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TABLE OF CONTENTS
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 |
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For the Quarterly Period Ended March 31, 2012 |
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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 |
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.) |
745 Atlantic Avenue, Boston, MA 02111
(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 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):
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
Number of shares of the registrant's Common Stock at April 23, 2012: 171,199,613
IRON MOUNTAIN INCORPORATED
Index
2
Part I. Financial Information
Item 1. Unaudited Consolidated Financial Statements
IRON MOUNTAIN INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In Thousands, except Share and Per Share Data)
(Unaudited)
|
December 31, 2011 |
March 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
ASSETS |
|||||||
Current Assets: |
|||||||
Cash and cash equivalents |
$ | 179,845 | $ | 178,293 | |||
Restricted cash |
35,110 | 35,112 | |||||
Accounts receivable (less allowances of $23,277 and $23,206 as of December 31, 2011 and March 31, 2012, respectively) |
543,467 | 558,357 | |||||
Deferred income taxes |
43,235 | 42,289 | |||||
Prepaid expenses and other |
105,537 | 110,654 | |||||
Assets of discontinued operations |
7,256 | 7,294 | |||||
Total Current Assets |
914,450 | 931,999 | |||||
Property, Plant and Equipment: |
|||||||
Property, plant and equipment |
4,232,594 | 4,244,184 | |||||
LessAccumulated depreciation |
(1,825,511 | ) | (1,841,526 | ) | |||
Property, Plant and Equipment, net |
2,407,083 | 2,402,658 | |||||
Other Assets, net: |
|||||||
Goodwill |
2,254,268 | 2,282,621 | |||||
Customer relationships and acquisition costs |
410,149 | 416,318 | |||||
Deferred financing costs |
35,798 | 34,435 | |||||
Other |
19,510 | 18,591 | |||||
Total Other Assets, net |
2,719,725 | 2,751,965 | |||||
Total Assets |
$ | 6,041,258 | $ | 6,086,622 | |||
LIABILITIES AND EQUITY |
|||||||
Current Liabilities: |
|||||||
Current portion of long-term debt |
$ | 73,320 | $ | 63,229 | |||
Accounts payable |
156,381 | 139,236 | |||||
Accrued expenses |
418,831 | 363,715 | |||||
Deferred revenue |
197,181 | 204,101 | |||||
Liabilities of discontinued operations |
3,317 | 7,859 | |||||
Total Current Liabilities |
849,030 | 778,140 | |||||
Long-term Debt, net of current portion |
3,280,268 | 3,390,447 | |||||
Other Long-term Liabilities |
53,169 | 57,697 | |||||
Deferred Rent |
97,177 | 97,585 | |||||
Deferred Income Taxes |
507,358 | 493,950 | |||||
Commitments and Contingencies (see Note 8) |
|||||||
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 172,140,966 shares and 171,182,398 shares as of December 31, 2011 and March 31, 2012, respectively) |
1,721 | 1,712 | |||||
Additional paid-in capital |
343,603 | 317,492 | |||||
Retained earnings |
902,567 | 915,126 | |||||
Accumulated other comprehensive items, net |
(2,203 | ) | 25,286 | ||||
Total Iron Mountain Incorporated Stockholders' Equity |
1,245,688 | 1,259,616 | |||||
Noncontrolling Interests |
8,568 | 9,187 | |||||
Total Equity |
1,254,256 | 1,268,803 | |||||
Total Liabilities and Equity |
$ | 6,041,258 | $ | 6,086,622 | |||
The accompanying notes are an integral part of these consolidated financial statements.
3
IRON MOUNTAIN INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except Per Share Data)
(Unaudited)
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2011 | 2012 | |||||
Revenues: |
|||||||
Storage |
$ | 415,705 | $ | 425,341 | |||
Service |
330,304 | 321,157 | |||||
Total Revenues |
746,009 | 746,498 | |||||
Operating Expenses: |
|||||||
Cost of sales (excluding depreciation and amortization) |
315,955 | 315,298 | |||||
Selling, general and administrative |
212,755 | 210,660 | |||||
Depreciation and amortization |
80,163 | 78,008 | |||||
(Gain) Loss on disposal/write-down of property, plant and equipment, net |
(464 | ) | 719 | ||||
Total Operating Expenses |
608,409 | 604,685 | |||||
Operating Income (Loss) |
137,600 | 141,813 | |||||
Interest Expense, Net (includes Interest Income of $551 and $545 for the three months ended March 31, 2011 and 2012, respectively) |
48,618 | 58,784 | |||||
Other (Income) Expense, Net |
(8,958 | ) | (3,304 | ) | |||
Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes |
97,940 | 86,333 | |||||
Provision (Benefit) for Income Taxes |
16,764 | 25,260 | |||||
Income (Loss) from Continuing Operations |
81,176 | 61,073 | |||||
Income (Loss) from Discontinued Operations, Net of Tax |
(6,557 | ) | (5,093 | ) | |||
Net Income (Loss) |
74,619 | 55,980 | |||||
Less: Net Income (Loss) Attributable to Noncontrolling Interests |
1,159 | 630 | |||||
Net Income (Loss) Attributable to Iron Mountain Incorporated |
$ | 73,460 | $ | 55,350 | |||
Earnings (Losses) per ShareBasic: |
|||||||
Income (Loss) from Continuing Operations |
$ | 0.41 | $ | 0.36 | |||
Total Income (Loss) from Discontinued Operations |
$ | (0.03 | ) | $ | (0.03 | ) | |
Net Income (Loss) Attributable to Iron Mountain Incorporated |
$ | 0.37 | $ | 0.32 | |||
Earnings (Losses) per ShareDiluted: |
|||||||
Income (Loss) from Continuing Operations |
$ | 0.40 | $ | 0.35 | |||
Total Income (Loss) from Discontinued Operations |
$ | (0.03 | ) | $ | (0.03 | ) | |
Net Income (Loss) Attributable to Iron Mountain Incorporated |
$ | 0.37 | $ | 0.32 | |||
Weighted Average Common Shares OutstandingBasic |
200,228 | 171,320 | |||||
Weighted Average Common Shares OutstandingDiluted |
201,251 | 172,223 | |||||
Dividends Declared per Common Share |
$ | 0.1875 | $ | 0.2500 | |||
The accompanying notes are an integral part of these consolidated financial statements.
4
IRON MOUNTAIN INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In Thousands)
(Unaudited)
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2011 | 2012 | |||||
Net Income (Loss) |
$ | 74,619 | $ | 55,980 | |||
Other Comprehensive Income (Loss): |
|||||||
Foreign Currency Translation Adjustments |
22,478 | 27,947 | |||||
Total Other Comprehensive Income (Loss) |
22,478 | 27,947 | |||||
Comprehensive Income (Loss) |
97,097 | 83,927 | |||||
Comprehensive Income (Loss) Attributable to Noncontrolling Interests |
1,119 | 1,088 | |||||
Comprehensive Income (Loss) Attributable to Iron Mountain Incorporated |
$ | 95,978 | $ | 82,839 | |||
The accompanying notes are an integral part of these consolidated financial statements.
5
IRON MOUNTAIN INCORPORATED
CONSOLIDATED STATEMENTS OF EQUITY
(In Thousands, except Share Data)
(Unaudited)
|
|
Iron Mountain Incorporated Stockholders' Equity | |
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---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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|
Common Stock | |
|
Accumulated Other Comprehensive Items, Net |
|
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|
|
Additional Paid-in Capital |
Retained Earnings |
Noncontrolling Interests |
||||||||||||||||||
|
Total | Shares | Amounts | |||||||||||||||||||
Balance, December 31, 2010 |
$ | 1,952,865 | 200,064,066 | $ | 2,001 | $ | 1,228,655 | $ | 685,310 | $ | 29,482 | $ | 7,417 | |||||||||
Issuance of shares under employee stock purchase plan and option plans and stock-based compensation, including tax benefit of $1,017 |
16,232 | 578,218 | 6 | 16,226 | | | | |||||||||||||||
Stock repurchases |
(10,971 | ) | (384,169 | ) | (4 | ) | (10,967 | ) | | | | |||||||||||
Parent cash dividends declared |
(37,601 | ) | | | | (37,601 | ) | | | |||||||||||||
Comprehensive Income (Loss): |
||||||||||||||||||||||
Currency translation adjustment |
22,478 | | | | | 22,518 | (40 | ) | ||||||||||||||
Net income (loss) |
74,619 | | | | 73,460 | | 1,159 | |||||||||||||||
Comprehensive Income (Loss) |
| | | | | | ||||||||||||||||
Noncontrolling interests dividends |
(33 | ) | | | | | | (33 | ) | |||||||||||||
Balance, March 31, 2011 |
$ | 2,017,589 | 200,258,115 | $ | 2,003 | $ | 1,233,914 | $ | 721,169 | $ | 52,000 | $ | 8,503 | |||||||||
|
|
Iron Mountain Incorporated Stockholders' Equity | |
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---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Common Stock | |
|
Accumulated Other Comprehensive Items, Net |
|
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Additional Paid-in Capital |
Retained Earnings |
Noncontrolling Interests |
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Total | Shares | Amounts | |||||||||||||||||||
Balance, December 31, 2011 |
$ | 1,254,256 | 172,140,966 | $ | 1,721 | $ | 343,603 | $ | 902,567 | $ | (2,203 | ) | $ | 8,568 | ||||||||
Issuance of shares under employee stock purchase plan and option plans and stock-based compensation, including tax benefit of $190 |
8,568 | 144,581 | 2 | 8,566 | | | | |||||||||||||||
Stock repurchases |
(34,688 | ) | (1,103,149 | ) | (11 | ) | (34,677 | ) | | | | |||||||||||
Parent cash dividends declared |
(42,791 | ) | | | | (42,791 | ) | | | |||||||||||||
Comprehensive Income (Loss): |
||||||||||||||||||||||
Currency translation adjustment |
27,947 | | | | | 27,489 | 458 | |||||||||||||||
Net income (loss) |
55,980 | | | | 55,350 | | 630 | |||||||||||||||
Comprehensive Income (Loss) |
| | | | | | ||||||||||||||||
Noncontrolling interests equity contributions |
39 | | | | | | 39 | |||||||||||||||
Noncontrolling interests dividends |
(508 | ) | | | | | | (508 | ) | |||||||||||||
Balance, March 31, 2012 |
$ | 1,268,803 | 171,182,398 | $ | 1,712 | $ | 317,492 | $ | 915,126 | $ | 25,286 | $ | 9,187 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
IRON MOUNTAIN INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2011 | 2012 | |||||
Cash Flows from Operating Activities: |
|||||||
Net income (loss) |
$ | 74,619 | $ | 55,980 | |||
Loss (Income) from discontinued operations |
6,557 | 5,093 | |||||
Adjustments to reconcile net income (loss) to cash flows from operating activities: |
|||||||
Depreciation |
73,338 | 70,149 | |||||
Amortization (includes deferred financing costs and bond discount of $1,426 |
|||||||
and $1,742 for the three months ended March 31, 2011 and 2012, respectively) |
8,251 | 9,601 | |||||
Stock-based compensation expense |
4,439 | 9,800 | |||||
(Benefit) Provision for deferred income taxes |
(7,903 | ) | (9,814 | ) | |||
(Gain) Loss on early extinguishment of debt |
(850 | ) | | ||||
(Gain) Loss on disposal/write-down of property, plant and equipment, net |
(464 | ) | 719 | ||||
Foreign currency transactions and other, net |
(8,434 | ) | (1,020 | ) | |||
Changes in Assets and Liabilities (exclusive of acquisitions): |
|||||||
Accounts receivable |
(22,858 | ) | (8,831 | ) | |||
Prepaid expenses and other current assets |
13,157 | (13,630 | ) | ||||
Accounts payable |
(5,419 | ) | (2,433 | ) | |||
Accrued expenses, deferred revenue and other current liabilities |
(24,744 | ) | (36,629 | ) | |||
Other assets and long-term liabilities |
729 | 74 | |||||
Cash Flows from Operating Activities-Continuing Operations |
110,418 | 79,059 | |||||
Cash Flows from Operating Activities-Discontinued Operations |
8,919 | (4,175 | ) | ||||
Cash Flows from Operating Activities |
119,337 | 74,884 | |||||
Cash Flows from Investing Activities: |
|||||||
Capital expenditures |
(52,208 | ) | (55,916 | ) | |||
Cash paid for acquisitions, net of cash acquired |
(34,705 | ) | (8,818 | ) | |||
Investment in restricted cash |
(2 | ) | (2 | ) | |||
Additions to customer relationship and acquisition costs |
(2,893 | ) | (3,008 | ) | |||
Investment in joint ventures |
(50 | ) | | ||||
Proceeds from sales of property and equipment and other, net |
166 | 1,853 | |||||
Cash Flows from Investing Activities-Continuing Operations |
(89,692 | ) | (65,891 | ) | |||
Cash Flows from Investing Activities-Discontinued Operations |
(9,299 | ) | (1,141 | ) | |||
Cash Flows from Investing Activities |
(98,991 | ) | (67,032 | ) | |||
Cash Flows from Financing Activities: |
|||||||
Repayment of revolving credit and term loan facilities and other debt |
(428,548 | ) | (635,539 | ) | |||
Proceeds from revolving credit and term loan facilities and other debt |
607,418 | 701,105 | |||||
Early retirement of senior subordinated notes |
(231,255 | ) | | ||||
Debt financing (repayment to) and equity contribution from (distribution to) |
|||||||
noncontrolling interests, net |
131 | 191 | |||||
Stock repurchases |
(10,970 | ) | (38,052 | ) | |||
Parent cash dividends |
(37,514 | ) | (43,180 | ) | |||
Proceeds from exercise of stock options and employee stock purchase plan |
9,164 | 1,321 | |||||
Excess tax benefits from stock-based compensation |
1,017 | 190 | |||||
Payment of debt financing costs |
| (93 | ) | ||||
Cash Flows from Financing Activities-Continuing Operations |
(90,557 | ) | (14,057 | ) | |||
Cash Flows from Financing Activities-Discontinued Operations |
46 | (39 | ) | ||||
Cash Flows from Financing Activities |
(90,511 | ) | (14,096 | ) | |||
Effect of Exchange Rates on Cash and Cash Equivalents |
1,289 | 4,692 | |||||
(Decrease) Increase in Cash and Cash Equivalents |
(68,876 | ) | (1,552 | ) | |||
Cash and Cash Equivalents, Beginning of Period |
258,693 | 179,845 | |||||
Cash and Cash Equivalents, End of Period |
$ | 189,817 | $ | 178,293 | |||
Supplemental Information: |
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Cash Paid for Interest |
$ | 65,008 | $ | 56,083 | |||
Cash Paid for Income Taxes |
$ | 20,575 | $ | 38,060 | |||
Non-Cash Investing and Financing Activities: |
|||||||
Capital Leases |
$ | 6,039 | $ | 2,499 | |||
Accrued Capital Expenditures |
$ | 21,095 | $ | 21,166 | |||
Dividends Payable |
$ | 37,601 | $ | 42,791 | |||
The accompanying notes are an integral part of these consolidated financial statements.
7
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(1) General
The interim 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 ("IMI") is a global, full-service provider of information management and related services for all media in various locations throughout North America, Europe, Latin America and Asia Pacific. We have a diversified customer base comprised of commercial, legal, banking, health care, accounting, insurance, entertainment and government organizations.
The unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("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 consolidated financial statements and notes included herein should be read in conjunction with the annual consolidated financial statements and notes for the year ended December 31, 2011 included in our Annual Report on Form 10-K filed on February 28, 2012.
On June 2, 2011, we completed the sale (the "Digital Sale") of our online backup and recovery, digital archiving and eDiscovery solutions businesses of our digital business (the "Digital Business") to Autonomy Corporation plc, a corporation formed under the laws of England and Wales ("Autonomy"), pursuant to a purchase and sale agreement dated as of May 15, 2011 among IMI, certain subsidiaries of IMI and Autonomy (the "Digital Sale Agreement"). Additionally, on October 3, 2011, we sold our records management business in New Zealand (the "New Zealand Business"), and in December 2011, we committed to a plan to sell our records management business in Italy (the "Italian Business"), which we sold on April 27, 2012. The financial position, operating results and cash flows of the Digital Business, New Zealand Business and the Italian Business, including the gain on the sale of the Digital Business and New Zealand Business, for all periods presented, have been reported as discontinued operations for financial reporting purposes. See Note 10 for a further discussion of these events.
(2) Summary of Significant Accounting Policies
a. Principles of Consolidation
The accompanying financial statements reflect our financial position, results of operations and cash flows on a consolidated basis. All intercompany account balances have been eliminated.
b. Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash on hand and cash invested in short-term securities, which have remaining maturities at the date of purchase of less than 90 days. Cash and cash equivalents are carried at cost, which approximates fair value.
We have restricted cash associated with a collateral trust agreement with our insurance carrier that was entered into in 2010 related to our worker's compensation self-insurance program. The restricted
8
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
cash subject to this agreement was $35,110 and $35,112 as of December 31, 2011 and March 31, 2012, respectively, and is included in current assets on our consolidated balance sheets. Restricted cash consists primarily of U.S. Treasuries.
c. Foreign Currency
Local currencies are considered the functional currencies for our operations outside the U.S., with the exception of certain foreign holding companies and our financing center in Switzerland, whose functional currencies are the U.S. 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 and Noncontrolling Interests. 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 (1) our 71/4% GBP Senior Subordinated Notes due 2014, (2) our 63/4% Euro Senior Subordinated Notes due 2018, (3) the borrowings in certain foreign currencies under our revolving credit agreement and (4) 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, on our consolidated statements of operations. The total gain or loss on foreign currency transactions amounted to a net gain of $3,096 and $2,575 for the three months ended March 31, 2011 and 2012, respectively.
d. Goodwill and Other Intangible Assets
Goodwill and intangible assets with indefinite lives are not amortized but are reviewed annually for impairment or more frequently if impairment indicators arise. Other than goodwill, we currently have no intangible assets that have indefinite lives and which are not amortized. Separable intangible assets that are not deemed to have indefinite lives are amortized over their useful lives. We annually assess whether a change in the life over which our intangible assets are amortized is necessary or more frequently if events or circumstances warrant.
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, 2011 and noted no impairment of goodwill. However, as a result of an interim triggering event as discussed below, we recorded a provisional goodwill impairment charge in the third quarter of 2011 associated with our Western European operations that was finalized in the fourth quarter of 2011. As of December 31, 2011 and March 31, 2012, no factors were identified that would alter our October 1, 2011 goodwill assessment. In making this assessment, we relied on 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.
9
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
In September 2011, as a result of certain changes we made in the manner in which our European operations are managed, we reorganized our reporting structure and reassigned goodwill among the revised reporting units. Previously, we tested goodwill impairment at the European level on a combined basis. As a result of the management and reporting changes, we concluded that we have three reporting units for our European operations: (1) United Kingdom, Ireland and Norway ("UKI"); (2) Belgium, France, Germany, Luxembourg, Netherlands and Spain ("Western Europe"); and (3) the remaining countries in Europe ("Central Europe"). Due to these changes, we will perform all future goodwill impairment analyses on the new reporting unit basis. As a result of the restructuring of our reporting units, we concluded that we had an interim triggering event, and, therefore, we performed an interim goodwill impairment test for UKI, Western Europe and Central Europe in the third quarter of 2011 as of August 31, 2011. As required by GAAP, prior to our goodwill impairment analysis, we performed an impairment assessment on the long-lived assets within our UKI, Western Europe and Central Europe reporting units and noted no impairment, except for the Italian Business, which was included in our Western Europe reporting unit, and which is now included in discontinued operations as discussed in Note 10. Based on our analysis, we concluded that the goodwill of our UKI and Central Europe reporting units was not impaired. Our UKI and Central Europe reporting units had fair values that exceeded their carrying values by 15.1% and 4.9%, respectively, as of August 31, 2011. Central Europe is still in the investment stage, and, accordingly, its fair value does not exceed its carrying value by a significant margin at this point in time. A deterioration of the UKI or Central Europe businesses or their failure to achieve the forecasted results could lead to impairments in future periods. Our Western Europe reporting unit's fair value was less than its carrying value, and, as a result, we recorded a goodwill impairment charge of $46,500 included as a component of intangible impairments from continuing operations in our consolidated statements of operations for the year ended December 31, 2011. See Note 10 for the portion of the charge allocated to the Italian Business based on a relative fair value basis.
Our reporting units at which level we performed our goodwill impairment analysis as of October 1, 2011 were as follows: North America; UKI; Western Europe; Central Europe; Latin America; Australia; and Joint Ventures (which includes India, our various joint ventures in Southeast Asia and Russia (referred to as "Joint Ventures")). As of December 31, 2011, the carrying value of goodwill, net amounted to $1,748,879, $306,150, $46,439, $63,781, $27,322, and $61,697 for North America, UKI, Western Europe, Central Europe, Latin America and Australia, respectively. Our Joint Ventures reporting unit has no goodwill as of December 31, 2011 and March 31, 2012. Our North America, Latin America and Australia reporting units had estimated fair values as of October 1, 2011 that exceeded their carrying values by greater than 40%. As of March 31, 2012, the carrying value of goodwill, net amounted to $1,758,722, $315,616, $47,891, $69,384, $28,461, and $62,547 for North America, UKI, Western Europe, Central Europe, Latin America and Australia, respectively.
Reporting unit valuations have been calculated using an income approach based on the present value of future cash flows of each reporting unit or a combined approach based on the present value of future cash flows and market and transaction multiples of revenues and earnings. The income approach incorporates many assumptions including future growth rates, discount factors, expected capital
10
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
expenditures and income tax cash flows. Changes in economic and operating conditions impacting these assumptions could result in goodwill impairments in future periods.
The changes in the carrying value of goodwill attributable to each reportable operating segment for the three months ended March 31, 2012 is as follows:
|
North American Business |
International Business |
Total Consolidated |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Gross Balance as of December 31, 2011 |
$ | 2,010,241 | $ | 564,044 | $ | 2,574,285 | ||||
Deductible goodwill acquired during the year |
4,818 | | 4,818 | |||||||
Currency effects |
5,289 | 18,883 | 24,172 | |||||||
Gross Balance as of March 31, 2012 |
$ | 2,020,348 | $ | 582,927 | $ | 2,603,275 | ||||
Accumulated Amortization Balance as of December 31, 2011 |
$ | 261,362 | $ | 58,655 | $ | 320,017 | ||||
Currency effects |
264 | 373 | 637 | |||||||
Accumulated Amortization Balance as of March 31, 2012 |
$ | 261,626 | $ | 59,028 | $ | 320,654 | ||||
Net Balance as of December 31, 2011 |
$ | 1,748,879 | $ | 505,389 | $ | 2,254,268 | ||||
Net Balance as of March 31, 2012 |
$ | 1,758,722 | $ | 523,899 | $ | 2,282,621 | ||||
Accumulated Goodwill Impairment Balance as of December 31, 2011 |
$ | 85,909 | $ | 46,500 | $ | 132,409 | ||||
Accumulated Goodwill Impairment Balance as of March 31, 2012 |
$ | 85,909 | $ | 46,500 | $ | 132,409 | ||||
The components of our amortizable intangible assets as of March 31, 2012 are as follows:
|
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Customer Relationships and Acquisition Costs |
$ | 612,560 | $ | (196,242 | ) | $ | 416,318 | |||
Core Technology(1) |
3,760 | (2,583 | ) | 1,177 | ||||||
Trademarks and Non-Compete Agreements(1) |
3,075 | (2,562 | ) | 513 | ||||||
Deferred Financing Costs |
55,008 | (20,573 | ) | 34,435 | ||||||
Total |
$ | 674,403 | $ | (221,960 | ) | $ | 452,443 | |||
Amortization expense associated with amortizable intangible assets (including deferred financing costs) was $8,251 and $9,601 for the three months ended March 31, 2011 and 2012, respectively.
11
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
e. Stock-Based Compensation
We record stock-based compensation expense, utilizing the straight-line method, for the cost of stock options, restricted stock, restricted stock units, performance units and shares of stock issued under the employee stock purchase plan (together, "Employee Stock-Based Awards").
Stock-based compensation expense for Employee Stock-Based Awards included in the accompanying consolidated statements of operations for the three months ended March 31, 2011 and 2012 was $5,033, including $594 in discontinued operations, ($3,164 after tax or $0.02 per basic and diluted share) and $9,800 ($6,847 after tax or $0.04 per basic and diluted share), respectively.
Stock-based compensation expense for Employee Stock-Based Awards included in the accompanying consolidated statements of operations related to continuing operations is as follows:
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2011 | 2012 | |||||
Cost of sales (excluding depreciation and amortization) |
$ | 275 | $ | 215 | |||
Selling, general and administrative expenses |
4,164 | 9,585 | |||||
Total stock-based compensation |
$ | 4,439 | $ | 9,800 | |||
The benefits associated with the tax deductions in excess of recognized compensation cost are required to be reported as a financing cash flow. This requirement reduces reported operating cash flows and increases reported financing cash flows. As a result, net financing cash flows from continuing operations included $1,017 and $190 for the three months ended March 31, 2011 and 2012, respectively, from the benefits of tax deductions in excess of recognized compensation cost. The tax benefit of any resulting excess tax deduction increases the Additional Paid-in Capital ("APIC") pool. Any resulting tax deficiency is deducted from the APIC pool.
Stock Options
Under our various stock option plans, options were granted with exercise prices equal to the market price of the stock on the date of grant. The majority of our options become exercisable ratably over a period of five years and generally have a contractual life of ten years, unless the holder's employment is sooner terminated. Certain of the options we issue become exercisable ratably over a period of ten years and have a contractual life of 12 years, unless the holder's employment is sooner terminated. As of March 31, 2012, ten-year vesting options represent 7.5% of total outstanding options. Beginning in 2011, certain of the options we issue become exercisable ratably over a period of three years and have a contractual life of ten years, unless the holder's employment is sooner terminated. As of March 31, 2012, three-year vesting options represented 11.3% of total outstanding options. Our non-employee directors are considered employees for purposes of our stock option plans and stock option reporting. Options granted to our non-employee directors generally become exercisable after one year.
12
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
The weighted average fair value of options granted for the three months ended March 31, 2011 and 2012 was $7.34 and $7.00 per share, respectively. These values were estimated on the date of grant using the Black-Scholes option pricing model. The following table summarizes the weighted average assumptions used for grants in the respective period:
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
Weighted Average Assumptions
|
2011 | 2012 | |||||
Expected volatility |
33.4 | % | 33.8 | % | |||
Risk-free interest rate |
2.51 | % | 1.23 | % | |||
Expected dividend yield |
3 | % | 3 | % | |||
Expected life |
6.3 years | 6.3 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 U.S. Treasury interest rates whose term is consistent with the expected life of the stock options. Expected dividend yield is considered in the option pricing model and represents our current expected per share dividends over the current trade price of our common stock. The expected life (estimated period of time outstanding) of the stock options granted is estimated using the historical exercise behavior of employees.
A summary of option activity for the three months ended March 31, 2012 is as follows:
|
Options | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term |
Aggregate Intrinsic value |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Outstanding at December 31, 2011 |
7,118,458 | $ | 25.73 | ||||||||||
Granted |
21,472 | 28.86 | |||||||||||
Exercised |
(103,868 | ) | 20.47 | ||||||||||
Forfeited |
(90,076 | ) | 25.92 | ||||||||||
Expired |
(9,510 | ) | 30.33 | ||||||||||
Outstanding at March 31, 2012 |
6,936,476 | $ | 25.81 | 6.47 | $ | 23,729 | |||||||
Options exercisable at March 31, 2012 |
4,082,790 | $ | 25.48 | 5.57 | $ | 15,598 | |||||||
Options expected to vest |
2,643,329 | $ | 26.31 | 7.75 | $ | 7,504 | |||||||
The following table provides the aggregate intrinsic value of stock options exercised for the three months ended March 31, 2011 and 2012:
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2011 | 2012 | |||||
Aggregate intrinsic value of stock options exercised |
$ | 6,047 | $ | 1,064 |
13
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
Restricted Stock and Restricted Stock Units
Under our various stock option plans, we may also issue grants of restricted stock or restricted stock units ("RSUs"). Our restricted stock and RSUs generally have a three to five year vesting period. The fair value of restricted stock and 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).
A summary of restricted stock and RSUs activity for the three months ended March 31, 2012 is as follows:
|
Restricted Stock and RSUs |
Weighted- Average Grant-Date Fair Value |
|||||
---|---|---|---|---|---|---|---|
Non-vested at December 31, 2011 |
610,951 | $ | 28.85 | ||||
Granted |
655,809 | 28.86 | |||||
Vested |
(139,477 | ) | 28.36 | ||||
Forfeited |
(11,550 | ) | 28.75 | ||||
Non-vested at March 31, 2012 |
1,115,733 | $ | 28.92 | ||||
No restricted stock vested during the three months ended March 31, 2011 and 2012, respectively. No RSUs vested during the three months ended March 31, 2011 and $3,979 vested during the three months ended March 31, 2012.
Performance Units
Under our various stock option plans, we may also issue grants of performance units ("PUs"). The number of PUs earned is determined based on our performance against predefined targets, which for 2011 and 2012 were calendar year revenue growth and return on invested capital ("ROIC"). The range of payout is zero to 150% of the number of granted PUs. The number of PUs earned is determined based on actual performance at the end of the one-year performance period, and the award will be settled in shares of our common stock, subject to cliff vesting, three years from the date of the original PU grant. Additionally, employees who are employed through the one-year anniversary of the date of grant and who reach both 55 years of age and 10 years of qualifying service (the "retirement criteria") shall immediately and completely vest in any PUs earned based on the actual achievement against the predefined targets as discussed above. As a result, PUs will be expensed over the shorter of (1) the vesting period, (2) achievement of the retirement criteria, which such achievement may occur as early as one year after the date of grant, or (3) a maximum of three years.
During 2012, we issued 221,781 PUs. During the one-year performance period, we will forecast the likelihood of achieving the predefined annual revenue growth and ROIC targets in order to calculate the expected PUs to be earned. We will record a compensation charge based on either the forecasted PUs to be earned (during the one-year performance period) or the actual PUs earned (at the one-year anniversary date) over the vesting period for each individual grant as described above. The PU liability is remeasured at each fiscal quarter-end during the vesting period using the estimated percentage of
14
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
units earned multiplied by the closing market price of our common stock on the current period-end date and is pro-rated based on the amount of time passed in the vesting period. The total fair value of earned PUs that vested during the first quarter of 2012 was $2,825. As of March 31, 2012, we expected 100% achievement of the predefined revenue and ROIC targets associated with the grants made in 2012, and the closing market price of our common stock was $28.80.
A summary of PU activity for the three months ended March 31, 2012 is as follows:
|
PUs Original Awards |
PUs Adjustment(1) |
Total PUs Awards |
Weighted- Average Grant-Date Fair Value |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Non-vested at December 31, 2011 |
112,749 | | 112,749 | $ | 29.06 | ||||||||
Granted |
221,781 | 12,012 | 233,793 | 28.87 | |||||||||
Vested |
(96,120 | ) | (1,938 | ) | (98,058 | ) | 28.46 | ||||||
Forfeited |
(291 | ) | | (291 | ) | 28.11 | |||||||
Non-vested at March 31, 2012 |
238,119 | 10,074 | 248,193 | $ | 29.11 | ||||||||
Employee Stock Purchase Plan
We offer an employee stock purchase plan (the "ESPP") in which participation is available to substantially all U.S. and Canadian employees who meet certain service eligibility requirements. The ESPP provides a way for our eligible employees to become stockholders on favorable terms. The ESPP provides for the purchase of our common stock by eligible employees through successive offering periods. We generally have two six-month offering periods per year, the first of which begins June 1 and ends November 30 and the second of which begins December 1 and ends May 31. During each offering period, participating employees accumulate after-tax payroll contributions, up to a maximum of 15% of their compensation, to pay the exercise price of their options. Participating employees may withdraw from an offering period before the purchase date and obtain a refund of the amounts withheld as payroll deductions. At the end of the offering period, outstanding options are exercised, and each employee's accumulated contributions are used to purchase our common stock. The price for shares purchased under the ESPP is 95% of the fair market price at the end of the offering period, without a look-back feature. As a result, we do not recognize compensation cost for the ESPP shares purchased. In the three months ended March 31, 2011 and 2012, there were no offering periods which ended under the ESPP and no shares were issued.
15
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
The number of shares available for purchase under the ESPP at March 31, 2012 was 399,761.
As of March 31, 2012, unrecognized compensation cost related to the unvested portion of our Employee Stock-Based Awards was $55,291 and is expected to be recognized over a weighted-average period of 2.8 years.
We generally issue shares for the exercises of stock options, restricted stock, RSUs, PUs and shares under our ESPP from unissued reserved shares.
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 options, warrants or convertible securities) that were outstanding during the period, unless the effect is antidilutive.
16
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
The following table presents the calculation of basic and diluted income (loss) per share:
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2011 | 2012 | |||||
Income (Loss) from continuing operations |
$ | 81,176 | $ | 61,073 | |||
Total income (loss) from discontinued operations (see Note 10) |
$ | (6,557 | ) | $ | (5,093 | ) | |
Net income (loss) attributable to Iron Mountain Incorporated |
$ | 73,460 | $ | 55,350 | |||
Weighted-average sharesbasic |
200,228,000 | 171,320,000 | |||||
Effect of dilutive potential stock options |
995,149 | 720,788 | |||||
Effect of dilutive potential restricted stock, RSUs and PUs |
27,659 | 181,867 | |||||
Weighted-average sharesdiluted |
201,250,808 | 172,222,655 | |||||
Earnings (Losses) per sharebasic: |
|||||||
Income (Loss) from continuing operations |
$ | 0.41 | $ | 0.36 | |||
Total income (loss) from discontinued operations (see Note 10) |
$ | (0.03 | ) | $ | (0.03 | ) | |
Net income (loss) attributable to Iron Mountain Incorporatedbasic |
$ | 0.37 | $ | 0.32 | |||
Earnings (Losses) per sharediluted: |
|||||||
Income (Loss) from continuing operations |
$ | 0.40 | $ | 0.35 | |||
Total income (loss) from discontinued operations (see Note 10) |
$ | (0.03 | ) | $ | (0.03 | ) | |
Net income (loss) attributable to Iron Mountain Incorporateddiluted |
$ | 0.37 | $ | 0.32 | |||
Antidilutive stock options, RSUs and PUs, excluded from the calculation |
8,701,049 | 2,045,616 | |||||
Our revenues consist of storage revenues as well as service revenues and are reflected net of sales and value added taxes. Storage revenues, which are considered a key performance indicator for the information management services industry, consist primarily of recurring periodic charges related to the storage of materials or data (generally on a per unit basis). Service revenues are comprised of charges for related core service activities and a wide array of complementary products and services. Included in core service revenues are: (1) the handling of records, including the addition of new records, temporary
17
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
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 (4) other recurring services, including hybrid services, which relate to physical and digital records, and recurring project revenues. Our complementary services revenues include special project work, customer termination and permanent withdrawal fees, data restoration projects, fulfillment services, consulting services, technology services and product sales (including specially designed storage containers and related supplies). Our secure shredding revenues include the sale of recycled paper (included in complementary services revenues), the price of which can fluctuate from period to period, adding to the volatility and reducing the predictability of that revenue stream.
We recognize revenue when the following criteria are met: persuasive evidence of an arrangement exists, services have been rendered, the sales price is fixed or determinable and collectability of the resulting receivable is reasonably assured. Storage and service revenues are recognized in the month the respective storage or service is provided, and customers are generally billed on a monthly basis on contractually agreed-upon terms. Amounts related to future storage or prepaid service contracts for customers where storage fees or services are billed in advance are accounted for as deferred revenue and recognized ratably over the applicable storage or service period or when the service is performed. Revenue from the sales of products, which is included as a component of service revenues, is recognized when products are shipped to the customer and title has passed to the customer. Revenues from the sales of products have historically not been significant.
We maintain an allowance for doubtful accounts and credit memos for estimated losses resulting from the potential inability of our customers to make required payments and potential disputes regarding billing and service issues. When calculating the allowance, we consider our past loss experience, current and prior trends in our aged receivables and credit memo activity, current economic conditions and specific circumstances of individual receivable balances. If the financial condition of our customers were to significantly change, resulting in a significant improvement or impairment of their ability to make payments, an adjustment of the allowance may be required. We consider accounts receivable to be delinquent after such time as reasonable means of collection have been exhausted. We charge-off uncollectible balances as circumstances warrant, generally, no later than one year past due.
Our effective tax rates for the three months ended March 31, 2011 and 2012 were 17.1% and 29.3%, respectively. The primary reconciling items between the federal statutory rate of 35% and our overall effective tax rate are state income taxes (net of federal benefit) and 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. During the three months ended March 31, 2011, foreign currency losses were recorded in higher tax jurisdictions associated with our marking-to-market of debt and derivative instruments while foreign currency gains were recorded in lower tax jurisdictions associated with our marking-to-market of intercompany loan positions, which reduced our 2011 effective tax rate
18
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
by 12.6%. In addition, the recognition of certain previously unrecognized tax benefits due to settlements with tax authorities in various jurisdictions reduced the 2011 tax rate by 2.0%. During the three months ended March 31, 2012, foreign currency losses were recorded in higher tax jurisdictions associated with our marking-to-market of debt and derivative instruments while foreign currency gains were recorded in lower tax jurisdictions associated with our marking-to-market of intercompany loan positions, which reduced our 2012 effective tax rate by 8.9%.
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 from foreign jurisdictions; (2) tax law changes; (3) volatility in foreign exchange gains (losses); (4) the timing of the establishment and reversal of tax reserves; and (5) our ability to utilize foreign tax credits that we generate. We are subject to income taxes in the U.S. and numerous foreign jurisdictions. We are subject to examination by various tax authorities in jurisdictions in which we have significant business operations. We regularly assess the likelihood of additional assessments by tax authorities and provide for these matters as appropriate. Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in changes in our estimates.
Accounting for income taxes requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the tax and financial reporting basis of assets and liabilities and for loss and credit carryforwards. Valuation allowances are provided when recovery of deferred tax assets is not considered more likely than not.
We have elected to recognize interest and penalties associated with uncertain tax positions as a component of the provision (benefit) for income taxes in the accompanying consolidated statements of operations. We recorded a reduction of $609 and $249 for gross interest and penalties for the three months ended March 31, 2011 and 2012, respectively. We had $2,819 and $2,570 accrued for the payment of interest and penalties as of December 31, 2011 and March 31, 2012, respectively.
We have not recorded deferred taxes on book over tax outside basis differences related to certain foreign subsidiaries because such basis differences are not expected to reverse in the foreseeable future and we intend to reinvest indefinitely outside the U.S. These basis differences arose primarily through the undistributed book earnings of our foreign subsidiaries. The basis differences could be reversed through a sale of the subsidiaries, each of which would result in an increase in our provision for income taxes. As of March 31, 2012, we had approximately $75,000 of undistributed earnings within our foreign subsidiaries. It is not practicable to calculate the amount of unrecognized deferred tax liability on the amount of undistributed earnings.
Financial instruments that potentially subject us to market risk consist principally of cash and cash equivalents (including money market funds and time deposits), restricted cash (primarily U.S. Treasuries) and accounts receivable. The only significant concentrations of liquid investments as of both December 31, 2011 and March 31, 2012 relate to cash and cash equivalents and restricted cash held on
19
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
deposit with five global banks and one "Triple A" rated money market fund, which we consider to be large, highly-rated investment-grade institutions. As per our risk management investment policy, we limit exposure to concentration of credit risk by limiting the amount invested in any one mutual fund or financial institution to a maximum of $50,000. As of December 31, 2011 and March 31, 2012, our cash and cash equivalents and restricted cash balance was $214,955 and $213,405, respectively, including a money market fund and time deposits amounting to $181,823 and $166,343, respectively. A substantial portion of the money market fund is invested in U.S. Treasuries.
Entities are permitted under GAAP to elect to measure many financial instruments and certain other items at either fair value or cost. We did not elect the fair value measurement option for any of our financial assets or liabilities.
Our financial assets or liabilities are 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 1Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
Level 2Inputs 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 3Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.
The following tables provide the assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2011 and March 31, 2012, respectively:
|
|
Fair Value Measurements at December 31, 2011 Using |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Description
|
Total Carrying Value at December 31, 2011 |
Quoted prices in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
|||||||||
Money Market Funds(1) |
$ | 35,110 | $ | | $ | 35,110 | $ | | |||||
Time Deposits(1) |
146,713 | | 146,713 | | |||||||||
Trading Securities |
9,124 | 8,497 | (2) | 627 | (1) | | |||||||
Derivative Assets(3) |
2,803 | | 2,803 | | |||||||||
Derivative Liabilities(3) |
435 | | 435 | |
20
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
|
|
Fair Value Measurements at March 31, 2012 Using |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Description
|
Total Carrying Value at March 31, 2012 |
Quoted prices in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
|||||||||
Money Market Funds(1) |
$ | 35,112 | $ | | $ | 35,112 | $ | | |||||
Time Deposits(1) |
131,231 | | 131,231 | | |||||||||
Trading Securities |
9,763 | 9,143 | (2) | 620 | (1) | | |||||||
Derivative Assets(3) |
72 | | 72 | | |||||||||
Derivative Liabilities(3) |
4,172 | | 4,172 | |
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 for the three months ended March 31, 2012.
In September 2011, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2011-08, IntangiblesGoodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 allows, but does not require, entities to first assess qualitatively whether it is necessary to perform the two-step goodwill impairment test. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative two-step impairment test is required; otherwise, no further testing is required. We adopted ASU 2011-08 as of January 1, 2012. The adoption of ASU 2011-08 did not have an impact on our consolidated financial position, results of operations or cash flows.
The preparation of financial statements in conformity with GAAP requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements and for the period then ended. On an on-going basis, we evaluate the estimates used. We base our estimates on historical experience, actuarial estimates, current conditions and various other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities and are not readily apparent from other sources. Actual results may differ from these estimates.
21
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)
Accumulated other comprehensive items, net consists of foreign currency translation adjustments as of December, 31, 2011 and March 31, 2012, respectively.
Other expense (income), net consists of the following:
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2011 | 2012 | |||||
Foreign currency transaction (gains) losses, net |
$ | (3,096 | ) | $ | (2,575 | ) | |
Debt extinguishment (income) expense, net |
(850 | ) | | ||||
Other, net |
(5,012 | ) | (729 | ) | |||
|
$ | (8,958 | ) | $ | (3,304 | ) | |
We develop various software applications for internal use. Computer software costs associated with internal use software are expensed as incurred until certain capitalization criteria are met. Payroll and related costs for employees who are directly associated with, and who devote time to, the development of internal use computer software projects (to the extent time is spent directly on the project) are capitalized and depreciated over the estimated useful life of the software. Capitalization begins when the design stage of the application has been completed and it is probable that the application will be completed and used to perform the function intended. Depreciation begins when the software is placed in service. Computer software costs that are capitalized are periodically evaluated for impairment.
Consolidated loss on disposal/write-down of property, plant and equipment, net of $719 for the three months ended March 31, 2012 consisted primarily of write-offs associated with our European and Latin American operations. Consolidated gain on disposal/write-down of property, plant and equipment, net of $464 for the three months ended March 31, 2011 consisted primarily of gains related to vehicle dispositions in North America.
(3) Derivative Instruments and Hedging Activities
Every derivative instrument is required to be recorded in the balance sheet as either an asset or a liability measured at its fair value. Periodically, we acquire derivative instruments that are intended to hedge either cash flows or values that are subject to foreign exchange or other market price risk and not for trading purposes. We have formally documented our hedging relationships, including identification of the hedging instruments and the hedged items, as well as our risk management objectives and strategies for undertaking each hedge transaction. Given the recurring nature of our revenues and the long-term nature of our asset base, we have the ability and the preference to use long-term, fixed interest rate debt to finance our business, thereby preserving our long-term returns on
22
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(3) Derivative Instruments and Hedging Activities (Continued)
invested capital. We target approximately 75% of our debt portfolio to be fixed with respect to interest rates. Occasionally, we may use interest rate swaps as a tool to maintain our targeted level of fixed rate debt. In addition, we may use borrowings in foreign currencies, either obtained in the U.S. or by our foreign subsidiaries, to hedge foreign currency risk associated with our international investments. Sometimes we enter into currency swaps to temporarily hedge an overseas investment, such as a major acquisition, while we arrange permanent financing or to hedge our exposure due to foreign currency exchange movements related to our intercompany accounts with and between our foreign subsidiaries. As of December 31, 2011 and March 31, 2012, none of our derivative instruments contained credit-risk related contingent features.
We have entered into a number of separate forward contracts to hedge our exposures in British pounds sterling and Australian dollars. As of March 31, 2012, we had an outstanding forward contract to purchase $195,851 U.S. dollars and sell 125,000 British pounds sterling to hedge our intercompany exposures with our European operations. As of March 31, 2012, we had an outstanding forward contract to purchase $77,415 U.S. dollars and sell 75,000 Australian dollars to hedge our intercompany exposures with our Australian subsidiary. 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 (income) expense, net in the accompanying statement 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 these forward contracts as hedges. During the three months ended March 31, 2011 and 2012, there was $3,625 and $1,503 in net cash disbursements, respectively, included in cash from operating activities from continuing operations related to settlements associated with these foreign currency forward contracts. The following table provides the fair value of our derivative instruments as of December 31, 2011 and March 31, 2012 and their gains and losses for the three months ended March 31, 2011 and 2012:
|
Asset Derivatives | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
December 31, 2011 | March 31, 2012 | |||||||||
Derivatives Not Designated as Hedging Instruments
|
Balance Sheet Location |
Fair Value |
Balance Sheet Location |
Fair Value |
|||||||
Foreign exchange contracts |
Current assets | $ | 2,803 | Current assets | $ | 72 | |||||
Total |
$ | 2,803 | $ | 72 | |||||||
|
Liability Derivatives | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
December 31, 2011 | March 31, 2012 | |||||||||
Derivatives Not Designated as Hedging Instruments
|
Balance Sheet Location |
Fair Value |
Balance Sheet Location |
Fair Value |
|||||||
Foreign exchange contracts |
Current liabilities | $ | 435 | Current liabilities | $ | 4,172 | |||||
Total |
$ | 435 | $ | 4,172 | |||||||
23
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(3) Derivative Instruments and Hedging Activities (Continued)
|
|
Amount of (Gain) Loss Recognized in Income on Derivatives |
|||||||
---|---|---|---|---|---|---|---|---|---|
|
|
Three Months Ended March 31, |
|||||||
|
Location of (Gain) Loss Recognized in Income on Derivative |
||||||||
Derivatives Not Designated as Hedging Instruments
|
2011 | 2012 | |||||||
Foreign exchange contracts |
Other expense (income), net | $ | 4,921 | $ | 7,971 | ||||
Total |
$ | 4,921 | $ | 7,971 | |||||
We have designated a portion of our 63/4% Euro Senior Subordinated Notes due 2018 issued by IMI (the "63/4% Notes") as a hedge of net investment of certain of our Euro denominated subsidiaries. For the three months ended March 31, 2011 and 2012, we designated on average 75,667 and 102,333 Euros, respectively, of the 63/4% Notes as a hedge of net investment of certain of our Euro denominated subsidiaries. As a result, we recorded foreign exchange losses of $6,300 ($3,938, net of tax) and $3,755 ($2,345, net of tax) for the three months ended March 31, 2011 and 2012, respectively, 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 included in stockholders' equity. As of March 31, 2012, cumulative net gains of $11,045, net of tax are recorded in accumulated other comprehensive items, net associated with this net investment hedge.
(4) Acquisitions
We account for acquisitions using the acquisition method of accounting, and, accordingly, 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 was primarily provided through borrowings under our credit facilities and cash equivalents on-hand. The unaudited pro forma results of operations for the period ended March 31, 2012 are not presented due to the insignificant impact of the 2012 acquisitions on our consolidated results of operations.
24
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(4) Acquisitions (Continued)
A summary of the cumulative consideration paid and the preliminary allocation of the purchase price paid for acquisitions in 2012 through March 31, 2012 is as follows:
Cash Paid (gross of cash acquired) |
$ | 8,818 | ||
Total Consideration |
8,818 | |||
Fair Value of Identifiable Assets Acquired: |
||||
Property, Plant and Equipment(1) |
82 | |||
Customer Relationship Assets(2) |
4,900 | |||
Liabilities Assumed(3) |
(982 | ) | ||
Total Fair Value of Identifiable Net Assets Acquired |
4,000 | |||
Recorded Goodwill |
$ | 4,818 | ||
25
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(5) Debt
Long-term debt consists of the following:
|
December 31, 2011 | March 31, 2012 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
|||||||||
Revolving Credit Facility(1) |
$ | 96,000 | $ | 96,000 | $ | 190,000 | $ | 190,000 | |||||
Term Loan Facility(1) |
487,500 | 487,500 | 481,250 | 481,250 | |||||||||
71/4% GBP Senior Subordinated Notes due 2014 (the "71/4% Notes")(2)(3) |
233,115 | 233,115 | 240,210 | 240,210 | |||||||||
65/8% Senior Subordinated Notes due 2016 (the "65/8% Notes")(2)(3) |
318,025 | 320,400 | 318,147 | 319,392 | |||||||||
71/2% CAD Senior Subordinated Notes due 2017 (the "Subsidiary Notes")(2)(4) |
171,273 | 174,698 | 175,245 | 180,940 | |||||||||
83/4% Senior Subordinated Notes due 2018 (the "83/4% Notes")(2)(3) |
200,000 | 209,000 | 200,000 | 206,870 | |||||||||
8% Senior Subordinated Notes due 2018 (the "8% Notes")(2)(3) |
49,806 | 47,607 | 49,813 | 54,140 | |||||||||
63/4% Euro Senior Subordinated Notes due 2018 (the "63/4% Notes")(2)(3) |
328,750 | 312,352 | 338,508 | 343,623 | |||||||||
73/4% Senior Subordinated Notes due 2019 (the "73/4% Notes due 2019")(2)(3) |
400,000 | 422,750 | 400,000 | 437,000 | |||||||||
8% Senior Subordinated Notes due 2020 (the "8% Notes due 2020")(2)(3) |
300,000 | 313,313 | 300,000 | 317,625 | |||||||||
83/8% Senior Subordinated Notes due 2021 (the "83/8% Notes")(2)(3) |
548,346 | 586,438 | 548,389 | 598,813 | |||||||||
Real Estate Mortgages, Capital Leases and Other(5) |
220,773 | 220,773 | 212,114 | 212,114 | |||||||||
Total Long-term Debt |
3,353,588 | 3,453,676 | |||||||||||
Less Current Portion |
(73,320 | ) | (63,229 | ) | |||||||||
Long-term Debt, Net of Current Portion |
$ | 3,280,268 | $ | 3,390,447 | |||||||||
26
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(5) Debt (Continued)
indirect wholly owned U.S. subsidiaries (the "Guarantors"). These guarantees are joint and several obligations of the Guarantors. Iron Mountain Canada Corporation ("Canada Company") and the remainder of our subsidiaries do not guarantee the Parent Notes.
On June 27, 2011, we entered into a credit agreement that consists of (1) revolving credit facilities under which we can borrow, subject to certain limitations as defined in the credit agreement, up to an aggregate amount of $725,000 (including Canadian dollars, British pounds sterling and Euros, among other currencies) (the "Revolving Credit Facility") and (2) a $500,000 term loan facility (the "Term Loan Facility," and collectively with the Revolving Credit Facility, the "Credit Agreement"). We have the right to increase the aggregate amount available to be borrowed under the Credit Agreement up to a maximum of $1,800,000. The Revolving Credit Facility is supported by a group of 19 banks. IMI, Iron Mountain Information Management, Inc. ("IMIM"), Canada Company, IME, Iron Mountain Australia Pty Ltd., Iron Mountain Switzerland Gmbh and any other subsidiary of IMIM designated by IMIM (the "Other Subsidiaries") may, with the consent of the administrative agent, as defined in the Credit Agreement, borrow under certain of the following tranches of the Revolving Credit Facility: (1) tranche one in the amount of $400,000 is available to IMI and IMIM in U.S. dollars, British pounds sterling and Euros, (2) tranche two in the amount of $150,000 is available to IMI or IMIM in either U.S. dollars or Canadian dollars and available to Canada Company in Canadian dollars and (3) tranche three in the amount of $175,000 is available to IMI or IMIM and the Other Subsidiaries in U.S. dollars, Canadian dollars, British pounds sterling, Euros and Australian dollars, among others. The Revolving Credit Facility terminates on June 27, 2016, at which point all revolving credit loans under such facility become due. With respect to the Term Loan Facility, loan payments are required through maturity on June 27, 2016 in equal quarterly installments of the aggregate annual amounts based upon the following percentage of the original principal amount in the table below (except that each of the first three quarterly installments in the fifth year shall be 10% of the original principal amount and the final quarterly installment in the fifth year shall be 35% of the original principal):
Year Ending
|
Percentage | |||
---|---|---|---|---|
June 30, 2012 |
5 | % | ||
June 30, 2013 |
5 | % | ||
June 30, 2014 |
10 | % | ||
June 30, 2015 |
15 | % | ||
June 27, 2016 |
65 | % |
The Term Loan Facility may be prepaid without penalty or premium, in whole or in part, at any time. IMI and IMIM guarantee the obligations of each of the subsidiary borrowers. The capital stock or other equity interests of most of the U.S. subsidiaries, and up to 66% of the capital stock or other equity interests of our first-tier foreign subsidiaries, are pledged to secure the Credit Agreement,
27
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(5) Debt (Continued)
together with all intercompany obligations of foreign subsidiaries owed to us or to one of our U.S. subsidiary guarantors. The interest rate on borrowings under the Credit Agreement varies depending on our choice of interest rate and currency options, plus an applicable margin, which varies based on certain financial ratios. Additionally, the Credit Agreement requires the payment of a commitment fee on the unused portion of the Revolving Credit Facility, which fee ranges from between 0.3% to 0.5% based on certain financial ratios. There are also fees associated with any outstanding letters of credit. As of March 31, 2012, we had $190,000 of outstanding borrowings under the Revolving Credit Facility, all of which was denominated in U.S. dollars; we also had various outstanding letters of credit totaling $6,217. The remaining availability on March 31, 2012, based on IMI's leverage ratio, which is calculated based on the last 12 months' earnings before interest, taxes, depreciation and amortization ("EBITDA"), and other adjustments as defined in the Credit Agreement and current external debt, under the Revolving Credit Facility was $528,783. The interest rate in effect under both the Revolving Credit Facility and Term Loan Facility was 2.3% as of March 31, 2012. For the three months ended March 31, 2011 and 2012, we recorded commitment fees and letters of credit fees of $489 and $600, respectively, based on the unused balances under our revolving credit facilities and outstanding letters of credit.
The Credit Agreement, our indentures and other agreements governing our indebtedness contain certain restrictive financial and operating covenants, including covenants that restrict our ability to complete acquisitions, pay cash dividends, incur indebtedness, make investments, sell assets and take certain other corporate actions. The covenants do not contain a rating trigger. Therefore, a change in our debt rating would not trigger a default under the Credit Agreement, our indentures or other agreements governing our indebtedness. The Credit Agreement, as well as our indentures, use EBITDA-based calculations as primary measures of financial performance, including leverage and fixed charge coverage ratios. IMI's revolving credit and term leverage ratio was 3.4 and 3.5 as of December 31, 2011 and March 31, 2012, respectively, compared to a maximum allowable ratio of 5.5. Similarly, our bond leverage ratio, per the indentures, was 3.9 and 4.5 as of December 31, 2011 and March 31, 2012, respectively, compared to a maximum allowable ratio of 6.5. IMI's revolving credit and term loan fixed charge coverage ratio was 1.5 as of both December 31, 2011 and March 31, 2012 compared to a minimum allowable ratio of 1.2. Noncompliance with these leverage and fixed charge coverage ratios would have a material adverse effect on our financial condition and liquidity.
(6) Selected Consolidated Financial Statements of Parent, Guarantors, Canada Company and Non-Guarantors
The following data summarizes the consolidating results of IMI on the equity method of accounting as of December 31, 2011 and March 31, 2012 and for the three months ended March 31, 2011 and 2012.
The Parent Notes and the Subsidiary Notes are guaranteed by the subsidiaries referred to below as the "Guarantors." These subsidiaries are wholly owned by the Parent. The guarantees are full and unconditional, as well as joint and several.
28
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(6) Selected Consolidated Financial Statements of Parent, Guarantors, Canada Company and Non-Guarantors (Continued)
Additionally, IMI guarantees the Subsidiary Notes, which were issued by Canada Company. Canada Company does not guarantee the Parent Notes. The other subsidiaries that do not guarantee the Parent Notes or the Subsidiary Notes are referred to below as the "Non-Guarantors."
|
December 31, 2011 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Parent | Guarantors | Canada Company |
Non- Guarantors |
Eliminations | Consolidated | |||||||||||||
Assets |
|||||||||||||||||||
Current Assets: |
|||||||||||||||||||
Cash and Cash Equivalents |
$ | 3,428 | $ | 10,750 | $ | 68,907 | $ | 96,760 | $ | | $ | 179,845 | |||||||
Restricted Cash |
35,110 | | | | | 35,110 | |||||||||||||
Accounts Receivable |
| 334,658 | 40,115 | 168,694 | | 543,467 | |||||||||||||
Intercompany Receivable |
905,451 | | 4,639 | | (910,090 | ) | | ||||||||||||
Assets of Discontinued Operations |
| | | 7,256 | | 7,256 | |||||||||||||
Other Current Assets |
2,016 | 103,899 | 3,323 | 40,538 | (1,004 | ) | 148,772 | ||||||||||||
Total Current Assets |
946,005 | 449,307 | 116,984 | 313,248 | (911,094 | ) | 914,450 | ||||||||||||
Property, Plant and Equipment, Net |
1,490 | 1,480,785 | 200,755 | 724,053 | | 2,407,083 | |||||||||||||
Other Assets, Net: |
|||||||||||||||||||
Long-term Notes Receivable from Affiliates and Intercompany Receivable |
928,182 | 1,000 | 2,961 | 15,010 | (947,153 | ) | | ||||||||||||
Investment in Subsidiaries |
1,828,712 | 1,563,690 | | | (3,392,402 | ) | | ||||||||||||
Goodwill |
| 1,529,359 | 196,989 | 527,920 | | 2,254,268 | |||||||||||||
Other |
27,226 | 240,557 | 9,804 | 187,870 | | 465,457 | |||||||||||||
Total Other Assets, Net |
2,784,120 | 3,334,606 | 209,754 | 730,800 | (4,339,555 | ) | 2,719,725 | ||||||||||||
Total Assets |
$ | 3,731,615 | $ | 5,264,698 | $ | 527,493 | $ | 1,768,101 | $ | (5,250,649 | ) | $ | 6,041,258 | ||||||
Liabilities and Equity |
|||||||||||||||||||
Intercompany Payable |
$ | | $ | 856,808 | $ | | $ | 53,282 | $ | (910,090 | ) | $ | | ||||||
Current Portion of Long-term Debt |
658 | 46,967 | 2,658 | 23,037 | | 73,320 | |||||||||||||
Liabilities of Discontinued Operations |
| | | 3,317 | | 3,317 | |||||||||||||
Total Other Current Liabilities |
100,921 | 453,648 | 31,407 | 187,421 | (1,004 | ) | 772,393 | ||||||||||||
Long-term Debt, Net of Current Portion |
2,378,040 | 630,118 | 185,953 | 86,157 | | 3,280,268 | |||||||||||||
Long-term Notes Payable to Affiliates and Intercompany Payable |
1,000 | 946,153 | | | (947,153 | ) | | ||||||||||||
Other Long-term Liabilities |
5,308 | 528,897 | 31,418 | 92,081 | 657,704 | ||||||||||||||
Commitments and Contingencies (See Note 8) |
|||||||||||||||||||
Total Iron Mountain Incorporated Stockholders' Equity |
1,245,688 | 1,802,107 | 276,057 | 1,314,238 | (3,392,402 | ) | 1,245,688 | ||||||||||||
Noncontrolling Interests |
| | | 8,568 | | 8,568 | |||||||||||||
Total Equity |
1,245,688 | 1,802,107 | 276,057 | 1,322,806 | (3,392,402 | ) | 1,254,256 | ||||||||||||
Total Liabilities and Equity |
$ | 3,731,615 | $ | 5,264,698 | $ | 527,493 | $ | 1,768,101 | $ | (5,250,649 | ) | $ | 6,041,258 | ||||||
29
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(6) Selected Consolidated Financial Statements of Parent, Guarantors, Canada Company and Non-Guarantors (Continued)
|
March 31, 2012 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Parent | Guarantors | Canada Company |
Non- Guarantors |
Eliminations | Consolidated | |||||||||||||
Assets |
|||||||||||||||||||
Current Assets: |
|||||||||||||||||||
Cash and Cash Equivalents |
$ | 71 | $ | 8,052 | $ | 68,178 | $ | 101,992 | $ | | $ | 178,293 | |||||||
Restricted Cash |
35,112 | | | | | 35,112 | |||||||||||||
Accounts Receivable |
| 341,827 | 42,752 | 173,778 | | 558,357 | |||||||||||||
Intercompany Receivable |
862,748 | | 7,983 | | (870,731 | ) | | ||||||||||||
Assets of Discontinued Operations |
| | | 7,294 | | 7,294 | |||||||||||||
Other Current Assets |
48 | 107,763 | 5,354 | 40,805 | (1,027 | ) | 152,943 | ||||||||||||
Total Current Assets |
897,979 | 457,642 | 124,267 | 323,869 | (871,758 | ) | 931,999 | ||||||||||||
Property, Plant and Equipment, Net |
1,450 | 1,458,216 | 205,166 | 737,826 | | 2,402,658 | |||||||||||||
Other Assets, Net: |
|||||||||||||||||||
Long-term Notes Receivable from Affiliates and Intercompany Receivable |
982,167 | 1,000 | 5,494 | | (988,661 | ) | | ||||||||||||
Investment in Subsidiaries |
1,863,354 | 1,595,137 | | | (3,458,491 | ) | | ||||||||||||
Goodwill |
| 1,534,176 | 201,558 | 546,887 | | 2,282,621 | |||||||||||||
Other |
26,084 | 250,484 | 9,766 | 183,010 | | 469,344 | |||||||||||||
Total Other Assets, Net |
2,871,605 | 3,380,797 | 216,818 | 729,897 | (4,447,152 | ) | 2,751,965 | ||||||||||||
Total Assets |
$ | 3,771,034 | $ | 5,296,655 | $ | 546,251 | $ | 1,791,592 | $ | (5,318,910 | ) | $ | 6,086,622 | ||||||
Liabilities and Equity |
|||||||||||||||||||
Intercompany Payable |
$ | | $ | 808,307 | $ | | $ | 62,424 | $ | (870,731 | ) | $ | | ||||||
Current Portion of Long-term Debt |
670 | 43,408 | 2,747 | 16,404 | | 63,229 | |||||||||||||
Liabilities of Discontinued Operations |
| | | 7,859 | | 7,859 | |||||||||||||
Total Other Current Liabilities |
107,840 | 403,010 | 28,491 | 168,738 | (1,027 | ) | 707,052 | ||||||||||||
Long-term Debt, Net of Current Portion |
2,395,066 | 716,601 | 190,186 | 88,594 | | 3,390,447 | |||||||||||||
Long-term Notes Payable to Affiliates and Intercompany Payable |
1,000 | 983,987 | | 3,674 | (988,661 | ) | | ||||||||||||
Other Long-term Liabilities |
6,842 | 507,788 | 34,474 | 100,128 | | 649,232 | |||||||||||||
Commitments and Contingencies (See Note 8) |
|||||||||||||||||||
Total Iron Mountain Incorporated Stockholders' Equity |
1,259,616 | 1,833,554 | 290,353 | 1,334,584 | (3,458,491 | ) | 1,259,616 | ||||||||||||
Noncontrolling Interests |
| | | 9,187 | | 9,187 | |||||||||||||
Total Equity |
1,259,616 | 1,833,554 | 290,353 | 1,343,771 | (3,458,491 | ) | 1,268,803 | ||||||||||||
Total Liabilities and Equity |
$ | 3,771,034 | $ | 5,296,655 | $ | 546,251 | $ | 1,791,592 | $ | (5,318,910 | ) | $ | 6,086,622 | ||||||
30
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(6) Selected Consolidated Financial Statements of Parent, Guarantors, Canada Company and Non-Guarantors (Continued)
|
Three Months Ended March 31, 2011 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Parent | Guarantors | Canada Company |
Non- Guarantors |
Eliminations | Consolidated | |||||||||||||
Revenues: |
|||||||||||||||||||
Storage |
$ | | $ | 282,713 | $ | 30,115 | $ | 102,877 | $ | | $ | 415,705 | |||||||
Service |
| 208,912 | 28,934 | 92,458 | | 330,304 | |||||||||||||
Total Revenues |
| 491,625 | 59,049 | 195,335 | | 746,009 | |||||||||||||
Operating Expenses: |
|||||||||||||||||||
Cost of Sales (Excluding Depreciation and Amortization) |
| 198,125 | 23,732 | 94,098 | | 315,955 | |||||||||||||
Selling, General and Administrative |
134 | 142,556 | 10,161 | 59,904 | | 212,755 | |||||||||||||
Depreciation and Amortization |
40 | 49,151 | 5,105 | 25,867 | | 80,163 | |||||||||||||
(Gain) Loss on Disposal/Write-down of Property, Plant and Equipment, Net |
| (461 | ) | (10 | ) | 7 | | (464 | ) | ||||||||||
Total Operating Expenses |
174 | 389,371 | 38,988 | 179,876 | | 608,409 | |||||||||||||
Operating (Loss) Income |
(174 | ) | 102,254 | 20,061 | 15,459 | | 137,600 | ||||||||||||
Interest Expense (Income), Net |
43,186 | (20,095 | ) | 10,167 | 15,360 | | 48,618 | ||||||||||||
Other Expense (Income), Net |
30,828 | (643 | ) | (47 | ) | (39,096 | ) | | (8,958 | ) | |||||||||
(Loss) Income from Continuing Operations Before Provision (Benefit) for Income Taxes |
(74,188 | ) | 122,992 | 9,941 | 39,195 | | 97,940 | ||||||||||||
Provision (Benefit) for Income Taxes |
| 6,911 | 7,572 | 2,281 | | 16,764 | |||||||||||||
Equity in the (Earnings) Losses of Subsidiaries, Net of Tax |
(147,648 | ) | (32,684 | )(1) | | | 180,332 | (1) | | ||||||||||
Income (Loss) from Continuing Operations |
73,460 | 148,765 | (1) | 2,369 | 36,914 | (180,332 | )(1) | 81,176 | |||||||||||
(Loss) Income from Discontinued Operations, Net of Tax |
| (2,470 | ) | | (4,087 | ) | | (6,557 | ) | ||||||||||
Net Income (Loss) |
73,460 | 146,295 | (1) | 2,369 | 32,827 | (180,332 | )(1) | 74,619 | |||||||||||
Less: Net Income (Loss) Attributable to Noncontrolling Interests |
| | | 1,159 | | 1,159 | |||||||||||||
Net Income (Loss) Attributable to Iron Mountain Incorporated |
$ | 73,460 | $ | 146,295 | $ | 2,369 | $ | 31,668 | $ | (180,332 | ) | $ | 73,460 | ||||||
Net Income (Loss) |
$ | 73,460 | $ | 146,295 | $ | 2,369 | $ | 32,827 | $ | (180,332 | ) | $ | 74,619 | ||||||
Other Comprehensive Income (Loss): |
|||||||||||||||||||
Foreign Currency Translation Adjustments |
(3,938 | ) | (2,435 | ) | 5,909 | 22,942 | | 22,478 | |||||||||||
Total Other Comprehensive Income (Loss) |
(3,938 | ) | (2,435 | ) | 5,909 | 22,942 | | 22,478 | |||||||||||
Comprehensive Income (Loss) |
69,522 | 143,860 | 8,278 | 55,769 | (180,332 | ) | 97,097 | ||||||||||||
Comprehensive Income (Loss) Attributable to Noncontrolling Interests |
| | | 1,119 | | 1,119 | |||||||||||||
Comprehensive Income (Loss) Attributable to Iron Mountain Incorporated |
$ | 69,522 | $ | 143,860 | $ | 8,278 | $ | 54,650 | $ | (180,332 | ) | $ | 95,978 | ||||||
31
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(6) Selected Consolidated Financial Statements of Parent, Guarantors, Canada Company and Non-Guarantors (Continued)
from continuing operations and Guarantors' net income were $17,231, $98,850 and $96,380, respectively, and the correction results in an increase in the equity in earnings, income from continuing operations and net income of the Guarantors of $49,915 with an offsetting increase for those line items in the eliminations column. Accordingly, there was no impact on the Parent, Canada Company, Non-Guarantors or consolidated results previously reported. Additionally, there was no change in the operating income or income from continuing operations before income taxes of the Guarantors. Our previously reported amount of the Guarantors' equity in the (earnings) losses of subsidiaries, net of tax for the six months ended June 30, 2011 was appropriately reported, however, the three months ended June 30, 2011 was impacted by the same amount but in the opposite direction. We will correct the three months ended June 30, 2011 figures in our 2012 second quarter filing which will result in a decrease in the equity in earnings, income from continuing operations and net income of the Guarantors' of $49,915. Our three months ended June 30, 2011 Guarantors' equity in the (earnings) losses of subsidiaries, net of tax, income from continuing operations and net income will be changed and disclosed in our second quarter 2012 filing to $(10,601), $114,285 and $297,236, respectively, with an offsetting decrease for those line items in the eliminations column.
32
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(6) Selected Consolidated Financial Statements of Parent, Guarantors, Canada Company and Non-Guarantors (Continued)
|
Three Months Ended March 31, 2012 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Parent | Guarantors | Canada Company |
Non- Guarantors |
Eliminations | Consolidated | |||||||||||||
Revenues: |
|||||||||||||||||||
Storage |
$ | | $ | 287,587 | $ | 30,475 | $ | 107,279 | $ | | $ | 425,341 | |||||||
Service |
| 200,361 | 29,401 | 91,395 | | 321,157 | |||||||||||||
Total Revenues |
| 487,948 | 59,876 | 198,674 | | 746,498 | |||||||||||||
Operating Expenses: |
|||||||||||||||||||
Cost of Sales (Excluding Depreciation and Amortization) |
| 193,215 | 25,041 | 97,042 | | 315,298 | |||||||||||||
Selling, General and Administrative |
18 | 147,862 | 9,185 | 53,595 | | 210,660 | |||||||||||||
Depreciation and Amortization |
75 | 48,086 | 4,563 | 25,284 | | 78,008 | |||||||||||||
(Gain) Loss on Disposal/Write-down of Property, Plant and Equipment, Net |
| (155 | ) | 42 | 832 | | 719 | ||||||||||||
Total Operating Expenses |
93 | 389,008 | 38,831 | 176,753 | | 604,685 | |||||||||||||
Operating (Loss) Income |
(93 | ) | 98,940 | 21,045 | 21,921 | | 141,813 | ||||||||||||
Interest Expense (Income), Net |
47,091 | (4,234 | ) | 11,466 | 4,461 | | 58,784 | ||||||||||||
Other Expense (Income), Net |
19,585 | (1,260 | ) | | (21,629 | ) | | (3,304 | ) | ||||||||||
(Loss) Income from Continuing Operations Before Provision (Benefit) for Income Taxes |
(66,769 | ) | 104,434 | 9,579 | 39,089 | | 86,333 | ||||||||||||
Provision (Benefit) for Income Taxes |
| 17,084 | 4,523 | 3,653 | | 25,260 | |||||||||||||
Equity in the (Earnings) Losses of Subsidiaries, Net of Tax |
(122,119 | ) | (33,131 | ) | | | 155,250 | | |||||||||||
Income (Loss) from Continuing Operations |
55,350 | 120,481 | 5,056 | 35,436 | (155,250 | ) | 61,073 | ||||||||||||
Income (Loss) from Discontinued Operations, Net of Tax |
| 464 | | (5,557 | ) | | (5,093 | ) | |||||||||||
Net Income (Loss) |
55,350 | 120,945 | 5,056 | 29,879 | (155,250 | ) | 55,980 | ||||||||||||
Less: Net Income (Loss) Attributable to Noncontrolling Interests |
| | | 630 | | 630 | |||||||||||||
Net Income (Loss) Attributable to Iron Mountain Incorporated |
$ | 55,350 | $ | 120,945 | $ | 5,056 | $ | 29,249 | $ | (155,250 | ) | $ | 55,350 | ||||||
Net Income (Loss) |
$ | 55,350 | $ | 120,945 | $ | 5,056 | $ | 29,879 | $ | (155,250 | ) | $ | 55,980 | ||||||
Other Comprehensive Income (Loss): |
|||||||||||||||||||
Foreign Currency Translation Adjustments |
(2,343 | ) | 1,057 | 6,474 | 22,759 | | 27,947 | ||||||||||||
Total Other Comprehensive Income (Loss) |
(2,343 | ) | 1,057 | 6,474 | 22,759 | | 27,947 | ||||||||||||
Comprehensive Income (Loss) |
53,007 | 122,002 | 11,530 | 52,638 | (155,250 | ) | 83,927 | ||||||||||||
Comprehensive Income (Loss) Attributable to Noncontrolling Interests |
| | | 1,088 | | 1,088 | |||||||||||||
Comprehensive Income (Loss) Attributable to Iron Mountain Incorporated |
$ | 53,007 | $ | 122,002 | $ | 11,530 | $ | 51,550 | $ | (155,250 | ) | $ | 82,839 | ||||||
33
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(6) Selected Consolidated Financial Statements of Parent, Guarantors, Canada Company and Non-Guarantors (Continued)
|
Three Months Ended March 31, 2011 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Parent | Guarantors | Canada Company |
Non- Guarantors |
Eliminations | Consolidated | |||||||||||||
Cash Flows from Operating Activities: |
|||||||||||||||||||
Cash Flows from Operating Activities-Continuing Operations |
$ | (53,891 | ) | $ | 142,876 | $ | 5,183 | $ | 16,250 | $ | | $ | 110,418 | ||||||
Cash Flows from Operating Activities-Discontinued Operations |
| 8,146 | | 773 | | 8,919 | |||||||||||||
Cash Flows from Operating Activities |
(53,891 | ) | 151,022 | 5,183 | 17,023 | | 119,337 | ||||||||||||
Cash Flows from Investing Activities: |
|||||||||||||||||||
Capital expenditures |
| (32,028 | ) | (2,262 | ) | (17,918 | ) | | (52,208 | ) | |||||||||
Cash paid for acquisitions, net of cash acquired |
| (4,971 | ) | (58 | ) | (29,676 | ) | | (34,705 | ) | |||||||||
Intercompany loans to subsidiaries |
132,655 | (24,524 | ) | | | (108,131 | ) | | |||||||||||
Investment in subsidiaries |
(1,000 | ) | (1,000 | ) | | | 2,000 | | |||||||||||
Investment in restricted cash |
(2 | ) | | | | | (2 | ) | |||||||||||
Additions to customer relationship and acquisition costs |
| (2,095 | ) | (121 | ) | (677 | ) | | (2,893 | ) | |||||||||
Investment in joint ventures |
| | | (50 | ) | | (50 | ) | |||||||||||
Proceeds from sales of property and equipment and other, net |
| 119 | 10 | 37 | | 166 | |||||||||||||
Cash Flows from Investing Activities-Continuing Operations |
131,653 | (64,499 | ) | (2,431 | ) | (48,284 | ) | (106,131 | ) | (89,692 | ) | ||||||||
Cash Flows from Investing Activities-Discontinued Operations |
| (9,115 | ) | | (184 | ) | | (9,299 | ) | ||||||||||
Cash Flows from Investing Activities |
131,653 | (73,614 | ) | (2,431 | ) | (48,468 | ) | (106,131 | ) | (98,991 | ) | ||||||||
Cash Flows from Financing Activities: |
|||||||||||||||||||
Repayment of revolving credit and term loan facilities and other debt |
(361,015 | ) | (10,435 | ) | (735 | ) | (56,363 | ) | | (428,548 | ) | ||||||||
Proceeds from revolving credit and term loan facilities and other debt |
540,000 | | | 67,418 | | 607,418 | |||||||||||||
Early retirement of senior subordinated notes |
(231,255 | ) | | | | | (231,255 | ) | |||||||||||
Debt financing (repayment to) and equity contribution from (distribution to) noncontrolling interests, net |
| | | 131 | | 131 | |||||||||||||
Intercompany loans from parent |
| (135,177 | ) | (2,067 | ) | 29,113 | 108,131 | | |||||||||||
Equity contribution from parent |
| 1,000 | | 1,000 | (2,000 | ) | | ||||||||||||
Stock repurchases |
(10,970 | ) | | | | | (10,970 | ) | |||||||||||
Parent cash dividends |
(37,514 | ) | | | | | (37,514 | ) | |||||||||||
Proceeds from exercise of stock options and employee stock purchase plan |
9,164 | | | | | 9,164 | |||||||||||||
Excess tax benefits from stock-based compensation |
1,017 | | | | | 1,017 | |||||||||||||
Cash Flows from Financing Activities-Continuing Operations |
(90,573 | ) | (144,612 | ) | (2,802 | ) | 41,299 | 106,131 | (90,557 | ) | |||||||||
Cash Flows from Financing Activities-Discontinued Operations |
| | | 46 | | 46 | |||||||||||||
Cash Flows from Financing Activities |
(90,573 | ) | (144,612 | ) | (2,802 | ) | 41,345 | 106,131 | (90,511 | ) | |||||||||
Effect of exchange rates on cash and cash equivalents |
| | 1,132 | 157 | | 1,289 | |||||||||||||
(Decrease) Increase in cash and cash equivalents |
(12,811 | ) | (67,204 | ) | 1,082 | 10,057 | | (68,876 | ) | ||||||||||
Cash and cash equivalents, beginning of period |
13,909 | 121,584 | 37,652 | 85,548 | | 258,693 | |||||||||||||
Cash and cash equivalents, end of period |
$ | 1,098 | $ | 54,380 | $ | 38,734 | $ | 95,605 | $ | | $ | 189,817 | |||||||
34
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(6) Selected Consolidated Financial Statements of Parent, Guarantors, Canada Company and Non-Guarantors (Continued)
|
Three Months Ended March 31, 2012 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Parent | Guarantors | Canada Company |
Non- Guarantors |
Eliminations | Consolidated | |||||||||||||
Cash Flows from Operating Activities: |
|||||||||||||||||||
Cash Flows from Operating ActivitiesContinuing Operations |
$ | (40,455 | ) | $ | 100,211 | $ | 4,108 | $ | 15,195 | $ | | $ | 79,059 | ||||||
Cash Flows from Operating ActivitiesDiscontinued Operations |
| (2,415 | ) | | (1,760 | ) | | (4,175 | ) | ||||||||||
Cash Flows from Operating Activities |
(40,455 | ) | 97,796 | 4,108 | 13,435 | | 74,884 | ||||||||||||
Cash Flows from Investing Activities: |
|||||||||||||||||||
Capital expenditures |
| (31,371 | ) | (2,828 | ) | (21,717 | ) | | (55,916 | ) | |||||||||
Cash paid for acquisitions, net of cash acquired |
| (8,818 | ) | | | | (8,818 | ) | |||||||||||
Intercompany loans to subsidiaries |
116,821 | (19,330 | ) | | | (97,491 | ) | | |||||||||||
Investment in restricted cash |
(2 | ) | | | | | (2 | ) | |||||||||||
Additions to customer relationship and acquisition costs |
| (2,523 | ) | (62 | ) | (423 | ) | | (3,008 | ) | |||||||||
Proceeds from sales of property and equipment and other, net |
| 1,885 | 5 | (37 | ) | | 1,853 | ||||||||||||
Cash Flows from Investing ActivitiesContinuing Operations |
116,819 | (60,157 | ) | (2,885 | ) | (22,177 | ) | (97,491 | ) | (65,891 | ) | ||||||||
Cash Flows from Investing ActivitiesDiscontinued Operations |
| (25 | ) | | (1,116 | ) | | (1,141 | ) | ||||||||||
Cash Flows from Investing Activities |
116,819 | (60,182 | ) | (2,885 | ) | (23,293 | ) | (97,491 | ) | (67,032 | ) | ||||||||
Cash Flows from Financing Activities: |
|||||||||||||||||||
Repayment of revolving credit and term loan facilities and other debt |
| (623,221 | ) | (715 | ) | (11,603 | ) | | (635,539 | ) | |||||||||
Proceeds from revolving credit and term loan facilities and other debt |
| 700,000 | | 1,105 | | 701,105 | |||||||||||||
Debt financing (repayment to) and equity contribution from (distribution to) noncontrolling interests, net |
| | | 191 | | 191 | |||||||||||||
Intercompany loans from parent |
| (116,998 | ) | (2,860 | ) | 22,367 | 97,491 | | |||||||||||
Stock repurchases |
(38,052 | ) | | | | | (38,052 | ) | |||||||||||
Parent cash dividends |
(43,180 | ) | | | | | (43,180 | ) | |||||||||||
Proceeds from exercise of stock options and employee stock purchase plan |
1,321 | | | | | 1,321 | |||||||||||||
Excess tax benefits from stock-based compensation |
190 | | | | | 190 | |||||||||||||
Payment of debt financing costs |
| (93 | ) | | | | (93 | ) | |||||||||||
Cash Flows from Financing ActivitiesContinuing Operations |
(79,721 | ) | (40,312 | ) | (3,575 | ) | 12,060 | 97,491 | (14,057 | ) | |||||||||
Cash Flows from Financing ActivitiesDiscontinued Operations |
| | | (39 | ) | | (39 | ) | |||||||||||
Cash Flows from Financing Activities |
(79,721 | ) | (40,312 | ) | (3,575 | ) | 12,021 | 97,491 | (14,096 | ) | |||||||||
Effect of exchange rates on cash and cash equivalents |
| | 1,623 | 3,069 | | 4,692 | |||||||||||||
Increase (Decrease) in cash and cash equivalents |
(3,357 | ) | (2,698 | ) | (729 | ) | 5,232 | | (1,552 | ) | |||||||||
Cash and cash equivalents, beginning of period |
3,428 | 10,750 | 68,907 | 96,760 | | 179,845 | |||||||||||||
Cash and cash equivalents, end of period |
$ | 71 | $ | 8,052 | $ | 68,178 | $ | 101,992 | $ | | $ | 178,293 | |||||||
35
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(7) Segment Information
Our operating segments and Corporate are described as follows:
36
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(7) Segment Information (Continued)
An analysis of our business segment information and reconciliation to the consolidated financial statements is as follows:
|
North American Business |
International Business |
Corporate | Total Consolidated |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Three Months Ended March 31, 2011 |
|||||||||||||
Total Revenues |
$ | 555,298 | $ | 190,711 | $ | | $ | 746,009 | |||||
Depreciation and Amortization |
45,416 | 25,421 | 9,326 | 80,163 | |||||||||
Depreciation |
42,453 | 21,599 | 9,286 | 73,338 | |||||||||
Amortization |
2,963 | 3,822 | 40 | 6,825 | |||||||||
Adjusted OIBDA |
227,975 | 38,878 | (49,554 | ) | 217,299 | ||||||||
Total Assets(1) |
4,310,523 | 1,792,908 | 384,173 | 6,487,604 | |||||||||
Expenditures for Segment Assets |
36,050 | 47,724 | 6,032 | 89,806 | |||||||||
Capital Expenditures |
28,785 | 17,391 | 6,032 | 52,208 | |||||||||
Cash Paid for Acquisitions, Net of Cash acquired |
5,029 | 29,676 | | 34,705 | |||||||||
Additions to Customer Relationship and Acquisition Costs |
2,236 | 657 | | 2,893 | |||||||||
Three Months Ended March 31, 2012 |
|||||||||||||
Total Revenues |
552,311 | 194,187 | | 746,498 | |||||||||
Depreciation and Amortization |
44,514 | 25,407 | 8,087 | 78,008 | |||||||||
Depreciation |
41,396 | 20,701 | 8,052 | 70,149 | |||||||||
Amortization |
3,118 | 4,706 | 35 | 7,859 | |||||||||
Adjusted OIBDA |
226,349 | 43,559 | (49,368 | ) | 220,540 | ||||||||
Total Assets(1) |
4,228,281 | 1,666,245 | 192,096 | 6,086,622 | |||||||||
Expenditures for Segment Assets |
39,336 | 20,294 | 8,112 | 67,742 | |||||||||
Capital Expenditures |
27,933 | 19,871 | 8,112 | 55,916 | |||||||||
Cash Paid for Acquisitions, Net of Cash acquired |
8,818 | | | 8,818 | |||||||||
Additions to Customer Relationship and Acquisition Costs |
2,585 | 423 | | 3,008 |
The accounting policies of the reportable segments are the same as those described in Note 2. Adjusted OIBDA for each segment is defined as operating income before depreciation, amortization, intangible impairments and (gain) loss on disposal/write-down of property, plant and equipment, net directly attributable to the segment. Internally, we use Adjusted OIBDA as the basis for evaluating the performance of, and allocating resources to, our operating segments.
37
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(7) Segment Information (Continued)
A reconciliation of Adjusted OIBDA to income from continuing operations before provision (benefit) for income taxes on a consolidated basis is as follows:
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2011 | 2012 | |||||
Adjusted OIBDA |
$ | 217,299 | $ | 220,540 | |||
Less: Depreciation and Amortization |
80,163 | 78,008 | |||||
(Gain) Loss on Disposal/Write-down of Property, Plant and Equipment, Net |
(464 | ) | 719 | ||||
Interest Expense, Net |
48,618 | 58,784 | |||||
Other (Income) Expense, Net |
(8,958 | ) | (3,304 | ) | |||
Income from Continuing Operations before Provision (Benefit) for Income Taxes |
$ | 97,940 | $ | 86,333 | |||
(8) Commitments and Contingencies
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. Our policy is to establish reserves for loss contingencies when the losses are both probable and reasonably estimable. We record legal costs associated with loss contingencies as expenses in the period in which they are incurred. The matters described below represent our significant loss contingencies. We have evaluated each matter and, if both probable and estimable, accrued an amount that represents our estimate of any probable loss associated with such matter. In addition, we have estimated a reasonably possible range for all loss contingencies including those described below. We believe it is reasonably possible that we could incur aggregate losses in addition to amounts currently accrued for all matters up to an additional $52,000 over the next several years.
In August 2010, we were named as a defendant in a patent infringement suit filed in the U.S. District Court for the Eastern District of Texas by Oasis Research, LLC. The plaintiff alleges that the technology found in our Connected and LiveVault products infringed certain U.S. patents owned by the plaintiff and seeks an unspecified amount of damages. The trial is scheduled to begin on March 4, 2013. As part of the sale of our Digital Business, discussed at Note 10, our Connected and LiveVault products were sold to Autonomy, and Autonomy has assumed this obligation and the defense of this litigation and has agreed to indemnify us against any losses.
38
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(8) Commitments and Contingencies (Continued)
Since October 2001, we have provided services to the U.S. Government under several General Services Administration ("GSA") multiple award schedule contracts (the "Schedules"). The earliest of the Schedules was renewed in October 2006 with certain modifications to its terms. The Schedules contain a price reductions clause ("Price Reductions Clause") that requires us to offer to reduce the prices billed to the Government under the Schedules to correspond to the prices billed to certain benchmark commercial customers. Over the five years and six months ended March 31, 2012 we billed approximately $45,000 under the Schedules. In 2011, we initiated an internal review covering the contract period commencing in October 2006, and we discovered potential non-compliance with the Price Reductions Clause. We voluntarily disclosed the potential non-compliance to the GSA and its Office of Inspector General ("OIG") in June 2011.
We continue to review this matter and will provide the GSA and OIG with information regarding our pricing practices and the proposed pricing adjustment amount to be refunded. The GSA and OIG, however, may not agree with our determination of the refund amount and may request additional pricing adjustments, refunds, civil penalties, up to treble damages and/or interest related to our Schedules.
In April 2012, the U.S. Government sent us a subpoena seeking information that substantially overlaps with the subjects that are covered by the voluntary disclosure process that we initiated with the GSA and OIG in June 2011, except that the subpoena seeks information dating back to 2000. Despite the substantial overlap, we understand that the subpoena relates to a separate inquiry, under the civil False Claims Act, that has been initiated independent of the GSA and OIG voluntary disclosure matter. We cannot determine at this time whether this separate inquiry will result in liability in addition to the amount that may be paid in connection with the voluntary disclosure to the OIG and GSA described above.
Given the above, it is reasonably possible that an adjustment to our estimates may be required in the future as a result of updated facts and circumstances. To the extent that an adjustment to our estimates is necessary in a future period, we will assess, at that time, whether the adjustment is a result of a change in estimate or the correction of an error. A change in estimate would be reflected as an adjustment through the then-current period statement of operations. A correction of an error would require a quantitative and qualitative analysis to determine the approach to correcting the error. A correction of an error could be reflected in the then-current period statement of operations or as a restatement of prior period financial information, depending upon the underlying facts and circumstances and our quantitative and qualitative analysis.
We are currently under audit by the state of Massachusetts for the 2004 through 2008 tax years. We have not received any final assessments to date. However, we have received notices of intention to assess for the 2004 to 2006 tax years in the amount of $7,867, including tax and penalties (but excluding interest). Currently this audit is on appeal with the Massachusetts Department of Revenue. The final outcome of this audit may result in an assessment of income tax, which is a component of the income
39
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(8) Commitments and Contingencies (Continued)
tax provision, or an assessment of net worth tax, which is an operating charge. We intend to defend this matter vigorously.
We experienced a fire at a facility we lease in Aprilla, Italy on November 4, 2011. The cause of the fire is currently being investigated. The facility primarily stored archival and inactive business records for local area businesses.
The leased facility, constructed in 2004, is one of approximately 1,000 facilities in our global portfolio and one of 10 facilities located in Italy. Despite quick response by local fire authorities, damage to the building was extensive, and the building was a total loss. We believe we carry adequate insurance and are in the process of assessing the impact of the fire but do not expect that this event will have a material impact to our consolidated financial condition, results of operations and cash flows.
Our policy related to business interruption insurance recoveries is to record gains within other (income) expense, net in our consolidated statement of operations and proceeds received within cash flows from operating activities in our consolidated statement of cash flows. Such amounts are recorded in the period the cash is received. Our policy with respect to involuntary conversion of property, plant and equipment is to record any gain or loss within (gain) loss on disposal/write-down of property, plant and equipment, net within operating income in our consolidated statement of operations and proceeds received within cash flows from investing activities within our consolidated statement of cash flows. Losses are recorded when incurred and gains are recorded in the period when the cash received exceeds the carrying value of the related property, plant and equipment.
(9) Stockholders' Equity Matters
Our board of directors has authorized up to $1,200,000 in repurchases of our common stock. All repurchases are subject to stock price, market conditions, corporate and legal requirements and other factors. As of March 31, 2012, we had a remaining amount available for repurchase under our share repurchase program of $66,035, which represents approximately 1% in the aggregate of our outstanding common stock based on the closing stock price on such date.
In February 2010, our board of directors adopted a dividend policy under which we intend to pay quarterly cash dividends on our common stock. Declaration and payment of future quarterly dividends is at the discretion of our board of directors. In fiscal year 2011 and in the first quarter of 2012, our board of directors declared the following dividends:
Declaration Date
|
Dividend Per Share |
Record Date |
Total Amount |
Payment Date |
||||||
---|---|---|---|---|---|---|---|---|---|---|
March 11, 2011 |
$ | 0.1875 | March 25, 2011 | $ | 37,601 | April 15, 2011 | ||||
June 10, 2011 |
0.2500 | June 24, 2011 | 50,694 | July 15, 2011 | ||||||
September 8, 2011 |
0.2500 | September 23, 2011 | 46,877 | October 14, 2011 | ||||||
December 1, 2011 |
0.2500 | December 23, 2011 | 43,180 | January 13, 2012 | ||||||
March 8, 2012 |
0.2500 | March 23, 2012 | 42,791 | April 13, 2012 |
40
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(10) Discontinued Operations
Digital Operations
On June 2, 2011, IMI completed the sale of the Digital Business to Autonomy pursuant to the Digital Sale Agreement. In the Digital Sale, Autonomy purchased (1) the shares of certain of IMI's subsidiaries through which IMI conducted the Digital Business and (2) certain assets of IMI and its subsidiaries relating to our Digital Business. The Digital Sale qualified as discontinued operations because (1) the remaining direct gross cash inflows and outflows of the Digital Business by IMI post-close are not expected to be significant in relation to the direct gross cash inflows and outflows absent the Digital Sale and (2) there is no significant continuing involvement because IMI does not retain the ability to influence the operating and financial policies of the Digital Business. As a result, the financial position, operating results and cash flows of the Digital Business, for all periods presented, including the gain on the sale, have been reported as discontinued operations for financial reporting purposes.
Pursuant to the Digital Sale Agreement, IMI received approximately $395,400 in cash, consisting of the initial purchase price of $380,000 and a preliminary working capital adjustment of approximately $15,400, which remains subject to a customary post-closing adjustment based on the amount of working capital at closing. The purchase price for the Digital Sale will be increased on a dollar-for-dollar basis if the working capital balance at the time of closing exceeds the target amount of working capital as set forth in the Digital Sale Agreement and decreased on a dollar-for-dollar basis if such closing working capital balance is less than the target amount. We and Autonomy are in disagreement regarding the working capital adjustment in the Digital Sale Agreement. As a result, as contemplated by the Digital Sale Agreement, the matter has been referred to an independent third party accounting firm for determination of the appropriate adjustment amount. Any change in the estimated amount of working capital adjustment will be recorded within gain (loss) on the sale of discontinued operations, net of tax within our consolidated statement of operations. Transaction costs relating to the Digital Sale amounted to $7,387 ($449 of such costs were unpaid as of March 31, 2012). Additionally, $11,075 of inducements are payable to Autonomy and have been netted against the proceeds in calculating the gain on the Digital Sale ($6,000 of such amount was unpaid as of March 31, 2012).
The table below summarizes certain results of operations of the Digital Business for the three months ended March 31, 2011 and 2012:
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2011 | 2012 | |||||
Total Revenues |
$ | 46,678 | $ | | |||
(Loss) Income Before (Benefit) Provision for Income Taxes of Discontinued Operations |
$ | (3,586 | ) | $ | 755 | ||
(Benefit) Provision for Income Taxes |
(1,116 | ) | 291 | ||||
(Loss) Income from Discontinued Operations, Net of Tax |
$ | (2,470 | ) | $ | 464 | ||
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IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(10) Discontinued Operations (Continued)
There have been no allocations of corporate general and administrative expenses to discontinued operations. In accordance with our policy, we have allocated corporate interest associated with all debt that is not specifically allocated to a particular component based on the proportion of the assets of the Digital Business to our total consolidated assets at the applicable weighted average interest rate associated with such debt for such reporting period. Interest allocated to the Digital Business and included in loss from discontinued operations amounted to $1,418 for three months ended March 31, 2011.
The revenues and corresponding expenses associated with the above agreements are reflected in our continuing operating results. None of these services gives us the ability to influence the operating and financial policies of the Digital Business. We have concluded that the direct cash flows associated with these agreements are not significant because they are estimated to represent less than 5% of both direct cash inflows and outflows of the Digital Business for the one-year period subsequent to the Digital Sale, and, therefore, we have reported the Digital Business as discontinued operations in the accompanying consolidated financial statements for all periods presented. We will continue to assess the cash flows associated with these agreements and our conclusion that the Digital Business be reported as discontinued operations through one year after the Digital Sale.
New Zealand Business
We completed the sale of the New Zealand Business on October 3, 2011 for a purchase price of approximately $10,000. For all periods presented, the financial position, operating results and cash flows of the New Zealand Business, including the gain on the sale, have been reported as discontinued operations for financial reporting purposes.
The table below summarizes certain results of operations of the New Zealand Business for the three months ended March 31, 2011:
|
Three Months Ended March 31, 2011 |
|||
---|---|---|---|---|
Total Revenues |
$ | 1,983 | ||
Loss Before Benefit for Income Taxes of Discontinued Operations |
$ | (72 | ) | |
Benefit for Income Taxes |
| |||
Loss from Discontinued Operations, Net of Tax |
$ | (72 | ) | |
Italian Business
We committed in December 2011 to a plan to sell the Italian Business and beginning in the fourth quarter of 2011, the Italian Business has been classified as held for sale and, for all periods presented, the financial position, operating results and cash flows of the Italian Business have been reported as discontinued operations for financial reporting purposes. We sold the Italian Business on April 27, 2012.
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IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(10) Discontinued Operations (Continued)
The table below summarizes certain results of operations of the Italian Business for the three months ended March 31, 2011 and 2012:
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2011 | 2012 | |||||
Total Revenues |
$ | 4,283 | $ | 2,138 | |||
Loss Before Benefit for Income Taxes of Discontinued Operations |
$ | (4,094 | ) | $ | (6,124 | ) | |
Benefit for Income Taxes |
(79 | ) | (567 | ) | |||
Loss from Discontinued Operations, Net of Tax |
$ | (4,015 | ) | $ | (5,557 | ) | |
The carrying amounts of the major classes of assets and liabilities of the Italian Business were as follows:
|
December 31, 2011 |
March 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
Accounts receivable, net |
$ | 4,676 | $ | 4,731 | |||
Prepaid expenses and other |
602 | 611 | |||||
Current assets of discontinued operations |
5,278 | 5,342 | |||||
Other assets, net |
1,978 | 1,952 | |||||
Non-current assets of discontinued operations |
1,978 | 1,952 | |||||
Assets of discontinued operations |
$ | 7,256 | $ | 7,294 | |||
Current portion of long-term debt |
$ | 118 | $ | 102 | |||
Accounts payable |
563 | 2,216 | |||||
Accrued expenses |
2,552 | 5,372 | |||||
Deferred revenue |
41 | 144 | |||||
Current liabilities of discontinued operations |
3,274 | 7,834 | |||||
Other long-term liabilities |
43 | 25 | |||||
Non-current liabilities of discontinued operations |
43 | 25 | |||||
Liabilities of discontinued operations |
$ | 3,317 | $ | 7,859 | |||
(11) Subsequent Events
In April 2012, we acquired the stock of Grupo Store, a records management and data protection business in Brazil with locations in Sao Paulo, Rio de Janeiro, Porto Alegre and Recife, for a purchase price of approximately $80,000 ($77,000, net of cash acquired) in order to enhance our existing operations in the information management business in Brazil. Included in the purchase price is approximately $11,000 to be held in escrow. The amounts held in escrow include (1) approximately
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IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(11) Subsequent Events (Continued)
$3,000, which represents the amount of cash and cash equivalents the former owners of the business (the "Sellers") have represented to us that we acquired as part of the acquisition, which is payable to the Sellers upon the earlier of (a) 15 days subsequent to the confirmation of the cash amount by IMI or (b) 45 days subsequent to the closing date and (2) approximately $8,000, which represents amounts to secure a working capital adjustment and the indemnification obligations of the Sellers. The amounts held in escrow for purposes of the working capital adjustment will be distributed either to IMI or the Sellers based on the final agreed upon working capital amount. Unless paid to us in accordance with the terms of the agreement, all amounts remaining in escrow after payments described in either (1) and (2) above will be released to the Sellers in four annual installments, commencing on the two-year anniversary of the closing date.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations for the three months ended March 31, 2012 should be read in conjunction with our Consolidated Financial Statements and Notes thereto for the three months ended March 31, 2012, included herein, and for the year ended December 31, 2011, included in our Annual Report on Form 10-K filed on February 28, 2012.
FORWARD-LOOKING STATEMENTS
We have made statements in this Quarterly Report on Form 10-Q that constitute "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995 and other federal 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 stock repurchases and dividend payments, (2) expected target leverage ratio, and (3) expected internal revenue growth rate and capital expenditures for 2012. 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. Important factors that could cause actual results to differ from expectations include, among others: (1) the cost to comply with current and future laws, regulations and customer demands relating to privacy issues; (2) the impact of litigation or disputes that may arise in connection with incidents in which we fail to protect our customers' information; (3) changes in the price for our services relative to the cost of providing such services; (4) changes in customer preferences and demand for our services; (5) the adoption of alternative technologies and shifts by our customers to storage of data through non-paper based technologies; (6) the cost or potential liabilities associated with real estate necessary for our business; (7) the performance of business partners upon whom we depend for technical assistance or management expertise outside the U.S.; (8) changes in the political and economic environments in the countries in which our international subsidiaries operate; (9) claims that our technology violates the intellectual property rights of a third party; (10) the impact of legal restrictions or limitations under stock repurchase plans on price, volume or timing of stock repurchases; (11) the impact of alternative, more attractive investments on dividends or stock repurchases; (12) our ability or inability to complete acquisitions on satisfactory terms and to integrate acquired companies efficiently; and (13) other trends in competitive or economic conditions affecting our financial condition or results of operations not presently contemplated. 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. Other risks may adversely impact us, as described more fully under "Item 1A. Risk Factors" in our Annual Report on Form 10-K filed on February 28, 2012. 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 Securities and Exchange Commission ("SEC").
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Non-GAAP Measures
Adjusted Operating Income Before Depreciation, Amortization and Intangible Impairments ("Adjusted OIBDA")
Adjusted OIBDA is defined as operating income before depreciation, amortization, intangible impairments and (gain) loss on disposal/write-down of property, plant and equipment, net. Adjusted OIBDA Margin is calculated by dividing Adjusted OIBDA by total revenues. We use multiples of current or projected Adjusted OIBDA in conjunction with our discounted cash flow models to determine our overall enterprise valuation and to evaluate acquisition targets. We believe Adjusted OIBDA and Adjusted OIBDA Margin provide current and potential investors with relevant and useful information regarding our ability to generate cash flow to support business investment. These measures are an integral part of the internal reporting system we use to assess and evaluate the operating performance of our business. Adjusted OIBDA does not include certain items that we believe are not indicative of our core operating results, specifically: (1) (gain) loss on disposal/write-down of property, plant and equipment, net; (2) intangible impairments; (3) other expense (income), net; (4) cumulative effect of change in accounting principle; (5) income (loss) from discontinued operations; (6) gain (loss) on sale of discontinued operations; and (7) net income (loss) attributable to noncontrolling interests.
Adjusted OIBDA also does not include interest expense, net and the provision (benefit) for income taxes. These expenses are associated with our capitalization and tax structures, which we do not consider when evaluating the operating profitability of our core operations. Finally, Adjusted OIBDA does not include depreciation and amortization expenses in order to eliminate the impact of capital investments, which we evaluate by comparing capital expenditures to incremental revenue generated and as a percentage of total revenues. Adjusted OIBDA and Adjusted OIBDA Margin should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with accounting principles generally accepted in the United States of America ("GAAP"), such as operating or net income (loss) or cash flows from operating activities from continuing operations (as determined in accordance with GAAP).
Reconciliation of Adjusted OIBDA to Operating Income, Income from Continuing Operations and Net Income (in thousands):
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2011 | 2012 | |||||
Adjusted OIBDA |
$ | 217,299 | $ | 220,540 | |||
Less: Depreciation and Amortization |
80,163 | 78,008 | |||||
(Gain) Loss on Disposal/Write-down of Property, Plant and Equipment, net |
(464 | ) | 719 | ||||
Operating Income |
137,600 | 141,813 | |||||
Less: Interest Expense, Net |
48,618 | 58,784 | |||||
Other Income, Net |
(8,958 | ) | (3,304 | ) | |||
Provision for Income Taxes |
16,764 | 25,260 | |||||
Income from Continuing Operations |
81,176 | 61,073 | |||||
Loss from Discontinued Operations, Net of Tax |
(6,557 | ) | (5,093 | ) | |||
Net Income Attributable to Noncontrolling Interests |
1,159 | 630 | |||||
Net Income Attributable to Iron Mountain Incorporated |
$ | 73,460 | $ | 55,350 | |||
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Free Cash Flows before Acquisitions and Discretionary Investment ("FCF")
FCF is defined as Cash Flows from Operating ActivitiesContinuing Operations less capital expenditures (excluding real estate), net of proceeds from the sales of property and equipment and other, net and additions to customer relationship and acquisition costs. Our management uses this measure when evaluating the operating performance of our consolidated business. We believe this measure provides relevant and useful information to our current and potential investors. FCF is a useful measure in determining our ability to generate excess cash that may be used for reinvestment in the business, discretionary deployment in investments such as real estate or acquisition opportunities, returning of capital to our stockholders and voluntary prepayments of indebtedness.
Reconciliation of FCF to Cash Flows from Operating ActivitiesContinuing Operations (in thousands):
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2011 | 2012 | |||||
Free Cash Flows before Acquisitions and Discretionary Investments |
$ | 58,378 | $ | 23,240 | |||
Add: Capital Expenditures (excluding real estate), net |
49,147 | 52,811 | |||||
Additions to Customer Relationship and Acquisitions Costs |
2,893 | 3,008 | |||||
Cash Flows From Operating ActivitiesContinuing Operations |
$ | 110,418 | $ | 79,059 | |||
Cash Flows From Investing ActivitiesContinuing Operations |
$ | (89,692 | ) | $ | (65,891 | ) | |
Cash Flows From Financing ActivitiesContinuing Operations |
$ | (90,557 | ) | $ | (14,057 | ) | |
Adjusted Earnings per Share from Continuing Operations ("Adjusted EPS")
Adjusted EPS is defined as reported earnings per share from continuing operations excluding: (1) (gain) loss on the disposal/write-down of property, plant and equipment, net; (2) intangible impairments; (3) other expense (income), net; and (4) the tax impact of reconciling items and discrete tax items. We do not believe these excluded items to be indicative of our ongoing operating results, and they are not considered when we are forecasting our future results. We believe Adjusted EPS is of value to investors when comparing our results from past, present and future periods.
Reconciliation of Adjusted EPSFully Diluted from Continuing Operations to Reported EPSFully Diluted from Continuing Operations:
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2011 | 2012 | |||||
Adjusted EPSFully Diluted from Continuing Operations |
$ | 0.28 | $ | 0.29 | |||
Less: (Gain) Loss on disposal/write-down of property, plant and equipment, net |
| | |||||
Intangible Impairments |
| | |||||
Other Expense (Income), net |
(0.04 | ) | (0.02 | ) | |||
Tax impact of reconciling items and discrete tax items |
(0.08 | ) | (0.04 | ) | |||
Reported EPSFully Diluted from Continuing Operations |
$ | 0.40 | $ | 0.35 | |||
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions
47
that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements and for the period then ended. On an on-going basis, we evaluate the estimates used. We base our estimates on historical experience, actuarial estimates, current conditions and various other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities and are not readily apparent from other sources. Actual results may differ from these estimates. Our critical accounting policies include the following, which are listed in no particular order:
Further detail regarding our critical accounting policies can be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K and the consolidated financial statements and the notes included therein filed with the SEC on February 28, 2012. Management has determined that no material changes concerning our critical accounting policies have occurred since December 31, 2011.
Recent Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2011-08, IntangiblesGoodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 allows, but does not require, entities to first assess qualitatively whether it is necessary to perform the two-step goodwill impairment test. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative two-step impairment test is required; otherwise, no further testing is required. We adopted ASU 2011-08 as of January 1, 2012. The adoption of ASU 2011-08 did not have an impact on our consolidated financial position, results of operations or cash flows.
Overview
The following discussions set forth, for the periods indicated, management's discussion and analysis of results. Significant trends and changes are discussed for the three month period ended March 31, 2012 within each section.
On June 2, 2011, we completed the sale (the "Digital Sale") of our online backup and recovery, digital archiving and eDiscovery solutions businesses of our digital business (the "Digital Business") to Autonomy Corporation plc, a corporation formed under the laws of England and Wales ("Autonomy"), pursuant to a purchase and sale agreement dated as of May 15, 2011 among Iron Mountain Incorporated ("IMI"), certain subsidiaries of IMI and Autonomy (the "Digital Sale Agreement"). In the Digital Sale, Autonomy purchased (1) the shares of certain of IMI's subsidiaries through which IMI conducted the Digital Business and (2) certain assets of IMI and its subsidiaries relating to our Digital Business. The financial position, operating results and cash flows of the Digital Business, for all periods presented in this Quarterly Report on Form 10-Q, including the gain on the sale, have been reported
48
as discontinued operations for financial reporting purposes. Additionally, on October 3, 2011, we sold our records management business in New Zealand (the "New Zealand Business"). Also, in December 2011, we committed to a plan to sell our records management business in Italy (the "Italian Business"), which we sold on April 27, 2012. The financial position, operating results and cash flows of the New Zealand Business and the Italian Business, for all periods presented, have been reported as discontinued operations for financial reporting purposes. See Note 10 to Notes to Consolidated Financial Statements.
Our revenues consist of storage revenues as well as service revenues. Storage revenues, which are considered a key performance indicator for the information management services industry, consist primarily of recurring periodic charges related to the storage of materials or data (generally on a per unit basis) that are typically retained by customers for many years. Service revenues are comprised of charges for related core service activities and a wide array of complementary products and services. Included in core service revenues are: (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 (4) other recurring services, including hybrid services, which relate to physical and digital records, and recurring project revenues. Our complementary services revenues include special project work, customer termination and permanent withdrawal fees, data restoration projects, fulfillment services, consulting services, technology services and product sales (including specially designed storage containers and related supplies). A by-product of our secure shredding and destruction services is the sale of recycled paper (included in complementary services revenues), the price of which can fluctuate from period to period, adding to the volatility and reducing the predictability of that revenue stream.
We recognize revenue when the following criteria are met: persuasive evidence of an arrangement exists, services have been rendered, the sales price is fixed or determinable and collectability of the resulting receivable is reasonably assured. Storage and service revenues are recognized in the month the respective storage or service is provided, and customers are generally billed on a monthly basis on contractually agreed-upon terms. Amounts related to future storage or prepaid service contracts for customers where storage fees or services are billed in advance are accounted for as deferred revenue and recognized ratably over the applicable storage or service period or when the service is performed. Revenue from the sales of products, which is included as a component of service revenues, is recognized when products are shipped to the customer and title has passed to the customer. Revenues from the sales of products have historically not been significant.
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. 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. 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.
The expansion of our European and secure shredding businesses has impacted the major cost of sales components. Our European operations are more labor intensive than our North American business and, therefore, add incremental labor costs at a higher percentage of segment revenue than our North American business. Our secure shredding operations incur lower facility costs and higher transportation costs as a percentage of revenues compared to our core physical businesses.
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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 total wage and benefit dollars 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. The overhead structure of our expanding European and Asian operations, as compared to our North American operations, is more labor intensive and has not achieved the same level of overhead leverage, which may result in an increase in selling, general and administrative expenses, as a percentage of consolidated revenue, as our European and Asian 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, building and leasehold improvements, computer systems hardware and software, and buildings. Amortization relates primarily to customer relationship acquisition costs and is impacted by the nature and timing of acquisitions.
Our consolidated revenues and expenses are subject to variations caused by the net effect of foreign currency translation on revenues and expenses incurred by our entities outside the U.S. It is difficult to predict how much foreign currency exchange rates will fluctuate in the future and how those fluctuations will impact our consolidated statement of operations. Due to the expansion of our international operations, these fluctuations have become material on individual balances. However, because both the revenues and expenses are denominated in the local currency of the country in which they are derived or incurred, 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 disclosure. The constant currency growth rates are calculated by translating the 2011 results at the 2012 average exchange rates.
The following table is a comparison of underlying average exchange rates of the foreign currencies that had the most significant impact on our U.S. dollar-reported revenues and expenses:
|
Average Exchange Rates for the Three Months Ended March 31, |
|
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Percentage Strengthening / (Weakening) of Foreign Currency |
|||||||||
|
2011 | 2012 | ||||||||
British pound sterling |
$ | 1.602 | $ | 1.571 | (1.9 | )% | ||||
Canadian dollar |
$ | 1.014 | $ | 0.998 | (1.6 | )% | ||||
Euro |
$ | 1.368 | $ | 1.311 | (4.2 | )% |
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Results of Operations
Comparison of Three Months Ended March 31, 2012 to Three Months Ended March 31, 2011 (in thousands):
|
Three Months Ended March 31, |
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Dollar Change |
Percentage Change |
|||||||||||
|
2011 | 2012 | |||||||||||
Revenues |
$ | 746,009 | $ | 746,498 | $ | 489 | 0.1 | % | |||||
Operating Expenses |
608,409 | 604,685 | (3,724 | ) | (0.6 | )% | |||||||
Operating Income |
137,600 | 141,813 | 4,213 | 3.1 | % | ||||||||
Other Expenses, Net |
56,424 | 80,740 | 24,316 | 43.1 | % | ||||||||
Income from Continuing Operations |
81,176 | 61,073 | (20,103 | ) | (24.8 | )% | |||||||
Loss from Discontinued Operations, Net of Tax |
(6,557 | ) | (5,093 | ) | 1,464 | 22.3 | % | ||||||
Net Income |
74,619 | 55,980 | (18,639 | ) | (25.0 | )% | |||||||
Net Income Attributable to Noncontrolling Interests |
1,159 | 630 | (529 | ) | 45.6 | % | |||||||
Net Income Attributable to Iron Mountain Incorporated |
$ | 73,460 | $ | 55,350 | $ | (18,110 | ) | (24.7 | )% | ||||
Adjusted OIBDA(1) |
$ | 217,299 | $ | 220,540 | $ | 3,241 | 1.5 | % | |||||
Adjusted OIBDA Margin(1) |
29.1 | % | 29.5 | % |
REVENUES
|
Three Months Ended March 31, |
|
Percentage Change | |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Dollar Change |
|
Constant Currency(1) |
Internal Growth(2) |
|||||||||||||||
|
2011 | 2012 | Actual | ||||||||||||||||
Storage |
$ | 415,705 | $ | 425,341 | $ | 9,636 | 2.3 | % | 3.1 | % | 2.9 | % | |||||||
Core Service |
241,912 | 241,080 | (832 | ) | (0.3 | )% | 0.5 | % | 0.3 | % | |||||||||
Total Core Revenue |
657,617 | 666,421 |