Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
|
| |
(Mark One) |
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| |
For the Quarterly Period Ended September 30, 2017 |
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OR |
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the Transition Period from to |
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Commission file number 1-13045 |
IRON MOUNTAIN INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
|
| |
Delaware (State or other Jurisdiction of Incorporation or Organization) | 23-2588479 (I.R.S. Employer Identification No.) |
One Federal Street, Boston, Massachusetts 02110
(Address of Principal Executive Offices, Including Zip Code)
(617) 535-4766
(Registrant's Telephone Number, Including Area Code)
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth 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 | | Emerging growth company o |
If emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.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
Number of shares of the registrant's Common Stock outstanding at October 20, 2017: 266,937,094
IRON MOUNTAIN INCORPORATED
Index
Part I. Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements
IRON MOUNTAIN INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, except Share and Per Share Data)
(Unaudited)
|
| | | | | | | |
| December 31, 2016 | | September 30, 2017 |
ASSETS | |
| | |
|
Current Assets: | |
| | |
|
Cash and cash equivalents | $ | 236,484 |
| | $ | 337,886 |
|
Accounts receivable (less allowances of $44,290 and $42,172 as of December 31, 2016 and September 30, 2017, respectively) | 691,249 |
| | 784,884 |
|
Prepaid expenses and other | 184,374 |
| | 205,454 |
|
Total Current Assets | 1,112,107 |
| | 1,328,224 |
|
Property, Plant and Equipment: | |
| | |
|
Property, plant and equipment | 5,535,783 |
| | 6,094,095 |
|
Less—Accumulated depreciation | (2,452,457 | ) | | (2,749,620 | ) |
Property, Plant and Equipment, Net | 3,083,326 |
| | 3,344,475 |
|
Other Assets, Net: | |
| | |
|
Goodwill | 3,905,021 |
| | 4,070,656 |
|
Customer relationships and customer inducements | 1,252,523 |
| | 1,385,148 |
|
Other | 133,823 |
| | 131,503 |
|
Total Other Assets, Net | 5,291,367 |
| | 5,587,307 |
|
Total Assets | $ | 9,486,800 |
| | $ | 10,260,006 |
|
LIABILITIES AND EQUITY | |
| | |
|
Current Liabilities: | |
| | |
|
Current portion of long-term debt | $ | 172,975 |
| | $ | 180,390 |
|
Accounts payable | 222,197 |
| | 252,955 |
|
Accrued expenses | 450,257 |
| | 580,991 |
|
Deferred revenue | 201,128 |
| | 218,033 |
|
Total Current Liabilities | 1,046,557 |
| | 1,232,369 |
|
Long-term Debt, net of current portion | 6,078,206 |
| | 6,700,094 |
|
Other Long-term Liabilities | 99,540 |
| | 87,484 |
|
Deferred Rent | 119,834 |
| | 128,820 |
|
Deferred Income Taxes | 151,295 |
| | 175,169 |
|
Commitments and Contingencies (see Note 8) |
|
| |
|
|
Redeemable Noncontrolling Interests | 54,697 |
| | 67,424 |
|
Equity: | |
| | |
|
Iron Mountain Incorporated Stockholders' Equity: | |
| | |
|
Preferred stock (par value $0.01; authorized 10,000,000 shares; none issued and outstanding) | — |
| | — |
|
Common stock (par value $0.01; authorized 400,000,000 shares; issued and outstanding 263,682,670 shares and 266,882,282 shares as of December 31, 2016 and September 30, 2017, respectively) | 2,636 |
| | 2,668 |
|
Additional paid-in capital | 3,489,795 |
| | 3,601,201 |
|
(Distributions in excess of earnings) Earnings in excess of distributions | (1,343,311 | ) | | (1,621,538 | ) |
Accumulated other comprehensive items, net | (212,573 | ) | | (115,343 | ) |
Total Iron Mountain Incorporated Stockholders' Equity | 1,936,547 |
| | 1,866,988 |
|
Noncontrolling Interests | 124 |
| | 1,658 |
|
Total Equity | 1,936,671 |
| | 1,868,646 |
|
Total Liabilities and Equity | $ | 9,486,800 |
| | $ | 10,260,006 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
IRON MOUNTAIN INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except Per Share Data)
(Unaudited)
|
| | | | | | | |
| Three Months Ended September 30, |
| 2016 | | 2017 |
Revenues: | |
| | |
|
Storage rental | $ | 576,465 |
| | $ | 601,091 |
|
Service | 366,357 |
| | 364,570 |
|
Total Revenues | 942,822 |
| | 965,661 |
|
Operating Expenses: | |
| | |
|
Cost of sales (excluding depreciation and amortization) | 429,808 |
| | 418,327 |
|
Selling, general and administrative | 252,944 |
| | 242,357 |
|
Depreciation and amortization | 124,670 |
| | 128,513 |
|
(Gain) Loss on disposal/write-down of property, plant and equipment (excluding real estate), net | (54 | ) | | (292 | ) |
Total Operating Expenses | 807,368 |
| | 788,905 |
|
Operating Income (Loss) | 135,454 |
| | 176,756 |
|
Interest Expense, Net (includes Interest Income of $2,118 and $2,526 for the three months ended September 30, 2016 and 2017, respectively) | 83,300 |
| | 88,989 |
|
Other Expense (Income), Net | 23,302 |
| | 59,479 |
|
Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes and Gain on Sale of Real Estate | 28,852 |
| | 28,288 |
|
Provision (Benefit) for Income Taxes | 23,418 |
| | 2,268 |
|
Gain on Sale of Real Estate, Net of Tax | (325 | ) | | 638 |
|
Income (Loss) from Continuing Operations | 5,759 |
| | 25,382 |
|
Income (Loss) from Discontinued Operations, Net of Tax | 2,041 |
| | (1,058 | ) |
Net Income (Loss) | 7,800 |
| | 24,324 |
|
Less: Net Income (Loss) Attributable to Noncontrolling Interests | 720 |
| | (21 | ) |
Net Income (Loss) Attributable to Iron Mountain Incorporated | $ | 7,080 |
| | $ | 24,345 |
|
Earnings (Losses) per Share—Basic: | |
| | |
|
Income (Loss) from Continuing Operations | $ | 0.02 |
| | $ | 0.10 |
|
Total Income (Loss) from Discontinued Operations, Net of Tax | $ | 0.01 |
| | $ | — |
|
Net Income (Loss) Attributable to Iron Mountain Incorporated | $ | 0.03 |
| | $ | 0.09 |
|
Earnings (Losses) per Share—Diluted: | |
| | |
|
Income (Loss) from Continuing Operations | $ | 0.02 |
| | $ | 0.10 |
|
Total Income (Loss) from Discontinued Operations, Net of Tax | $ | 0.01 |
| | $ | — |
|
Net Income (Loss) Attributable to Iron Mountain Incorporated | $ | 0.03 |
| | $ | 0.09 |
|
Weighted Average Common Shares Outstanding—Basic | 263,269 |
| | 265,198 |
|
Weighted Average Common Shares Outstanding—Diluted | 264,502 |
| | 266,139 |
|
Dividends Declared per Common Share | $ | 0.4852 |
| | $ | 0.5534 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
IRON MOUNTAIN INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except Per Share Data)
(Unaudited)
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2016 | | 2017 |
Revenues: | |
| | |
|
Storage rental | $ | 1,576,358 |
| | $ | 1,763,609 |
|
Service | 1,000,902 |
| | 1,090,734 |
|
Total Revenues | 2,577,260 |
| | 2,854,343 |
|
Operating Expenses: | | |
|
|
Cost of sales (excluding depreciation and amortization) | 1,151,562 |
| | 1,259,318 |
|
Selling, general and administrative | 737,787 |
| | 719,968 |
|
Depreciation and amortization | 326,896 |
| | 381,319 |
|
(Gain) Loss on disposal/write-down of property, plant and equipment (excluding real estate), net | (1,131 | ) | | (967 | ) |
Total Operating Expenses | 2,215,114 |
| | 2,359,638 |
|
Operating Income (Loss) | 362,146 |
| | 494,705 |
|
Interest Expense, Net (includes Interest Income of $5,549 and $5,719 for the nine months ended September 30, 2016 and 2017, respectively) | 225,228 |
| | 265,010 |
|
Other Expense (Income), Net | 37,006 |
| | 33,749 |
|
Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes and Gain on Sale of Real Estate | 99,912 |
| | 195,946 |
|
Provision (Benefit) for Income Taxes | 46,157 |
| | 29,497 |
|
Gain on Sale of Real Estate, Net of Tax | (325 | ) | | (925 | ) |
Income (Loss) from Continuing Operations | 54,080 |
| | 167,374 |
|
Income (Loss) from Discontinued Operations, Net of Tax | 3,628 |
| | (3,421 | ) |
Net Income (Loss) | 57,708 |
| | 163,953 |
|
Less: Net Income (Loss) Attributable to Noncontrolling Interests | 1,822 |
| | 2,853 |
|
Net Income (Loss) Attributable to Iron Mountain Incorporated | $ | 55,886 |
| | $ | 161,100 |
|
Earnings (Losses) per Share—Basic: | |
| | |
|
Income (Loss) from Continuing Operations | $ | 0.22 |
| | $ | 0.62 |
|
Total Income (Loss) from Discontinued Operations, Net of Tax | $ | 0.02 |
| | $ | (0.01 | ) |
Net Income (Loss) Attributable to Iron Mountain Incorporated | $ | 0.23 |
| | $ | 0.61 |
|
Earnings (Losses) per Share—Diluted: | |
| | |
|
Income (Loss) from Continuing Operations | $ | 0.22 |
| | $ | 0.62 |
|
Total Income (Loss) from Discontinued Operations, Net of Tax | $ | 0.02 |
| | $ | (0.01 | ) |
Net Income (Loss) Attributable to Iron Mountain Incorporated | $ | 0.23 |
| | $ | 0.61 |
|
Weighted Average Common Shares Outstanding—Basic | 240,394 |
| | 264,423 |
|
Weighted Average Common Shares Outstanding—Diluted | 241,520 |
| | 265,293 |
|
Dividends Declared per Common Share | $ | 1.4886 |
| | $ | 1.6543 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
IRON MOUNTAIN INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In Thousands)
(Unaudited)
|
| | | | | | | |
| Three Months Ended September 30, |
| 2016 | | 2017 |
Net Income (Loss) | $ | 7,800 |
| | $ | 24,324 |
|
Other Comprehensive Income (Loss): | |
| | |
|
Foreign Currency Translation Adjustments | 11,304 |
| | 37,541 |
|
Total Other Comprehensive Income (Loss) | 11,304 |
| | 37,541 |
|
Comprehensive Income (Loss) | 19,104 |
| | 61,865 |
|
Comprehensive Income (Loss) Attributable to Noncontrolling Interests | 1,181 |
| | (727 | ) |
Comprehensive Income (Loss) Attributable to Iron Mountain Incorporated | $ | 17,923 |
| | $ | 62,592 |
|
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2016 | | 2017 |
Net Income (Loss) | $ | 57,708 |
| | $ | 163,953 |
|
Other Comprehensive Income (Loss): | |
| | |
|
Foreign Currency Translation Adjustments | 38,071 |
| | 95,863 |
|
Market Value Adjustments for Securities | (734 | ) | | — |
|
Total Other Comprehensive Income (Loss) | 37,337 |
| | 95,863 |
|
Comprehensive Income (Loss) | 95,045 |
| | 259,816 |
|
Comprehensive Income (Loss) Attributable to Noncontrolling Interests | 2,688 |
| | 1,486 |
|
Comprehensive Income (Loss) Attributable to Iron Mountain Incorporated | $ | 92,357 |
| | $ | 258,330 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
IRON MOUNTAIN INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In Thousands, except Share Data)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Iron Mountain Incorporated Stockholders' Equity | | | | | |
| | | | | | | | | | | | | | | | |
| | | Common Stock | | Additional Paid-in Capital | | (Distributions in Excess of Earnings) Earnings in Excess of Distributions | | | | Noncontrolling Interests | | | |
| Total | | Shares | | Amounts | | | | Accumulated Other Comprehensive Items, Net | | | Redeemable Noncontrolling Interests |
Balance, December 31, 2015 | $ | 528,607 |
| | 211,340,296 |
| | $ | 2,113 |
| | $ | 1,623,863 |
| | $ | (942,218 | ) | | $ | (174,917 | ) | | $ | 19,766 |
| | | $ | — |
|
Issuance of shares under employee stock purchase plan and option plans and stock-based compensation | 48,545 |
| | 1,851,304 |
| | 19 |
| | 48,526 |
| | — |
| | — |
| | — |
| | | — |
|
Issuance of shares in connection with the acquisition of Recall Holdings Limited (see Note 4) | 1,835,026 |
| | 50,233,412 |
| | 502 |
| | 1,834,524 |
| | — |
| | — |
| | — |
| | | — |
|
Parent cash dividends declared | (360,076 | ) | | — |
| | — |
| | — |
| | (360,076 | ) | | — |
| | — |
| | | — |
|
Foreign currency translation adjustment | 38,071 |
| | — |
| | — |
| | — |
| | — |
| | 37,205 |
| | 866 |
| | | — |
|
Market value adjustments for securities | (734 | ) | | — |
| | — |
| | — |
| | — |
| | (734 | ) | | — |
| | | — |
|
Net income (loss) | 57,708 |
| | — |
| | — |
| | — |
| | 55,886 |
| | — |
| | 1,822 |
| | | — |
|
Noncontrolling interests equity contributions | 1,299 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,299 |
| | | — |
|
Noncontrolling interests dividends | (1,698 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1,698 | ) | | | — |
|
Purchase of noncontrolling interests | 3,506 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,506 |
| | | — |
|
Balance, September 30, 2016 | $ | 2,150,254 |
| | 263,425,012 |
| | $ | 2,634 |
| | $ | 3,506,913 |
| | $ | (1,246,408 | ) | | $ | (138,446 | ) | | $ | 25,561 |
| | | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Iron Mountain Incorporated Stockholders' Equity | | | | | |
| | | | | | | | | | | | | | |
| | | Common Stock | | Additional Paid-in Capital | | (Distributions in Excess of Earnings) Earnings in Excess of Distributions | | | | Noncontrolling Interests | | | |
| Total | | Shares | | Amounts | | | | Accumulated Other Comprehensive Items, Net | | | Redeemable Noncontrolling Interests |
Balance, December 31, 2016 | $ | 1,936,671 |
| | 263,682,670 |
| | $ | 2,636 |
| | $ | 3,489,795 |
| | $ | (1,343,311 | ) | | $ | (212,573 | ) | | $ | 124 |
| | | $ | 54,697 |
|
Issuance of shares under employee stock purchase plan and option plans and stock-based compensation | 29,929 |
| | 1,005,975 |
| | 10 |
| | 29,919 |
| | — |
| | — |
| | — |
| | | — |
|
Issuance of shares in connection with the Fortrust Transaction (see Note 4) | 83,014 |
| | 2,193,637 |
| | 22 |
| | 82,992 |
| | — |
| | — |
| | — |
| | | — |
|
Change in value of redeemable noncontrolling interests | (1,505 | ) | | — |
| | — |
| | (1,505 | ) | | — |
| | — |
| | — |
| | | 1,505 |
|
Parent cash dividends declared | (439,327 | ) | | — |
| | — |
| | — |
| | (439,327 | ) | | — |
| | — |
| | | — |
|
Foreign currency translation adjustment | 97,123 |
| | — |
| | — |
| | — |
| | — |
| | 97,230 |
| | (107 | ) | | | (1,260 | ) |
Net income (loss) | 163,200 |
| | — |
| | — |
| | — |
| | 161,100 |
| | — |
| | 2,100 |
| | | 753 |
|
Noncontrolling interests equity contributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | | 13,230 |
|
Noncontrolling interests dividends | (1,956 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1,956 | ) | | | (1,501 | ) |
Purchase of noncontrolling interests | 1,497 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,497 |
| | | — |
|
Balance, September 30, 2017 | $ | 1,868,646 |
| | 266,882,282 |
| | $ | 2,668 |
| | $ | 3,601,201 |
| | $ | (1,621,538 | ) | | $ | (115,343 | ) | | $ | 1,658 |
| | | $ | 67,424 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
IRON MOUNTAIN INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2016 | | 2017 |
Cash Flows from Operating Activities: | |
| | |
|
Net income (loss) | $ | 57,708 |
| | $ | 163,953 |
|
(Income) Loss from discontinued operations | (3,628 | ) | | 3,421 |
|
Adjustments to reconcile net income (loss) to cash flows from operating activities: | |
| | |
|
Depreciation | 267,280 |
| | 302,480 |
|
Amortization (includes amortization of deferred financing costs and discount of $9,241 and $11,904 for the nine months ended September 30, 2016 and 2017, respectively) | 68,857 |
| | 90,743 |
|
Revenue reduction associated with amortization of permanent withdrawal fees | 9,047 |
| | 8,627 |
|
Stock-based compensation expense | 21,870 |
| | 22,853 |
|
(Benefit) Provision for deferred income taxes | (22,196 | ) | | (28,219 | ) |
Loss on early extinguishment of debt | 9,283 |
| | 48,298 |
|
(Gain) Loss on disposal/write-down of property, plant and equipment, net (including real estate) | (1,490 | ) | | (2,532 | ) |
Anticipated loss on disposal of assets held for sale (see Note 2.i.) | 14,000 |
| | — |
|
Gain on Russia and Ukraine Divestment (see Note 10) | — |
| | (38,869 | ) |
Foreign currency transactions and other, net | 14,959 |
| | 35,621 |
|
Changes in Assets and Liabilities (exclusive of acquisitions): | |
| | |
|
Accounts receivable | (6,996 | ) | | (59,927 | ) |
Prepaid expenses and other | (642 | ) | | (8,210 | ) |
Accounts payable | (39,073 | ) | | 15,993 |
|
Accrued expenses and deferred revenue | 39,553 |
| | (37,498 | ) |
Other assets and long-term liabilities | (9,580 | ) | | 5,556 |
|
Cash Flows from Operating Activities - Continuing Operations | 418,952 |
| | 522,290 |
|
Cash Flows from Operating Activities - Discontinued Operations | 3,640 |
| | (3,421 | ) |
Cash Flows from Operating Activities | 422,592 |
| | 518,869 |
|
Cash Flows from Investing Activities: | |
| | |
|
Capital expenditures | (246,029 | ) | | (243,746 | ) |
Cash paid for acquisitions, net of cash acquired | (276,371 | ) | | (194,128 | ) |
Acquisition of customer relationships | (24,756 | ) | | (43,556 | ) |
Customer inducements | (16,099 | ) | | (13,331 | ) |
Net proceeds from Divestments (see Note 10) | 53,950 |
| | 2,423 |
|
Proceeds from sales of property and equipment and other, net (including real estate) | 2,197 |
| | 8,937 |
|
Cash Flows from Investing Activities - Continuing Operations | (507,108 | ) | | (483,401 | ) |
Cash Flows from Investing Activities - Discontinued Operations | (12 | ) | | — |
|
Cash Flows from Investing Activities | (507,120 | ) | | (483,401 | ) |
Cash Flows from Financing Activities: | |
| | |
|
Repayment of revolving credit, term loan and bridge facilities and other debt | (11,560,385 | ) | | (9,662,160 | ) |
Proceeds from revolving credit, term loan and bridge facilities and other debt | 11,427,389 |
| | 9,866,760 |
|
Early retirement of senior notes | — |
| | (1,193,882 | ) |
Net proceeds from sales of senior notes | 925,443 |
| | 1,320,183 |
|
Debt financing and equity contribution from noncontrolling interests | 1,299 |
| | 13,230 |
|
Debt repayment and equity distribution to noncontrolling interests | (1,305 | ) | | (3,601 | ) |
Parent cash dividends | (360,462 | ) | | (292,980 | ) |
Net proceeds (payments) associated with employee stock-based awards | 26,374 |
| | 6,615 |
|
Excess tax benefits (deficiency) from stock-based compensation | 91 |
| | — |
|
Payment of debt financing and stock issuance costs | (17,107 | ) | | (12,685 | ) |
Cash Flows from Financing Activities - Continuing Operations | 441,337 |
| | 41,480 |
|
Cash Flows from Financing Activities - Discontinued Operations | — |
| | — |
|
Cash Flows from Financing Activities | 441,337 |
| | 41,480 |
|
Effect of Exchange Rates on Cash and Cash Equivalents | (27,062 | ) | | 24,454 |
|
Increase (Decrease) in Cash and Cash Equivalents | 329,747 |
| | 101,402 |
|
Cash and Cash Equivalents, Beginning of Period | 128,381 |
| | 236,484 |
|
Cash and Cash Equivalents, End of Period | $ | 458,128 |
| | $ | 337,886 |
|
Supplemental Information: | |
| | |
|
Cash Paid for Interest | $ | 226,770 |
| | $ | 309,357 |
|
Cash Paid for Income Taxes, Net | $ | 49,776 |
| | $ | 67,716 |
|
Non-Cash Investing and Financing Activities: | |
| | |
|
Capital Leases | $ | 45,997 |
| | $ | 123,116 |
|
Accrued Capital Expenditures | $ | 47,900 |
| | $ | 50,085 |
|
Dividends Payable | $ | 5,193 |
| | $ | 151,972 |
|
Fair Value of Stock Issued for Recall Transaction (see Note 4) | $ | 1,835,026 |
| | $ | — |
|
Fair Value of OSG Investment (see Note 10) | $ | — |
| | $ | 17,973 |
|
Fair Value of Stock Issued for Fortrust Transaction (see Note 4) | $ | — |
| | $ | 83,014 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(1) General
The interim condensed consolidated financial statements are presented herein and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair presentation. Interim results are not necessarily indicative of results for a full year. Iron Mountain Incorporated, a Delaware corporation ("IMI"), and its subsidiaries ("we" or "us") store records, primarily physical records and data backup media, and provide information management services in various locations throughout North America, Europe, Latin America, Asia and Africa. We have a diversified customer base consisting of commercial, legal, financial, healthcare, insurance, life sciences, energy, business services, entertainment and government organizations.
The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been omitted pursuant to those rules and regulations, but we believe that the disclosures included herein are adequate to make the information presented not misleading. The Condensed Consolidated Financial Statements and Notes thereto, which are included herein, should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the year ended December 31, 2016 included in our Annual Report on Form 10-K filed with the SEC on February 23, 2017 (our "Annual Report").
We have been organized and have operated as a real estate investment trust for United States federal income tax purposes ("REIT") since our taxable year ended December 31, 2014.
On May 2, 2016 (Sydney, Australia time), we completed the acquisition of Recall Holdings Limited ("Recall") pursuant to the Scheme Implementation Deed, as amended, with Recall (the "Recall Transaction"). See Note 4.
(2) Summary of Significant Accounting Policies
This Note 2 to Notes to Condensed Consolidated Financial Statements provides information and disclosure regarding certain of our significant accounting policies and should be read in conjunction with Note 2 to Notes to Consolidated Financial Statements included in our Annual Report, which may provide additional information with regard to the accounting policies set forth herein and other of our significant accounting policies.
a. Foreign Currency
Local currencies are the functional currencies for our operations outside the United States, with the exception of certain foreign holding companies and our financing centers in Europe, whose functional currency is the United States dollar. In those instances where the local currency is the functional currency, assets and liabilities are translated at period-end exchange rates, and revenues and expenses are translated at average exchange rates for the applicable period. Resulting translation adjustments are reflected in the accumulated other comprehensive items, net component of Iron Mountain Incorporated Stockholders' Equity, Redeemable Noncontrolling Interests and Noncontrolling Interests in the accompanying Condensed Consolidated Balance Sheets. The gain or loss on foreign currency transactions, calculated as the difference between the historical exchange rate and the exchange rate at the applicable measurement date, including those related to (i) borrowings in certain foreign currencies under our Former Revolving Credit Facility and Revolving Credit Facility (each as defined and discussed more fully in Note 5), (ii) our Euro Notes (as defined and discussed more fully in Note 5), and (iii) certain foreign currency denominated intercompany obligations of our foreign subsidiaries to us and between our foreign subsidiaries, which are not considered permanently invested, are included in Other expense (income), net, in the accompanying Condensed Consolidated Statements of Operations.
Total loss on foreign currency transactions for the three and nine months ended September 30, 2016 and 2017 is as follows:
|
| | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | |
| 2016 | | 2017 | | 2016 | | 2017 | |
Total loss on foreign currency transactions | $ | 10,685 |
| | $ | 11,865 |
| | $ | 15,336 |
| | $ | 27,900 |
| |
IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
b. Goodwill and Other Intangible Assets
Goodwill
Goodwill is not amortized but is reviewed annually for impairment, or more frequently if impairment indicators arise. We have selected October 1 as our annual goodwill impairment review date. We performed our most recent annual goodwill impairment review as of October 1, 2016 and concluded there was no impairment of goodwill at such date. As of December 31, 2016 and September 30, 2017, no factors were identified that would alter our October 1, 2016 goodwill impairment analysis. In making this assessment, we considered a number of factors including operating results, business plans, anticipated future cash flows, transactions and marketplace data. There are inherent uncertainties related to these factors and our judgment in applying them to the analysis of goodwill impairment. When changes occur in the composition of one or more reporting units, the goodwill is reassigned to the reporting units affected based on their relative fair values.
Our reporting units as of December 31, 2016 are described in detail in Note 2.h. to Notes to Consolidated Financial Statements included in our Annual Report. The goodwill associated with acquisitions completed during the first nine months of 2017 (which are described in Note 4) has been incorporated into our reporting units as they existed as of December 31, 2016. During the nine months ended September 30, 2017, there were certain changes to the composition of our reporting units, which are described below.
i. Impact of Russia and Ukraine Divestment
Prior to the Russia and Ukraine Divestment (as defined in Note 10), our businesses in Russia and Ukraine were a component of our Northern and Eastern Europe reporting unit. As disclosed in Note 10, on May 30, 2017, Iron Mountain EES Holdings Ltd. ("IM EES"), a consolidated subsidiary of IMI, sold its records and information management operations in Russia and Ukraine. As a result of the Russia and Ukraine Divestment, $3,515 of goodwill associated with our Northern and Eastern Europe reporting unit was allocated, on a relative fair value basis, to the Russia and Ukraine Divestment and included in the carrying value of the divested businesses. See Note 10 for additional information regarding the Russia and Ukraine Divestment.
ii. Northern and Eastern Europe, Africa and India reporting units
During the second quarter of 2017, as a result of changes in the management of our businesses included in our Other International Business segment, we reassessed the composition of our reporting units. As a result of this reassessment, we determined that our businesses in our former Africa and India reporting unit, which included our businesses in South Africa and India, as well as our business in the United Arab Emirates which was acquired in the first quarter of 2017, were now being managed in conjunction with our businesses included in our Northern and Eastern Europe reporting unit. This newly formed reporting unit, which consists of (i) the businesses included in our former Northern and Eastern Europe reporting unit and (ii) our businesses in the United Arab Emirates, South Africa and India is referred to as the Northern/Eastern Europe and Middle East, Africa and India, or NEE and MEAI, reporting unit.
iii. North American Secure Shredding reporting unit
During the second quarter of 2017, we reassessed the composition of our reporting units included in our North American Records and Information Management Business segment. As a result of this reassessment, we determined that the discrete financial information and operating results of our North American Secure Shredding business are no longer being regularly reviewed by the segment manager of our North American Records and Information Management Business segment. Therefore, we have concluded that our secure shredding operations in North America no longer constitute a separate reporting unit and that our North American Records and Information Management Business segment consists of one reporting unit, which is referred to as the North American Records and Information Management reporting unit.
IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
The changes in the carrying value of goodwill attributable to each reportable operating segment for the nine months ended September 30, 2017 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| North American Records and Information Management Business | | North American Data Management Business | | Western European Business | | Other International Business | | Corporate and Other Business | | Total Consolidated |
Gross Balance as of December 31, 2016 | $ | 2,485,806 |
| | $ | 559,443 |
| | $ | 405,571 |
| | $ | 743,126 |
| | $ | 25,922 |
| | $ | 4,219,868 |
|
Deductible goodwill acquired during the year | 409 |
| | — |
| | — |
| | 620 |
| | 717 |
| | 1,746 |
|
Non-deductible goodwill acquired during the year | — |
| | 13,919 |
| | 16,947 |
| | 26,886 |
| | 1,899 |
| | 59,651 |
|
Goodwill allocated to Russia and Ukraine Divestment (see Note 10) | — |
| | — |
| | — |
| | (3,515 | ) | | — |
| | (3,515 | ) |
Fair value and other adjustments(1) | (24,801 | ) | | 208 |
| | 9,749 |
| | 20,042 |
| | — |
| | 5,198 |
|
Currency effects | 14,670 |
| | 4,180 |
| | 33,889 |
| | 51,300 |
| | — |
| | 104,039 |
|
Gross Balance as of September 30, 2017 | $ | 2,476,084 |
| | $ | 577,750 |
| | $ | 466,156 |
| | $ | 838,459 |
| | $ | 28,538 |
| | $ | 4,386,987 |
|
Accumulated Amortization Balance as of December 31, 2016 | $ | 204,895 |
| | $ | 53,753 |
| | $ | 56,150 |
| | $ | 49 |
| | $ | — |
| | $ | 314,847 |
|
Currency effects | 535 |
| | 134 |
| | 800 |
| | 15 |
| | — |
| | 1,484 |
|
Accumulated Amortization Balance as of September 30, 2017 | $ | 205,430 |
| | $ | 53,887 |
| | $ | 56,950 |
| | $ | 64 |
| | $ | — |
| | $ | 316,331 |
|
Net Balance as of December 31, 2016 | $ | 2,280,911 |
| | $ | 505,690 |
| | $ | 349,421 |
| | $ | 743,077 |
| | $ | 25,922 |
| | $ | 3,905,021 |
|
Net Balance as of September 30, 2017 | $ | 2,270,654 |
| | $ | 523,863 |
| | $ | 409,206 |
| | $ | 838,395 |
| | $ | 28,538 |
| | $ | 4,070,656 |
|
Accumulated Goodwill Impairment Balance as of December 31, 2016 | $ | 85,909 |
| | $ | — |
| | $ | 46,500 |
| | $ | — |
| | $ | — |
| | $ | 132,409 |
|
Accumulated Goodwill Impairment Balance as of September 30, 2017 | $ | 85,909 |
| | $ | — |
| | $ | 46,500 |
| | $ | — |
| | $ | — |
| | $ | 132,409 |
|
_______________________________________________________________________________
| |
(1) | Total fair value and other adjustments include $5,198 in net adjustments primarily related to property, plant and equipment, customer relationship intangible assets and deferred income taxes (which represent adjustments within the applicable measurement period to provisional amounts recognized in purchase accounting). |
IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
Finite-lived intangible assets
Customer relationship intangible assets, which are acquired through either business combinations or acquisitions of customer relationships, are amortized over periods ranging from eight to 30 years and are included in depreciation and amortization in the accompanying Condensed Consolidated Statements of Operations. The value of customer relationship intangible assets is calculated based upon estimates of their fair value utilizing an income approach based on the present value of expected future cash flows.
Costs related to the acquisition of large volume accounts are capitalized. Free intake costs to transport boxes to one of our facilities, which include labor and transportation costs ("Move Costs"), are amortized over periods ranging from eight to 30 years and are included in depreciation and amortization in the accompanying Condensed Consolidated Statements of Operations. 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"), are amortized over periods ranging from three to 15 years and are included in storage and service revenue in the accompanying Condensed Consolidated Statements of Operations. Move Costs and Permanent Withdrawal Fees are collectively referred to as "Customer Inducements". If a customer terminates its relationship with us, the unamortized carrying value of the Customer Inducement intangible asset is charged to expense or revenue. However, in the event of such termination, we generally collect, and record as income, permanent removal fees that generally equal or exceed the amount of the unamortized Customer Inducement intangible asset.
Other finite-lived intangible assets, including trade names, noncompetition agreements and trademarks, are capitalized and amortized over periods ranging from three to 10 years and are included in depreciation and amortization in the accompanying Condensed Consolidated Statements of Operations.
The components of our finite-lived intangible assets as of December 31, 2016 and September 30, 2017 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | | September 30, 2017 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Customer relationship intangible assets and Customer Inducements | $ | 1,604,020 |
| | $ | (351,497 | ) | | $ | 1,252,523 |
| | $ | 1,810,871 |
| | $ | (425,723 | ) | | $ | 1,385,148 |
|
Other finite-lived intangible assets (included in other assets, net) | 24,788 |
| | (7,989 | ) | | 16,799 |
| | 20,990 |
| | (9,616 | ) | | 11,374 |
|
Total | $ | 1,628,808 |
| | $ | (359,486 | ) | | $ | 1,269,322 |
| | $ | 1,831,861 |
| | $ | (435,339 | ) | | $ | 1,396,522 |
|
Amortization expense associated with finite-lived intangible assets and revenue reduction associated with the amortization of Permanent Withdrawal Fees for the three and nine months ended September 30, 2016 and 2017 are as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Amortization expense associated with finite-lived intangible assets | $ | 26,310 |
| | $ | 27,940 |
| | $ | 59,616 |
| | $ | 78,839 |
|
Revenue reduction associated with amortization of Permanent Withdrawal Fees | 2,947 |
| | 2,721 |
| | 9,047 |
| | 8,627 |
|
IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
c. Stock-Based Compensation
We record stock-based compensation expense, utilizing the straight-line method, for the cost of stock options, restricted stock units ("RSUs") and performance units ("PUs"). The stock options, RSUs, PUs and shares of stock issued under our employee stock purchase plan ("ESPP") are collectively the "Employee Stock-Based Awards".
Stock-based compensation expense for Employee Stock-Based Awards for the three and nine months ended September 30, 2016 was $5,957 ($4,245 after tax or $0.02 per basic and diluted share) and $21,870 ($16,170 after tax or $0.07 per basic and diluted share), respectively. Stock-based compensation expense for Employee Stock-Based Awards for the three and nine months ended September 30, 2017 was $7,761 ($6,851 after tax or $0.03 per basic and diluted share) and $22,853 ($20,174 after tax or $0.08 per basic and diluted share), respectively.
Stock-based compensation expense for Employee Stock-Based Awards included in the accompanying Condensed Consolidated Statements of Operations is as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Cost of sales (excluding depreciation and amortization) | $ | 28 |
| | $ | 25 |
| | $ | 80 |
| | $ | 80 |
|
Selling, general and administrative expenses | 5,929 |
| | 7,736 |
| | 21,790 |
| | 22,773 |
|
Total stock-based compensation | $ | 5,957 |
| | $ | 7,761 |
| | $ | 21,870 |
| | $ | 22,853 |
|
Stock Options
A summary of our stock options outstanding as of September 30, 2017 by vesting terms is as follows:
|
| | | | | |
| September 30, 2017 |
| Stock Options Outstanding | | % of Stock Options Outstanding |
Three-year vesting period (10 year contractual life) | 3,386,180 |
| | 88.5 | % |
Five-year vesting period (10 year contractual life) | 442,171 |
| | 11.5 | % |
| 3,828,351 |
| | 100.0 | % |
The weighted average fair value of stock options granted for the nine months ended September 30, 2016 and 2017 was $2.55 and $4.26 per share, respectively. These values were estimated on the date of grant using the Black-Scholes option pricing model. The weighted average assumptions used for grants in the respective periods are as follows:
|
| | | | | | |
| | Nine Months Ended September 30, |
Weighted Average Assumptions | | 2016 | | 2017 |
Expected volatility | | 27.2 | % | | 25.8 | % |
Risk-free interest rate | | 1.32 | % | | 1.96 | % |
Expected dividend yield | | 7 | % | | 6 | % |
Expected life | | 5.6 years |
| | 5.0 years |
|
Expected volatility is calculated utilizing daily historical volatility over a period that equates to the expected life of the option. The risk-free interest rate was based on the United States Treasury interest rates whose term is consistent with the expected life (estimated period of time outstanding) of the stock options. Expected dividend yield is considered in the option pricing model and represents our current annualized expected per share dividends over the current trade price of our common stock. The expected life of the stock options granted is estimated using the historical exercise behavior of employees.
IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
A summary of stock option activity for the nine months ended September 30, 2017 is as follows:
|
| | | | | | | | | | | | |
| Stock Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) | | Average Intrinsic Value |
Outstanding at December 31, 2016 | 3,451,698 |
| | $ | 31.79 |
| | | | |
|
Granted | 1,007,224 |
| | 36.89 |
| | | | |
|
Exercised | (572,677 | ) | | 24.51 |
| | | | |
|
Forfeited | (56,113 | ) | | 33.50 |
| | | | |
|
Expired | (1,781 | ) | | 38.83 |
| | | | |
|
Outstanding at September 30, 2017 | 3,828,351 |
| | $ | 34.20 |
| | 7.42 | | $ | 21,436 |
|
Options exercisable at September 30, 2017 | 1,751,045 |
| | $ | 31.44 |
| | 5.83 | | $ | 15,332 |
|
Options expected to vest | 1,966,919 |
| | $ | 36.54 |
| | 8.76 | | $ | 5,789 |
|
The aggregate intrinsic value of stock options exercised for the three and nine months ended September 30, 2016 and 2017 is as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Aggregate intrinsic value of stock options exercised | $ | 5,433 |
| | $ | 3,142 |
| | $ | 16,792 |
| | $ | 6,989 |
|
Restricted Stock Units
Under our various equity compensation plans, we may also grant RSUs. Our RSUs generally have a vesting period of between three and five years from the date of grant. However, RSUs granted to our non-employee directors vest immediately upon grant.
All RSUs accrue dividend equivalents associated with the underlying stock as we declare dividends. Dividends will generally be paid to holders of RSUs in cash upon the vesting date of the associated RSU and will be forfeited if the RSU does not vest. The fair value of RSUs is the excess of the market price of our common stock at the date of grant over the purchase price (which is typically zero).
Cash dividends accrued and paid on RSUs for the three and nine months ended September 30, 2016 and 2017 are as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Cash dividends accrued on RSUs | $ | 620 |
| | $ | 615 |
| | $ | 1,867 |
| | $ | 1,960 |
|
Cash dividends paid on RSUs | 129 |
| | 183 |
| | 1,960 |
| | 2,122 |
|
The fair value of RSUs vested during the three and nine months ended September 30, 2016 and 2017 is as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Fair value of RSUs vested | $ | 1,486 |
| | $ | 1,933 |
| | $ | 19,271 |
| | $ | 18,006 |
|
IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
A summary of RSU activity for the nine months ended September 30, 2017 is as follows:
|
| | | | | | |
| RSUs | | Weighted- Average Grant-Date Fair Value |
Non-vested at December 31, 2016 | 1,163,393 |
| | $ | 33.21 |
|
Granted | 592,119 |
| | 36.66 |
|
Vested | (550,683 | ) | | 32.70 |
|
Forfeited | (88,226 | ) | | 34.98 |
|
Non-vested at September 30, 2017 | 1,116,603 |
| | $ | 35.15 |
|
Performance Units
Under our various equity compensation plans, we may also make awards of PUs. For the majority of outstanding PUs, the number of PUs earned is determined based on our performance against predefined targets of revenue and return on invested capital ("ROIC"). The number of PUs earned may range from 0% to 200% of the initial award. The number of PUs earned is determined based on our actual performance as compared to the targets at the end of a three-year performance period. Certain PUs that we grant will be earned based on a market condition associated with the total return on our common stock in relation to either (i) a subset of the Standard & Poor's 500 Index (for certain PUs granted prior to 2017), or (ii) a subset of the MSCI United States REIT Index (for certain PUs granted in 2017), rather than the revenue and ROIC targets noted above. The number of PUs earned based on the applicable market condition may range from 0% to 200% of the initial award.
All of our PUs will be settled in shares of our common stock and are subject to cliff vesting three years from the date of the original PU grant. PUs awarded to employees who terminate their employment during the three-year performance period and on or after attaining age 55 and completing 10 years of qualifying service are eligible for pro-rated vesting, subject to the actual achievement against the predefined targets or a market condition as discussed above, based on the number of full years of service completed following the grant date (but delivery of the shares remains deferred). As a result, PUs are generally expensed over the three-year performance period.
All PUs accrue dividend equivalents associated with the underlying stock as we declare dividends. Dividends will generally be paid to holders of PUs in cash upon the settlement date of the associated PU and will be forfeited if the PU does not vest.
Cash dividends accrued and paid on PUs for the three and nine months ended September 30, 2016 and 2017 are as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Cash dividends accrued on PUs | $ | 264 |
| | $ | 315 |
| | $ | 789 |
| | $ | 960 |
|
Cash dividends paid on PUs | — |
| | — |
| | 645 |
| | 205 |
|
IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
During the nine months ended September 30, 2017, we issued 229,692 PUs. The majority of our PUs are earned based on our performance against revenue and ROIC targets during their applicable performance period; therefore, we forecast the likelihood of achieving the predefined revenue and ROIC targets in order to calculate the expected PUs to be earned. We record a compensation charge based on either the forecasted PUs to be earned (during the performance period) or the actual PUs earned (at the three-year anniversary of the grant date) over the vesting period for each of the awards. The fair value of PUs based on our performance against revenue and ROIC targets is the excess of the market price of our common stock at the date of grant over the purchase price (which is typically zero). For PUs earned based on a market condition, we utilize a Monte Carlo simulation to fair value these awards at the date of grant, and such fair value is expensed over the three-year performance period. As of September 30, 2017, we expected 50%, 100% and 100% achievement of the predefined revenue and ROIC targets associated with the awards of PUs made in 2015, 2016 and 2017, respectively.
The fair value of earned PUs that vested during the three and nine months ended September 30, 2016 and 2017 is as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Fair value of earned PUs that vested | $ | 17 |
| | $ | 52 |
| | $ | 5,272 |
| | $ | 957 |
|
A summary of PU activity for the nine months ended September 30, 2017 is as follows:
|
| | | | | | | | | | | | |
| Original PU Awards | | PU Adjustment(1) | | Total PU Awards | | Weighted- Average Grant-Date Fair Value |
Non-vested at December 31, 2016 | 559,340 |
| | (121,038 | ) | | 438,302 |
| | $ | 33.67 |
|
Granted | 229,692 |
| | — |
| | 229,692 |
| | 41.93 |
|
Vested | (34,242 | ) | | — |
| | (34,242 | ) | | 27.95 |
|
Forfeited/Performance or Market Conditions Not Achieved | (19,188 | ) | | (129,029 | ) | | (148,217 | ) | | 29.66 |
|
Non-vested at September 30, 2017 | 735,602 |
| | (250,067 | ) | | 485,535 |
| | $ | 39.20 |
|
_______________________________________________________________________________
| |
(1) | Represents an increase or decrease in the number of original PUs awarded based on either the final performance criteria or market condition achievement at the end of the performance period of such PUs or a change in estimated awards based on the forecasted performance against the predefined targets. |
Employee Stock Purchase Plan
We offer an ESPP in which participation is available to substantially all United States and Canadian employees who meet certain service eligibility requirements. The price for shares purchased under the ESPP is 95% of the market price of our common stock at the end of the offering period, without a look-back feature. As a result, we do not recognize compensation expense for the ESPP shares purchased. For the nine months ended September 30, 2016 and 2017, there were 56,662 shares and 60,167 shares, respectively, purchased under the ESPP. As of September 30, 2017, we had 667,427 shares available under the ESPP.
_______________________________________________________________________________
As of September 30, 2017, unrecognized compensation cost related to the unvested portion of our Employee Stock-Based Awards was $44,965 and is expected to be recognized over a weighted-average period of 2.0 years.
We generally issue shares of our common stock for the exercises of stock options, the vesting of RSUs and PUs and under our ESPP from unissued reserved shares.
IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
d. Income (Loss) Per Share—Basic and Diluted
Basic income (loss) per common share is calculated by dividing income (loss) by the weighted average number of common shares outstanding. The calculation of diluted income (loss) per share is consistent with that of basic income (loss) per share but gives effect to all potential common shares (that is, securities such as stock options, RSUs or PUs) that were outstanding during the period, unless the effect is antidilutive.
The calculation of basic and diluted income (loss) per share for the three and nine months ended September 30, 2016 and 2017 is as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Income (loss) from continuing operations | $ | 5,759 |
| | $ | 25,382 |
| | $ | 54,080 |
| | $ | 167,374 |
|
Less: Net income (loss) attributable to noncontrolling interests | 720 |
| | (21 | ) | | 1,822 |
| | 2,853 |
|
Income (loss) from continuing operations (utilized in numerator of Earnings Per Share calculation) | $ | 5,039 |
| | $ | 25,403 |
| | $ | 52,258 |
| | $ | 164,521 |
|
Income (loss) from discontinued operations, net of tax | $ | 2,041 |
| | $ | (1,058 | ) | | $ | 3,628 |
| | $ | (3,421 | ) |
Net income (loss) attributable to Iron Mountain Incorporated | $ | 7,080 |
| | $ | 24,345 |
| | $ | 55,886 |
| | $ | 161,100 |
|
| | | | | | | |
Weighted-average shares—basic | 263,269,000 |
| | 265,198,000 |
| | 240,394,000 |
| | 264,423,000 |
|
Effect of dilutive potential stock options | 640,202 |
| | 414,258 |
| | 628,263 |
| | 423,688 |
|
Effect of dilutive potential RSUs and PUs | 592,773 |
| | 526,725 |
| | 497,658 |
| | 446,002 |
|
Weighted-average shares—diluted | 264,501,975 |
| | 266,138,983 |
| | 241,519,921 |
| | 265,292,690 |
|
| | | | | | | |
Earnings (losses) per share—basic: | |
| | |
| | |
| | |
|
Income (loss) from continuing operations | $ | 0.02 |
| | $ | 0.10 |
| | $ | 0.22 |
| | $ | 0.62 |
|
Income (loss) from discontinued operations, net of tax | 0.01 |
| | — |
| | 0.02 |
| | (0.01 | ) |
Net income (loss) attributable to Iron Mountain Incorporated(1) | $ | 0.03 |
| | $ | 0.09 |
| | $ | 0.23 |
| | $ | 0.61 |
|
| | | | | | | |
Earnings (losses) per share—diluted: | |
| | |
| | |
| | |
|
Income (loss) from continuing operations | $ | 0.02 |
| | $ | 0.10 |
| | $ | 0.22 |
| | $ | 0.62 |
|
Income (loss) from discontinued operations, net of tax | 0.01 |
| | — |
| | 0.02 |
| | (0.01 | ) |
Net income (loss) attributable to Iron Mountain Incorporated(1) | $ | 0.03 |
| | $ | 0.09 |
| | $ | 0.23 |
| | $ | 0.61 |
|
| | | | | | | |
Antidilutive stock options, RSUs and PUs, excluded from the calculation | 759,478 |
| | 2,620,225 |
| | 1,725,249 |
| | 2,605,203 |
|
_______________________________________________________________________________
(1) Columns may not foot due to rounding.
IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
e. Income Taxes
We provide for income taxes during interim periods based on our estimate of the effective tax rate for the year. Discrete items and changes in our estimate of the annual effective tax rate are recorded in the period they occur. Our effective tax rate is subject to variability in the future due to, among other items: (1) changes in the mix of income between our qualified REIT subsidiaries ("QRSs") and our domestic taxable REIT subsidiaries ("TRSs"), as well as among the jurisdictions in which we operate; (2) tax law changes; (3) volatility in foreign exchange gains and losses; (4) the timing of the establishment and reversal of tax reserves; and (5) our ability to utilize net operating losses that we generate.
Our effective tax rates for the three and nine months ended September 30, 2016 were 81.2% and 46.2%, respectively. The primary reconciling items between the federal statutory tax rate of 35.0% and our overall effective tax rates for the three and nine months ended September 30, 2016 were the benefit derived from the dividends paid deduction, differences in the rates of tax at which our foreign earnings are subject, including foreign exchange gains and losses in different jurisdictions with different tax rates, and the impact of the $14,000 charge (described in Note 2.i.) recorded during the third quarter of 2016 related to the anticipated loss on disposal of the Australia Divestment Business (as defined in Note 6 to Notes to Consolidated Financial Statements included in our Annual Report), which had no associated tax benefit. Our effective tax rates for the three and nine months ended September 30, 2017 were 8.0% and 15.1%, respectively. The primary reconciling items between the federal statutory tax rate of 35.0% and our overall effective tax rate for the three months ended September 30, 2017 were the benefit derived from the dividends paid deduction, differences in the rates of tax at which our foreign earnings are subject and a release of valuation allowances on certain of our foreign net operating losses of $18,457 as a result of the merger of certain of our foreign subsidiaries. The primary reconciling items between the federal statutory tax rate of 35.0% and our overall effective tax rate for the nine months ended September 30, 2017 were the benefit derived from the dividends paid deduction, differences in the rates of tax at which our foreign earnings are subject and a release of valuation allowances on certain of our foreign net operating losses of $25,968 as a result of the merger of certain of our foreign subsidiaries.
During 2016, as a result of the closing of the Recall Transaction and the subsequent integration of Recall's operations into our operations, we reassessed our intentions regarding the indefinite reinvestment of current and future undistributed earnings of our unconverted foreign TRSs outside the United States (the "2016 Indefinite Reinvestment Assessment"). As a result of the 2016 Indefinite Reinvestment Assessment, we concluded that it is our intent to indefinitely reinvest our current and future undistributed earnings of our unconverted foreign TRSs outside the United States. Accordingly, we no longer provide incremental foreign withholding taxes on the retained book earnings of these unconverted foreign TRSs. As a REIT, future repatriation of incremental undistributed earnings of our foreign subsidiaries will not be subject to federal or state income tax, with the exception of foreign withholding taxes in limited instances; however, such future repatriations will require distribution in accordance with REIT distribution rules, and any such distribution may then be taxable, as appropriate, at the stockholder level. We continue, however, to provide for incremental foreign withholding taxes on net book over outside basis differences related to the earnings of our foreign QRSs and certain of our converted TRSs.
f. Concentrations of Credit Risk
Financial instruments that potentially subject us to credit risk consist principally of cash and cash equivalents (including time deposits) and accounts receivable. The only significant concentrations of liquid investments as of December 31, 2016 and September 30, 2017, respectively, related to cash and cash equivalents. At December 31, 2016 and September 30, 2017, we had time deposits with six global banks. As of December 31, 2016 and September 30, 2017, our cash and cash equivalents was $236,484 and $337,886, respectively, including time deposits of $22,240 and $55,132, respectively.
IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
g. Fair Value Measurements
Our financial assets or liabilities that are carried at fair value are required to be measured using inputs from the three levels of the fair value hierarchy. A financial asset or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The three levels of the fair value hierarchy are as follows:
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3—Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.
The assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2016 and September 30, 2017, respectively, are as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at December 31, 2016 Using |
Description | | Total Carrying Value at December 31, 2016 | | Quoted prices in active markets (Level 1) | | | | Significant other observable inputs (Level 2) | | | | Significant unobservable inputs (Level 3) |
Time Deposits(1) | | $ | 22,240 |
| | $ | — |
| | | | $ | 22,240 |
| | | | $ | — |
|
Trading Securities | | 10,659 |
| | 10,181 |
| | (2) | | 478 |
| | (1) | | — |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at September 30, 2017 Using |
Description | | Total Carrying Value at September 30, 2017 | | Quoted prices in active markets (Level 1) | | | | Significant other observable inputs (Level 2) | | | | Significant unobservable inputs (Level 3) |
Time Deposits(1) | | $ | 55,132 |
| | $ | — |
| | | | $ | 55,132 |
| | | | $ | — |
|
Trading Securities | | 11,252 |
| | 10,741 |
| | (2) | | 511 |
| | (1) | | — |
|
Derivative Assets(3) | | 808 |
| | — |
| | | | 808 |
| | | | — |
|
_______________________________________________________________________________
| |
(1) | Time deposits and certain trading securities (included in Prepaid expenses and other in our Condensed Consolidated Balance Sheets) are measured based on quoted prices for similar assets and/or subsequent transactions. |
| |
(2) | Certain trading securities are measured at fair value using quoted market prices. |
| |
(3) | Derivative assets relate to short-term (six months or less) foreign currency contracts that we have entered into to hedge certain of our foreign exchange intercompany exposures, as more fully disclosed at Note 3. We calculate the value of such forward contracts by adjusting the spot rate utilized at the balance sheet date for translation purposes by an estimate of the forward points observed in active markets. |
IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
Disclosures are required in the financial statements for items measured at fair value on a non-recurring basis. We did not have any material items that are measured at fair value on a non-recurring basis at December 31, 2016 and September 30, 2017, with the exception of: (i) goodwill (as disclosed in Note 2.b.); (ii) the assets and liabilities acquired through acquisitions (as disclosed in Note 6 to Notes to Consolidated Financial Statements included in our Annual Report and Note 4); (iii) the Access Contingent Consideration (as defined and disclosed in Note 10); (iv) the redemption value of certain redeemable noncontrolling interests (as disclosed in Note 2.x. in Notes to Consolidated Financial Statements included in our Annual Report); and (v) our investment in OSG Records Management (Europe) Limited (as disclosed in Note 10), all of which are based on Level 3 inputs.
The fair value of our long-term debt, which was determined based on either Level 1 inputs or Level 3 inputs, is disclosed in Note 5. Long-term debt is measured at cost in our Condensed Consolidated Balance Sheets as of December 31, 2016 and September 30, 2017.
h. Accumulated Other Comprehensive Items, Net
The changes in accumulated other comprehensive items, net for the three months ended September 30, 2016 and 2017, respectively, are as follows:
|
| | | | | | | | | | | |
| Foreign Currency Translation Adjustments | | Market Value Adjustments for Securities | | Total |
Balance as of June 30, 2016 | $ | (149,289 | ) | | $ | — |
| | $ | (149,289 | ) |
Other comprehensive income (loss): |
|
| | | |
|
|
Foreign currency translation adjustments | 10,843 |
| | — |
| | 10,843 |
|
Total other comprehensive income (loss) | 10,843 |
| | — |
| | 10,843 |
|
Balance as of September 30, 2016 | $ | (138,446 | ) | | $ | — |
| | $ | (138,446 | ) |
|
| | | | | | | | | | | |
| Foreign Currency Translation Adjustments | | Market Value Adjustments for Securities | | Total |
Balance as of June 30, 2017 | $ | (153,590 | ) | | $ | — |
| | $ | (153,590 | ) |
Other comprehensive income (loss): |
|
| |
|
| |
|
|
Foreign currency translation adjustments | 38,247 |
| | — |
| | 38,247 |
|
Total other comprehensive income (loss) | 38,247 |
| | — |
| | 38,247 |
|
Balance as of September 30, 2017 | $ | (115,343 | ) | | $ | — |
| | $ | (115,343 | ) |
The changes in accumulated other comprehensive items, net for the nine months ended September 30, 2016 and 2017, respectively, are as follows:
|
| | | | | | | | | | | |
| Foreign Currency Translation Adjustments | | Market Value Adjustments for Securities | | Total |
Balance as of December 31, 2015 | $ | (175,651 | ) | | $ | 734 |
| | $ | (174,917 | ) |
Other comprehensive income (loss): | | | | | |
Foreign currency translation adjustments | 37,205 |
| | — |
| | 37,205 |
|
Market value adjustments for securities | — |
| | (734 | ) | | (734 | ) |
Total other comprehensive income (loss) | 37,205 |
| | (734 | ) | | 36,471 |
|
Balance as of September 30, 2016 | $ | (138,446 | ) | | $ | — |
| | $ | (138,446 | ) |
IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
|
| | | | | | | | | | | |
| Foreign Currency Translation Adjustments | | Market Value Adjustments for Securities | | Total |
Balance as of December 31, 2016 | $ | (212,573 | ) | | $ | — |
| | $ | (212,573 | ) |
Other comprehensive income (loss): |
|
| | | |
|
|
Foreign currency translation adjustments(1) | 97,230 |
| | — |
| | 97,230 |
|
Total other comprehensive income (loss) | 97,230 |
| | — |
| | 97,230 |
|
Balance as of September 30, 2017 | $ | (115,343 | ) | | $ | — |
| | $ | (115,343 | ) |
______________________________________________________________
| |
(1) | During the nine months ended September 30, 2017, approximately $29,100 of cumulative translation adjustment associated with our businesses in Russia and Ukraine was reclassified from accumulated other comprehensive items, net and was included in the gain on sale associated with the Russia and Ukraine Divestment (see Note 10). |
i. Other Expense (Income), Net
Other expense (income), net for the three and nine months ended September 30, 2016 and 2017 consists of the following:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Foreign currency transaction losses (gains), net | $ | 10,685 |
| | $ | 11,865 |
| | $ | 15,336 |
| | $ | 27,900 |
|
Debt extinguishment expense | — |
| | 48,298 |
| | 9,283 |
| | 48,298 |
|
Other, net | 12,617 |
| | (684 | ) | | 12,387 |
| | (42,449 | ) |
| $ | 23,302 |
| | $ | 59,479 |
| | $ | 37,006 |
| | $ | 33,749 |
|
We recorded a charge of $9,283 in the nine months ended September 30, 2016 related to the termination of an $850,000 unsecured bridge term loan during the second quarter of 2016 (which is described more fully in our Annual Report), which primarily consisted of the write-off of unamortized deferred financing costs. We recorded a charge of $48,298 in the three and nine months ended September 30, 2017, primarily related to the early extinguishment of (i) the 6% Senior Notes due 2020 and (ii) the CAD Notes due 2021 (each as defined and described more fully in Note 5), consisting of the write-off of unamortized deferred financing costs and call premiums.
Other, net for the three and nine months ended September 30, 2016 includes a charge of $14,000 associated with the anticipated loss on disposal of the Australia Divestment Business (as defined in Note 6 to Notes to Consolidated Financial Statements included in our Annual Report). The Australia Divestment Business, which was sold on October 31, 2016 (see Note 10), met the criteria to be reported as held for sale beginning in the second quarter of 2016 and, therefore, the Australia Divestment Business was reflected in our Condensed Consolidated Balance Sheet as of September 30, 2016 at the lower of its carrying value or its fair value (less costs to sell). This charge represents the excess of the carrying value of the Australia Divestment Business compared to its fair value (less costs to sell) as of September 30, 2016, based upon the sale price of the business.
Other, net for the nine months ended September 30, 2017 includes a gain of $38,869 associated with the Russia and Ukraine Divestment (see Note 10).
IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
j. Property, Plant and Equipment and Long-Lived Assets
During the three and nine months ended September 30, 2016, we capitalized $3,601 and $12,139 of costs, respectively, associated with the development of internal use computer software projects. During the three and nine months ended September 30, 2017, we capitalized $5,872 and $17,792 of costs, respectively, associated with the development of internal use computer software projects.
Consolidated gain on disposal/write-down of property, plant and equipment (excluding real estate), net for the three and nine months ended September 30, 2016 was $54 and $1,131, respectively, and $292 and $967 for the three and nine months ended September 30, 2017, respectively. These gains are primarily associated with the retirement of leased vehicles accounted for as capital lease assets within our North American Records and Information Management Business segment.
Consolidated gain on sale of real estate, net of tax, for the three and nine months ended September 30, 2016 was $325 associated with the sale of land in the United States and Canada. Consolidated gain on sale of real estate for the nine months ended September 30, 2017 was $925, net of tax of $640, and consisted of the sale of land and a building in the United States for net proceeds of approximately $12,700.
k. New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 modifies the process by which entities will test goodwill for impairment. Under existing GAAP, when the carrying value of a reporting unit exceeds the reporting unit’s fair value, an entity would then proceed to a “Step 2” goodwill impairment analysis, which requires calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities, as if that reporting unit had been acquired in a business combination. Under ASU 2017-04, a goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of the reporting unit’s goodwill. We adopted ASU 2017-04 in the first quarter of 2017. ASU 2017-04 did not impact our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("ASU 2017-01"). ASU 2017-01 provides greater clarity on the definition of a business to assist entities in evaluating whether transactions should be accounted for as an acquisition or disposal of assets or businesses. We adopted ASU 2017-01 in the third quarter of 2017. ASU 2017-01 did not have a material impact on our consolidated financial statements.
As Yet Adopted Accounting Pronouncements
a. ASU 2014-09
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). ASU 2014-09 provides guidance for management to reassess revenue recognition as it relates to: (1) transfer of control, (2) variable consideration, (3) allocation of transaction price based on relative standalone selling price, (4) licenses, (5) time value of money, and (6) contract costs.
IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
ASU 2014-09 will replace the current revenue recognition criteria under GAAP, including industry-specific requirements, and provide companies with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of ASU 2014-09 is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for such goods or services. The two permitted transition methods under ASU 2014-09 are: (i) the full retrospective method, whereby ASU 2014-09 would be applied to each prior reporting period presented and the cumulative effect of adoption would be recognized at the earliest period shown, or (ii) the modified retrospective method, whereby the cumulative effect of applying ASU 2014-09 would be recognized at the date of initial application. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 for one year, making ASU 2014-09 effective for us on January 1, 2018, with early adoption permitted as of January 1, 2017. We will adopt ASU 2014-09 as of January 1, 2018 using the modified retrospective method.
During 2015, we established a project team responsible for the assessment and implementation of ASU 2014-09. We utilized a bottoms-up approach to analyze the impact of ASU 2014-09 on our contracts with customers by reviewing our current accounting policies and practices to identify potential differences that would result from applying the requirements of ASU 2014-09 to our contracts with customers. We are currently in the process of designing and implementing appropriate changes to our business processes, systems and controls to support the accounting and the financial disclosure requirements under ASU 2014-09. We have been closely monitoring the FASB activity related to specific interpretative issues pertaining to ASU 2014-09. During the second half of 2016, we substantially completed our evaluation of the potential changes resulting from the adoption of ASU 2014-09 on our accounting and the financial disclosure requirements and are currently assessing the quantification of the impacts of adopting ASU 2014-09 on our consolidated financial statements, the more significant of which are discussed below. Based on our analysis to date, we expect that the most significant impacts associated with adopting ASU 2014-09 compared to current GAAP will relate to (i) the deferral of certain commissions related to our long-term storage contracts (“Accounting for Commissions”) and (ii) certain policy changes related to initial moves of physical storage (“Accounting for Initial Moves”).
i. Accounting for Commissions
Under current GAAP, commissions that we pay related to our long-term storage contracts are expensed as incurred. Under ASU 2014-09, however, certain commissions will be capitalized and amortized over the period of expected earned revenue. In the year of adoption, this will result in increased contract assets on our Consolidated Balance Sheet, a reduction in selling, general and administrative expenses and a corresponding increase in amortization expense (assuming consistent levels of spending up through the adoption date) on our Consolidated Statement of Operations and an increase in cash flows from operating activities and a corresponding increase in cash used for investing activities on our Consolidated Statement of Cash Flows.
ii. Accounting for Initial Moves
Under current GAAP, intake costs incurred but not charged to a customer to transport records to our facilities, which include labor and transportation costs, are capitalized and amortized as a component of depreciation and amortization in our Consolidated Statements of Operations. Under ASU 2014-09, however, the revenue and costs associated with all initial moves of physical storage, regardless of whether or not the services associated with such initial moves are provided to the customer at no charge, will be deferred and recognized over the period consistent with the transfer of the service to the customer to which the asset relates. In the year of adoption, this will result in decreased assets and increased deferred revenue on our Consolidated Balance Sheet, a reduction in cost of sales and a corresponding increase in amortization expense (assuming consistent levels of initial move spending through the adoption date) on our Consolidated Statement of Operations and an increase in cash flows from operating activities and a corresponding increase in cash used for investing activities on our Consolidated Statement of Cash Flows.
IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
b. Other As Yet Adopted Accounting Pronouncements
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). ASU 2016-01 requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income, while eliminating the available-for-sale classification for equity securities with readily determinable fair values and the cost method for equity investments without readily determinable fair values. ASU 2016-01 also impacts financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. ASU 2016-01 is effective for us on January 1, 2018. We will adopt ASU 2016-01 on January 1, 2018 and are currently evaluating the impact ASU 2016-01 will have on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. ASU 2016-02 also will require certain qualitative and quantitative disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 will be effective for us on January 1, 2019, with early adoption permitted. We will adopt ASU 2016-02 on January 1, 2019 and are currently evaluating the impact ASU 2016-02 will have on our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18"). ASU 2016-18 provides guidance on the classification of restricted cash in the statement of cash flows. ASU 2016-18 is effective for us on January 1, 2018, with early adoption permitted and is required to be adopted on a retrospective basis. We do not believe that the adoption of ASU 2016-18 will have a material impact on our consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"). ASU 2017-12 amends the hedge accounting recognition and presentation requirements as outlined in Accounting Standards Codification Topic 815 with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and enhance the transparency and understandability of hedge transactions. In addition, ASU 2017-12 makes improvements to simplify the application of the hedge accounting guidance. ASU 2017-12 is effective for us on January 1, 2019, with early adoption permitted. We are currently evaluating the impact ASU 2017-12 will have on our consolidated financial statements.
IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(3) Derivative Instruments and Hedging Activities
Historically, we have entered into forward contracts to hedge our exposures associated with certain foreign currencies. At the maturity of the forward contracts, we may enter into new forward contracts to hedge movements in the underlying currencies. At the time of settlement, we either pay or receive the net settlement amount from the forward contract and recognize this amount in Other expense (income), net in the Consolidated Statements of Operations as a realized foreign exchange gain or loss. At the end of each month, we mark the outstanding forward contracts to market and record an unrealized foreign exchange gain or loss for the mark-to-market valuation. We have not designated any of the forward contracts we have entered into as hedges. Our policy is to record the fair value of each derivative instrument on a gross basis. As of December 31, 2016, we had no forward contracts outstanding. As of September 30, 2017, we had outstanding forward contracts to purchase 135,000 Euros and sell $159,591 United States dollars to hedge our foreign exchange exposures associated with the Euro. As of September 30, 2017, we recorded a derivative asset of $808 as a component of Prepaid expenses and other on our Condensed Consolidated Balance Sheet, associated with open forward contracts as of September 30, 2017. During the three and nine months ended September 30, 2016, there were no cash receipts or payments included in cash from operating activities from continuing operations related to settlements associated with foreign currency forward contracts. During the three and nine months ended September 30, 2017, cash receipts included in cash from operating activities from continuing operations related to settlements associated with foreign currency forward contracts was $7,643 and $8,536, respectively.
We have designated a portion of our (i) Euro denominated borrowings by IMI under our Former Revolving Credit Facility and (ii) Euro Notes (as defined in Note 5) as a hedge of net investment of certain of our Euro denominated subsidiaries. For the nine months ended September 30, 2016, we designated, on average, 29,858 Euros of our Euro denominated borrowings by IMI under our Former Revolving Credit Facility as a hedge of net investment of certain of our Euro denominated subsidiaries. For the nine months ended September 30, 2017, we designated, on average, 84,443 Euros of our Euro denominated borrowings by IMI under our Former Revolving Credit Facility and Euro Notes as a hedge of net investment of certain of our Euro denominated subsidiaries. As a result, we recorded the following foreign exchange gains (losses), net of tax, related to the change in fair value of such debt due to currency translation adjustments, which is a component of accumulated other comprehensive items, net:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2016 | | 2017 | | 2016 | | 2017 |
Foreign exchange (losses) gains | | $ | (313 | ) | | $ | (4,211 | ) | | $ | (901 | ) | | $ | (12,359 | ) |
Less: Tax (benefit) expense on foreign exchange (losses) gains | | — |
| | — |
| | — |
| | — |
|
Foreign exchange (losses) gains, net of tax | | $ | (313 | ) | | $ | (4,211 | ) | | $ | (901 | ) | | $ | (12,359 | ) |
As of September 30, 2017, cumulative net gains of $5,844, net of tax, are recorded in accumulated other comprehensive items, net associated with this net investment hedge.
IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(4) Acquisitions
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. Cash consideration for our various acquisitions completed in 2017 was primarily provided through cash flows from operating activities and borrowings, as well as cash and cash equivalents on-hand.
a. Acquisition of Recall in 2016
On May 2, 2016 (Sydney, Australia time), we completed the Recall Transaction. At the closing of the Recall Transaction, we paid approximately $331,800 in cash and issued 50,233,412 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 New York Stock Exchange ("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 $2,166,900.
In connection with the acquisition of Recall, we sought regulatory approval of the Recall Transaction from the United States Department of Justice (the “DOJ”), the Australian Competition and Consumer Commission (the “ACCC”), the Canada Competition Bureau (the “CCB”) and the United Kingdom Competition and Markets Authority (the “CMA”).
As part of the regulatory approval process, we agreed to make certain divestments in order to address competition concerns raised by the DOJ, the ACCC, the CCB and the CMA in respect of the Recall Transaction (the “Divestments”). The Divestments, all of which were completed during the year ended December 31, 2016, are defined in Note 6 to Notes to Consolidated Financial Statements included in our Annual Report and are described in greater detail within that note, as well as within Note 10 in this Quarterly Report, were as follows:
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• | The Initial United States Divestments |
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• | The Seattle/Atlanta Divestments |
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• | The Australia Divestment Business |
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• | The Recall Canadian Divestments |
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• | The Iron Mountain Canadian Divestments |
IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(4) Acquisitions (Continued)
The unaudited consolidated pro forma financial information (the "Pro Forma Financial Information") below summarizes the combined results of us and Recall on a pro forma basis as if the Recall Transaction had occurred on January 1, 2015. The Pro Forma Financial Information is presented for informational purposes and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place on January 1, 2015. The Pro Forma Financial Information, for all periods presented, includes adjustments to convert Recall's historical results from International Financial Reporting Standards to GAAP, purchase accounting adjustments (including amortization expenses from acquired intangible assets, depreciation of acquired property, plant and equipment and amortization of favorable and unfavorable operating leases), stock-based compensation and related tax effects. Through September 30, 2017, we and Recall have collectively incurred $140,661 of operating expenditures to complete the Recall Transaction (including advisory and professional fees and costs to complete the Divestments and to provide transitional services required to support the divested businesses during a transition period). These operating expenditures have been reflected within the results of operations in the Pro Forma Financial Information as if they were incurred on January 1, 2015. The costs w