98,590 |
| | 44,300 |
|
Income from Continuing Operations Before Provision (Benefit) for Income Taxes and Gain on Sale of Real Estate | 296,805 |
| | 159,871 |
| | 223,373 |
| | 162,066 |
| | 146,644 |
|
Provision (Benefit) for Income Taxes | 114,304 |
| | 62,127 |
| | (97,275 | ) | | 37,713 |
| | 44,944 |
|
Gain on Sale of Real Estate, Net of Tax | (206 | ) | | (1,417 | ) | | (8,307 | ) | | (850 | ) | | (2,180 | ) |
Income from Continuing Operations | 182,707 |
| | 99,161 |
| | 328,955 |
| | 125,203 |
| | 103,880 |
|
(Loss) Income from Discontinued Operations, Net of Tax | (6,774 | ) | | 831 |
| | (209 | ) | | — |
| | 3,353 |
|
(Loss) Gain on Sale of Discontinued Operations, Net of Tax | (1,885 | ) | | — |
| | — |
| | — |
| | — |
|
Net Income | 174,048 |
| | 99,992 |
| | 328,746 |
| | 125,203 |
| | 107,233 |
|
Less: Net Income Attributable to Noncontrolling Interests | 3,126 |
| | 3,530 |
| | 2,627 |
| | 1,962 |
| | 2,409 |
|
Net Income Attributable to Iron Mountain Incorporated | $ | 170,922 |
| | $ | 96,462 |
| | $ | 326,119 |
| | $ | 123,241 |
| | $ | 104,824 |
|
(footnotes follow) | |
| | |
| | |
| | |
| | |
|
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2012 | | 2013 | | 2014 | | 2015 | | 2016(1) |
| | | (In thousands, except per share data) | | |
Earnings (Losses) per Share—Basic: | |
| | |
| | |
| | |
| | |
|
Income from Continuing Operations | $ | 1.05 |
| | $ | 0.52 |
| | $ | 1.68 |
| | $ | 0.59 |
| | $ | 0.41 |
|
Total (Loss) Income from Discontinued Operations | $ | (0.05 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.01 |
|
Net Income Attributable to Iron Mountain Incorporated | $ | 0.98 |
| | $ | 0.51 |
| | $ | 1.67 |
| | $ | 0.58 |
| | $ | 0.43 |
|
Earnings (Losses) per Share—Diluted: | |
| | |
| | |
| | |
| | |
|
Income from Continuing Operations | $ | 1.04 |
| | $ | 0.52 |
| | $ | 1.67 |
| | $ | 0.59 |
| | $ | 0.41 |
|
Total (Loss) Income from Discontinued Operations | $ | (0.05 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.01 |
|
Net Income Attributable to Iron Mountain Incorporated | $ | 0.98 |
| | $ | 0.50 |
| | $ | 1.66 |
| | $ | 0.58 |
| | $ | 0.42 |
|
Weighted Average Common Shares Outstanding—Basic | 173,604 |
| | 190,994 |
| | 195,278 |
| | 210,764 |
| | 246,178 |
|
Weighted Average Common Shares Outstanding—Diluted | 174,867 |
| | 192,412 |
| | 196,749 |
| | 212,118 |
| | 247,267 |
|
Dividends Declared per Common Share | $ | 5.1200 |
| | $ | 1.0800 |
| | $ | 5.3713 |
| | $ | 1.9100 |
| | $ | 2.0427 |
|
(footnotes follow) | |
| | |
| | |
| | |
| | |
|
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2012 | | 2013 | | 2014 | | 2015 | | 2016(1) |
| (In thousands) |
Other Data: | |
| | |
| | |
| | |
| | |
|
Adjusted EBITDA(2) | $ | 910,917 |
| | $ | 894,581 |
| | $ | 925,797 |
| | $ | 920,005 |
| | $ | 1,087,288 |
|
Adjusted EBITDA Margin(2) | 30.3 | % | | 29.6 | % | | 29.7 | % | | 30.6 | % | | 31.0 | % |
Ratio of Earnings to Fixed Charges | 1.9x |
| | 1.5x |
| | 1.7x |
| | 1.5x |
| | 1.4x |
|
(footnotes follow) | |
| | |
| | |
| | |
| | |
|
|
| | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2012 | | 2013 | | 2014 | | 2015 | | 2016(1) |
| (in thousands) |
Consolidated Balance Sheet Data: | |
| | |
| | |
| | |
| | |
|
Cash and Cash Equivalents | $ | 243,415 |
| | $ | 120,526 |
| | $ | 125,933 |
| | $ | 128,381 |
| | $ | 236,484 |
|
Total Assets | 6,314,489 |
| | 6,607,398 |
| | 6,523,265 |
| | 6,350,587 |
| | 9,486,800 |
|
Total Long-Term Debt (including Current Portion of Long-Term Debt) | 3,781,153 |
| | 4,126,115 |
| | 4,616,454 |
| | 4,845,678 |
| | 6,251,181 |
|
Redeemable Noncontrolling Interests | — |
| | — |
| | — |
| | — |
| | 54,697 |
|
Total Equity | 1,157,148 |
| | 1,051,734 |
| | 869,955 |
| | 528,607 |
| | 1,936,671 |
|
(footnotes follow) | |
| | |
| | |
| | |
| | |
|
_______________________________________________________________________________
| |
(1) | Our financial results as of and for the year ended December 31, 2016 include the results of Recall from May 2, 2016. |
| |
(2) | For definitions of Adjusted EBITDA and Adjusted EBIDTA Margin, a reconciliation of Adjusted EBITDA and a discussion of why we believe these non-GAAP measures provide relevant and useful information to our current and potential investors, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures" of this Annual Report. |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with "Item 6. Selected Financial Data" and the Consolidated Financial Statements and Notes thereto and the other financial and operating information included elsewhere in this Annual Report.
This discussion contains "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995 and in other securities laws. See "Cautionary Note Regarding Forward-Looking Statements" on page iii of this Annual Report and "Item 1A. Risk Factors" beginning on page 12 of this Annual Report.
Overview
Recall Acquisition
On May 2, 2016 (Sydney, Australia time), we completed the Recall Transaction. At the closing of the Recall Transaction, we paid approximately $331.8 million in cash and issued approximately 50.2 million shares of our common stock which, based on the closing price of our common stock as of April 29, 2016 (the last day of trading on the NYSE prior to the closing of the Recall Transaction) of $36.53 per share, resulted in a total purchase price to Recall shareholders of approximately $2,166.9 million.
We account for acquisitions using the acquisition method of accounting, and, accordingly, the assets and liabilities acquired are recorded at their estimated fair values and the results of operations for each acquisition have been included in our consolidated results from their respective acquisition dates. With respect to the acquisition of Recall, the results of operations of Recall have been included in our consolidated results from May 2, 2016. See Note 6 to Notes to Consolidated Financial Statements included in this Annual Report for unaudited pro forma results of operations for us and Recall, as if the Recall Transaction was completed on January 1, 2015, for the years ended December 31, 2015 and 2016, respectively.
We currently estimate total acquisition and integration expenditures associated with the Recall Transaction to be approximately $380.0 million, the majority of which is expected to be incurred by the end of 2018. This amount consists of (i) approximately $80.0 million of operating expenditures to complete the Recall Transaction, including advisory and professional fees and costs to complete the Divestments (as defined in Note 6 to Notes to Consolidated Financial Statements included in this Annual Report) required in connection with receipt of regulatory approval and to provide transitional services required to support the divested businesses during a transition period (“Recall Deal Close & Divestment Costs”) and (ii) approximately $300.0 million of integration expenditures, including operating expenditures associated with moving, severance, facility upgrade, REIT conversion and system upgrade costs (“Recall Integration Costs” and, collectively with Recall Deal Close & Divestment Costs, “Recall Costs”) and capital expenditures to integrate Recall with our existing operations. From January 1, 2015 through December 31, 2016, we have incurred cumulative operating and capital expenditures associated with the Recall Transaction of $197.4 million, including $179.0 million of Recall Costs and $18.4 million of capital expenditures.
See Note 16 to Notes to Consolidated Financial Statements included in this Annual Report for more information on Recall Costs, including costs recorded by segment as well as recorded between cost of sales and selling, general and administrative expenses.
Divestitures
i. Divestments Associated with the Recall Transaction
As disclosed in Note 6 to Notes to Consolidated Financial Statements included in this Annual Report, we sought regulatory approval of the Recall Transaction and, as part of the regulatory approval process, we agreed to make the Divestments.
The Initial United States Divestments, the Seattle/Atlanta Divestments, the Recall Canadian Divestments and the UK Divestments (each as defined in Note 6 to Notes to Consolidated Financial Statements included in this Annual Report) (collectively, the "Recall Divestments") meet the criteria to be reported as discontinued operations as the Recall Divestments met the criteria to be reported as assets and liabilities held for sale at, or within a short period of time following, the closing of the Recall Transaction. Accordingly, the results of operations for the Recall Divestments are presented as a component of discontinued operations in our Consolidated Statement of Operations and the cash flows associated with the Recall Divestments are presented as a component of cash flows from discontinued operations in our Consolidated Statement of Cash Flows for the year ended December 31, 2016.
The Australia Divestment Business and the Iron Mountain Canadian Divestments (each as defined in Note 6 to Notes to Consolidated Financial Statements included in this Annual Report) (collectively, the "Iron Mountain Divestments") do not meet the criteria to be reported as discontinued operations as our decision to divest the Iron Mountain Divestments does not represent a strategic shift that will have a major effect on our operations and financial results. Accordingly, the results of operations for the Iron Mountain Divestments are presented as a component of income (loss) from continuing operations in our Consolidated Statements of Operations for the years ended December 31, 2014, 2015 and 2016 and the cash flows associated with the Iron Mountain Divestments are presented as a component of cash flows from continuing operations in our Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2015 and 2016.
The Australia Divestment Business represents approximately $65.0 million and $44.0 million of total revenues and approximately $5.8 million and $1.1 million of total income from continuing operations for the years ended December 31, 2015 and 2016, respectively. The Iron Mountain Canadian Divestments represent approximately $2.7 million of total revenues and approximately $1.5 million of total income from continuing operations for each of the years ended December 31, 2015 and 2016, respectively. The Australia Divestment Business was previously included in our Other International Business segment and the Iron Mountain Canadian Divestments were previously included in our North American Records and Information Management Business segment.
See Note 14 to Notes to Consolidated Financial Statements included in this Annual Report for additional information regarding the presentation of the Divestments in our Consolidated Statements of Operations and Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2015 and 2016.
ii. International Shredding Operations
In December 2014, we divested our secure shredding operations in Australia, Ireland and the United Kingdom (the "International Shredding Operations") in a stock transaction for approximately $26.2 million of cash at closing. The assets sold primarily consisted of customer contracts and certain long-lived assets. We concluded that this divestiture did not meet the requirements to be presented as a discontinued operation and, therefore, recorded a pretax gain on sale in other (income) expense, net of approximately $6.9 million ($10.2 million, inclusive of a tax benefit) in our Consolidated Statement of Operations for the year ended December 31, 2014. Revenues from our International Shredding Operations represented less than 1% of our consolidated revenues for the year ended December 31, 2014. The International Shredding Operations in Australia were previously included in the Other International Business segment and the International Shredding Operations in Ireland and the United Kingdom were previously included in the Western European Business segment.
Cost Optimization Plans
i. Organizational Restructuring
During the third quarter of 2013, we implemented a plan that called for certain organizational realignments to advance our growth strategy and reduce operating costs (the “Organizational Restructuring”), which was completed in 2014. As a result of the Organizational Restructuring, we recorded a charge of $3.5 million for the year ended December 31, 2014, primarily related to employee severance and associated benefits. Costs included in our results from operations associated with the Organizational Restructuring are as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2014 | | 2015 | | 2016 |
Cost of sales (excluding depreciation and amortization) | $ | 1,228 |
| | $ | — |
| | $ | — |
|
Selling, general and administrative expenses | 2,247 |
| | — |
| | — |
|
Total | $ | 3,475 |
| | $ | — |
| | $ | — |
|
Costs recorded by segment associated with the Organizational Restructuring are as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2014 | | 2015 | | 2016 |
North American Records and Information Management Business | $ | 1,560 |
| | $ | — |
| | $ | — |
|
North American Data Management Business | 340 |
| | — |
| | — |
|
Western European Business | 33 |
| | — |
| | — |
|
Other International Business | — |
| | — |
| | — |
|
Corporate and Other Business | 1,542 |
| | — |
| | — |
|
Total | $ | 3,475 |
| | $ | — |
| | $ | — |
|
ii. Transformation Initiative
During the third quarter of 2015, we implemented a plan that calls for certain organizational realignments to reduce our overhead costs, particularly in our developed markets, in order to optimize our selling, general and administrative cost structure and to support investments to advance our growth strategy (the “Transformation Initiative”), which is expected to be completed by the end of 2017. As a result of the Transformation Initiative, we recorded charges of $10.2 million and $6.0 million for the years ended December 31, 2015 and 2016, respectively, primarily related to employee severance and associated benefits. Costs included in the accompanying Consolidated Statements of Operations associated with the Transformation Initiative are as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2014 | | 2015 | | 2016 |
Cost of sales (excluding depreciation and amortization) | $ | — |
| | $ | — |
| | $ | — |
|
Selling, general and administrative expenses | — |
| | 10,167 |
| | 6,007 |
|
Total | $ | — |
| | $ | 10,167 |
| | $ | 6,007 |
|
Costs recorded by segment associated with the Transformation Initiative are as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2014 | | 2015 | | 2016 |
North American Records and Information Management Business | $ | — |
| | $ | 5,403 |
| | $ | 2,329 |
|
North American Data Management Business | — |
| | 241 |
| | 395 |
|
Western European Business | — |
| | 1,537 |
| | 204 |
|
Other International Business | — |
| | — |
| | — |
|
Corporate and Other Business | — |
| | 2,986 |
| | 3,079 |
|
Total | $ | — |
| | $ | 10,167 |
| | $ | 6,007 |
|
Through December 31, 2016, we have recorded cumulative charges to our Consolidated Statements of Operations associated with the Transformation Initiative of $16.2 million. As of December 31, 2016, we had $0.5 million accrued related to the Transformation Initiative. We expect the majority of this liability will be paid in the first half of 2017.
As we quantify incremental costs associated with future Transformation Initiative actions to achieve our $125.0 million cost reduction goal, we will disclose the relevant cost estimates and charges in the period that such actions are approved.
General
Our revenues consist of storage rental revenues as well as service revenues and are reflected net of sales and value added taxes. Storage rental revenues, which are considered a key driver of financial performance for the storage and information management services industry, consist primarily of recurring periodic rental charges related to the storage of materials or data (generally on a per unit basis) that are typically retained by customers for many years and technology escrow services that protect and manage source code. Service revenues include charges for related service activities, which include: (1) the handling of records, including the addition of new records, temporary removal of records from storage, refiling of removed records and the destruction of records; (2) courier operations, consisting primarily of the pickup and delivery of records upon customer request; (3) secure shredding of sensitive documents and the related sale of recycled paper, the price of which can fluctuate from period to period; (4) other services, including Information Governance and Digital Solutions, which relate to physical and digital records, and project revenues; (5) customer termination and permanent removal fees; (6) data restoration projects; (7) special project work; (8) fulfillment services; (9) consulting services; and (10) other technology services and product sales (including specially designed storage containers and related supplies). Our service revenue growth has been negatively impacted by declining activity rates as stored records are becoming less active. While customers continue to store their records and tapes with us, they are less likely than they have been in the past to retrieve records for research and other purposes, thereby reducing service activity levels.
Cost of sales (excluding depreciation and amortization) consists primarily of wages and benefits for field personnel, facility occupancy costs (including rent and utilities), transportation expenses (including vehicle leases and fuel), other product cost of sales and other equipment costs and supplies. Of these, wages and benefits and facility occupancy costs are the most significant. Selling, general and administrative expenses consist primarily of wages and benefits for management, administrative, information technology, sales, account management and marketing personnel, as well as expenses related to communications and data processing, travel, professional fees, bad debts, training, office equipment and supplies. Trends in facility occupancy costs are impacted by the total number of facilities we occupy, the mix of properties we own versus properties we occupy under operating leases, fluctuations in per square foot occupancy costs, and the levels of utilization of these properties. Trends in total wages and benefits in dollars and as a percentage of total consolidated revenue are influenced by changes in headcount and compensation levels, achievement of incentive compensation targets, workforce productivity and variability in costs associated with medical insurance and workers' compensation.
The expansion of our international businesses has impacted the major cost of sales components and selling, general and administrative expenses. Our international operations are more labor intensive than our operations in North America and, therefore, labor costs are a higher percentage of international segment revenue. In addition, the overhead structure of our expanding international operations has not achieved the same level of overhead leverage as our North American segments, which may result in an increase in selling, general and administrative expenses, as a percentage of consolidated revenue, as our international operations become a more meaningful percentage of our consolidated results.
Our depreciation and amortization charges result primarily from the capital-intensive nature of our business. The principal components of depreciation relate to storage systems, which include racking structures, buildings, building and leasehold improvements and computer systems hardware and software. Amortization relates primarily to customer relationship intangible assets. Both depreciation and amortization are impacted by the timing of acquisitions.
Our consolidated revenues and expenses are subject to variations caused by the net effect of foreign currency translation incurred by our entities outside the United States. It is difficult to predict the future fluctuations of foreign currency exchange rates and how those fluctuations will impact our Consolidated Statements of Operations. As a result of the relative size of our international operations, these fluctuations may be material on individual balances. Our revenues and expenses from our international operations are generally denominated in the local currency of the country in which they are derived or incurred. Therefore, the impact of currency fluctuations on our operating income and operating margin is partially mitigated. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, we compare the percentage change in the results from one period to another period in this report using constant currency presentation. The constant currency growth rates are calculated by translating the 2014 results at the 2015 average exchange rates and the 2015 results at the 2016 average exchange rates. Constant currency growth rates are a non-GAAP measure.
The following table is a comparison of underlying average exchange rates of the foreign currencies that had the most significant impact on our United States dollar-reported revenues and expenses:
|
| | | | | | | | | |
| Average Exchange Rates for the Year Ended December 31, | |
| Percentage Strengthening / (Weakening) of Foreign Currency |
| 2015 | | 2016 |
Australian dollar | $ | 0.753 |
| | $ | 0.744 |
| (1.2 | )% |
Brazilian real | $ | 0.305 |
| | $ | 0.288 |
| (5.6 | )% |
British pound sterling | $ | 1.529 |
| | $ | 1.356 |
| (11.3 | )% |
Canadian dollar | $ | 0.784 |
| | $ | 0.755 |
| (3.7 | )% |
Euro | $ | 1.110 |
| | $ | 1.107 |
| (0.3 | )% |
|
| | | | | | | | | |
| Average Exchange Rates for the Year Ended December 31, | |
| Percentage Strengthening / (Weakening) of Foreign Currency |
| 2014 | | 2015 |
Australian dollar | $ | 0.902 |
| | $ | 0.753 |
| (16.5 | )% |
Brazilian real | $ | 0.426 |
| | $ | 0.305 |
| (28.4 | )% |
British pound sterling | $ | 1.648 |
| | |