IRON MOUNTAIN INCORPORATED The following discussion and analysis of our financial condition and results of operations for the three and nine months endedSeptember 30, 2021 should be read in conjunction with our Condensed Consolidated Financial Statements and Notes thereto for the three and nine months endedSeptember 30, 2021 , included herein, and our Consolidated Financial Statements and Notes thereto for the year endedDecember 31, 2020 , included in our Annual Report on Form 10-K filed with theUnited States Securities and Exchange Commission ("SEC") onFebruary 24, 2021 (our "Annual Report"). FORWARD-LOOKING STATEMENTS We have made statements in this Quarterly Report on Form 10-Q (this "Quarterly Report") that constitute "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements concern our operations, economic performance, financial condition, goals, beliefs, future growth strategies, investment objectives, plans and current expectations, such as our (1) expectations and assumptions regarding the impact of the COVID-19 (as defined below) pandemic on us and our customers, including on our businesses, financial position, results of operations and cash flows, (2) commitment to future dividend payments, (3) expected change in volume of records stored with us, (4) expected organic revenue growth, including 2021 consolidated organic storage rental revenue growth rate and consolidated organic total revenue growth rate, (5) expectations that profits will increase in our growth portfolio, including our higher-growth markets, and that our growth portfolio will become a larger part of our business over time, (6) expectations related to our revenue management programs and continuous improvement initiatives, (7) expectations related to monetizing our owned industrial real estate assets as part of our capital recycling program, (8) expected ability to identify and complete acquisitions and other investments, including joint ventures, and drive returns on invested capital, (9) anticipated capital expenditures, (10) expected benefits, costs and actions related to, and timing of, Project Summit (as defined below), and (11) other forward-looking statements related to our business, results of operations and financial condition. These forward-looking statements are subject to various known and unknown risks, uncertainties and other factors, and you should not rely upon them except as statements of our present intentions and of our present expectations, which may or may not occur. When we use words such as "believes," "expects," "anticipates," "estimates", "plans", "intends" or similar expressions, we are making forward-looking statements. Although we believe that our forward-looking statements are based on reasonable assumptions, our expected results may not be achieved, and actual results may differ materially from our expectations. In addition, important factors that could cause actual results to differ from expectations include, among others: •the severity and duration of the COVID-19 pandemic and its effects on the global economy, including its effects on us, the markets we serve and our customers and the third parties with whom we do business within those markets; •our ability to execute on Project Summit and the potential impacts of Project Summit on our ability to retain and recruit employees; •our ability to remain qualified for taxation as a real estate investment trust forUnited States federal income tax purposes ("REIT"); •changes in customer preferences and demand for our storage and information management services, including as a result of the shift from paper and tape storage to alternative technologies that require less physical space; •our ability or inability to execute our strategic growth plan, including our ability to invest according to plan, incorporate new digital information technologies into our offerings, achieve satisfactory returns on new product offerings, continue our revenue management, expand internationally, complete acquisitions on satisfactory terms, integrate acquired companies efficiently and grow our business through joint ventures; •changes in the amount of our capital expenditures; •our ability to raise debt or equity capital and changes in the cost of our debt; •the costs of complying with, and our ability to comply with, laws, regulations and customer demands, including those relating to data security and privacy issues, as well as fire and safety and environmental standards; •the impact of litigation or disputes that may arise in connection with incidents in which we fail to protect our customers' information or our internal records or information technology ("IT") systems and the impact of such incidents on our reputation and ability to compete; •changes in the price for our storage and information management services relative to the cost of providing such storage and information management services; •changes in the political and economic environments in the countries in which our international subsidiaries operate and changes in the global political climate, particularly as we consolidate operations and move records and data across borders; 30 IRON MOUNTAINSEPTEMBER 30, 2021 FORM 10-Q
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•our ability to comply with our existing debt obligations and restrictions in
our debt instruments;
•the impact of service interruptions or equipment damage and the cost of power
on our data center operations;
•the cost or potential liabilities associated with real estate necessary for our
business;
•failures in our adoption of new IT systems;
•unexpected events, including those resulting from climate change, could disrupt
our operations and adversely affect our reputation and results of operations;
•other trends in competitive or economic conditions affecting our financial
condition or results of operations not presently contemplated; and
•the other risks described in our periodic reports filed with the SEC , including
under the caption "Risk Factors" in Part I, Item 1A of our Annual Report.
Except as required by law, we undertake no obligation to update any
forward-looking statements appearing in this report.
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Table of Contents Part I. Financial Information
OVERVIEW
The following discussions set forth, for the periods indicated, management's discussion and analysis of financial condition and results of operations. Significant trends and changes are discussed for the three and nine months endedSeptember 30, 2021 within each section. Trends and changes that are consistent for both the three and nine month periods are not repeated and are discussed on a year to date basis only. COVID-19 InMarch 2020 , theWorld Health Organization declared a novel strain of coronavirus ("COVID-19") a pandemic. The preventative and protective actions that governments have ordered, or we or our customers have implemented, have resulted in a period of reduced service operations and business disruption for us, our customers and other third parties with which we do business. While we have broad geographic and customer diversification with operations in 63 countries and no single customer accounting for a significant portion of our revenue during the nine months endedSeptember 30, 2021 , COVID-19 is a global pandemic impacting numerous industries and geographies. While our service operations have increased from the reductions we experienced during the peak of the COVID-19 pandemic, future service revenues remain uncertain and will be dependent on the severity of the COVID-19 pandemic, including new variants of COVID-19 that may emerge.
PROJECT SUMMIT
Compelling Adjusted EBITDA Benefits Implementation Details
~$375M •Project Summit began in
Q4 2019 and is expected
Expected annual run-rate to be substantiallycomplete by the end of 2021
benefits realized exiting 2021 •Cost to implement is estimated to be
InOctober 2019 , we announced our global program designed to better position us for future growth and achievement of our strategic objectives ("Project Summit"). As a result of the program, we expect to reduce the number of positions at vice president and above by approximately 45%. The total program is expected to reduce our total managerial and administrative workforce by approximately 700 positions by the end of 2021. We have also reduced our services and operations workforce. As ofSeptember 30, 2021 , we have completed approximately 95% of our planned workforce reductions. The activities associated with Project Summit began in the fourth quarter of 2019 and are expected to be substantially complete by the end of 2021. We expect the total program benefits associated with Project Summit to be fully realized exiting 2021. We expect that Project Summit will improve annual Adjusted EBITDA (as defined below) by approximately$375.0 million exiting 2021. We will continue to evaluate our overall operating model, as well as various opportunities and initiatives, including those associated with real estate consolidation, system implementation and process changes, which could result in the identification and implementation of additional actions associated with Project Summit and incremental costs and benefits.
Exiting 2021 [[Image Removed: irm-20210930_g4.jpg]]
(expected)
32 IRON MOUNTAIN SEPTEMBER 30, 2021 FORM 10-Q
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We estimate that the implementation of Project Summit will result in total
operating expenditures ("Restructuring Charges") of approximately $450.0 million
that primarily consist of: (1) employee severance costs; (2) internal costs
associated with the development and implementation of Project Summit
initiatives; (3) professional fees, primarily related to third party consultants
who are assisting with the design and execution of various initiatives as well
as project management activities and (4) system implementation and data
conversion costs. The following table presents total Restructuring Charges
related to Project Summit primarily related to employee severance costs,
internal costs associated with the development and implementation of Project
Summit initiatives and professional fees from the inception of Project Summit
through September 30, 2021 , and for the three and nine months ended September
30, 2021 :
TOTAL
From the Inception of Project
Summit through September 30, $372,679 $372.7 million
2021
For the Three Months Ended
For the Nine Months Ended
We have also incurred approximately$6.6 million and$16.6 million in capital expenditures related to Project Summit during the three and nine months endedSeptember 30, 2021 and approximately$26.7 million from the inception of Project Summit throughSeptember 30, 2021 . See Note 11 to Notes to Condensed Consolidated Financial Statements included in this Quarterly Report for more information on the Restructuring Charges. DIVESTMENTS OnJune 7, 2021 , as disclosed in Note 4 to Notes to Condensed Consolidated Financial Statements included in this Quarterly Report, we sold ourIntellectual Property Management ("IPM") business, also known as our technology escrow services business, which we predominantly operated inthe United States , for total gross consideration of approximately$216.6 million (the "IPM Divestment"). As described in Note 4 to Notes to Condensed Consolidated Financial Statements included in this Quarterly Report, the IPM Divestment does not meet the criteria to be reported as discontinued operations in our condensed consolidated financial statements. Our IPM business represented approximately$0.0 million and$14.2 million of total revenues and approximately$0.0 million and$6.8 million of total net income for the three and nine months endedSeptember 30, 2021 , respectively. Our IPM business represented approximately$8.2 million and$24.7 million of total revenues and approximately$4.4 million and$14.1 million of total net income for the three and nine months endedSeptember 30, 2020 , respectively. CHANGES IMPACTING COMPARABILITY WITH PRIOR YEAR During the fourth quarter of 2020, we made changes to the definitions of the following non-GAAP measures: Adjusted EBITDA, Adjusted EPS, FFO (Nareit) and FFO (Normalized) (each as defined below). These changes were implemented to align our definitions more closely with our peers. All prior periods have been recast to conform to these changes.
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Table of Contents Part I. Financial Information GENERAL RESULTS OF OPERATIONS -KEY TRENDS •In spite of the COVID-19 pandemic, we have experienced relatively steady volume in our Global RIM Business segment, with organic storage rental revenue growth driven primarily by revenue management. We expect organic storage rental revenue growth to benefit from revenue management and volume, which we expect will be flat to slightly positive when compared to the prior year. We expect low single digit organic storage rental revenue growth for the remainder of 2021. •Our organic service revenue growth is primarily due to increases in our service activity, particularly in regions where governments have lifted or eased restrictions on our customers' non-essential business operations. While our service operations have increased from the reductions we experienced during the peak of the COVID-19 pandemic, future service revenues remain uncertain and will be dependent on the severity of the COVID-19 pandemic, including new variants of COVID-19 that may emerge. Cost of sales (excluding depreciation and amortization) and Selling, general and administrative expenses for the nine months endedSeptember 30, 2021 consists of the following: COST OF SALES SELLING, GENERAL AND ADMINISTRATIVE EXPENSES [[Image Removed: irm-20210930_g5.jpg]]
[[Image Removed: irm-20210930_g6.jpg]]
NON-GAAP MEASURES ADJUSTED EBITDA We define Adjusted EBITDA as net income (loss) before interest expense, net, provision (benefit) for income taxes, depreciation and amortization (inclusive of our share of Adjusted EBITDA from our unconsolidated joint ventures), and excluding certain items we do not believe to be indicative of our core operating results, specifically: EXCLUDED •Acquisition and Integration Costs (as defined below) •Other (income) expense, net •Restructuring Charges •Stock-based compensation expense •Intangible impairments •COVID-19
Costs (as defined below) •(Gain) loss on disposal/write-down of property, plant and equipment, net (including real estate)
Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by total revenues. We also show Adjusted EBITDA and Adjusted EBITDA Margin for each of our reportable operating segments under "Results of Operations - Segment Analysis" below. [[Image Removed: irm-20210930_g7.jpg]] 34 IRON MOUNTAINSEPTEMBER 30, 2021 FORM 10-Q
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Adjusted EBITDA excludes both 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. Adjusted EBITDA 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 EBITDA and Adjusted
EBITDA 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 income, net income (loss) or cash flows from operating activities (as
determined in accordance with GAAP).
RECONCILIATION OF NET INCOME (LOSS) TO ADJUSTED EBITDA (IN THOUSANDS):
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2021 2020 2021 2020
Net Income (Loss) $ 68,111 $ 38,562 $ 391,264 $ 96,341
Add/(Deduct):
Interest expense, net 103,809 104,303 313,451 313,408
Provision (benefit) for income taxes 28,017 13,934 153,073 33,304
Depreciation and amortization 174,818 157,252 507,145 483,686
Acquisition and Integration Costs(1) 1,138 - 3,415 -
Restructuring Charges 50,432 48,371 129,686 128,715
Intangible impairments - - - 23,000(Gain) loss on disposal/write-down of property, (935) (75,840)
(134,321) (78,170)
plant and equipment, net (including real estate)
Other (income) expense, net, excluding our share
of losses (gains) from our unconsolidated joint (21,517) 81,190 (209,001) 59,398
ventures
Stock-based compensation expense(2) 12,644 8,065 45,913 32,056 COVID-19 Costs(3) - - - 9,285 Our share of Adjusted EBITDA reconciling items 1,252 175 3,340 450 from our unconsolidated joint ventures Adjusted EBITDA$ 417,769 $
376,012
(1) Represent operating expenditures directly associated with the closing and integration activities of our business acquisitions that have closed, or are highly probable of closing, and include (i) advisory, legal and professional fees to complete business acquisitions and (ii) costs to integrate acquired businesses into our existing operations, including move, severance, facility upgrade and system integration costs (collectively, "Acquisition and Integration Costs"). Acquisition and Integration Costs do not include costs associated with the formation of joint ventures or costs associated with the acquisition of customer relationships. (2) Stock-based compensation expense related to Project Summit is included within Restructuring Charges for the three and nine months endedSeptember 30, 2021 and 2020. (3) Costs that are incremental and directly attributable to the COVID-19 pandemic which are not expected to recur once the pandemic ends ("COVID-19 Costs"). These costs include the purchase of personal protective equipment for our employees and incremental cleaning costs of our facilities, among other direct costs.
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Table of Contents Part I. Financial Information ADJUSTED EPS We define Adjusted EPS as reported earnings per share fully diluted from net income (loss) attributable toIron Mountain Incorporated (inclusive of our share of adjusted losses (gains) from our unconsolidated joint ventures) and excluding certain items, specifically:
EXCLUDED
•Acquisition and Integration Costs •Other (income) expense, net •Restructuring Charges •Stock-based compensation expense •Intangible impairments •COVID-19 Costs •(Gain) loss on disposal/write-down of property, plant and •Tax impact of reconciling items and discrete equipment, net (including real estate) 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 our current and potential investors when comparing our results from past, present and future periods. RECONCILIATION OF REPORTED EPS-FULLY DILUTED FROMNET INCOME (LOSS) ATTRIBUTABLE TO IRON MOUNTAIN INCORPORATED TO ADJUSTED EPS-FULLY DILUTED FROMNET INCOME (LOSS) ATTRIBUTABLE TO IRON MOUNTAIN INCORPORATED: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2021 2020 2021 2020 Reported EPS-Fully Diluted from Net Income (Loss) Attributable to Iron Mountain Incorporated$ 0.23 $ 0.13 $ 1.34 $ 0.33
Add/(Deduct):
Acquisition and Integration Costs - - 0.01 - Restructuring Charges 0.17 0.17 0.45 0.45 Intangible impairments - - - 0.08 (Gain) loss on disposal/write-down of property, plant and equipment, net (including real estate) (0.01) (0.26) (0.46) (0.27)
Other (income) expense, net, excluding our share of losses (gains) from our unconsolidated joint ventures
(0.07) 0.28 (0.72) 0.21
Stock-based compensation expense 0.04 0.03 0.16 0.11
COVID-19 Costs - - - 0.03
Tax impact of reconciling items and discrete tax
items(1) 0.02 (0.02) 0.31 (0.06)
Income (Loss) Attributable to Noncontrolling
Interests - - 0.01 -
Adjusted EPS-Fully Diluted from Net Income (Loss)
Attributable to Iron Mountain Incorporated(2) $ 0.40 $ 0.33 $ 1.09 $ 0.88
(1)The difference between our effective tax rates and our structural tax rate
(or adjusted effective tax rates) for the three and nine months ended
September 30, 2021 and 2020 is primarily due to (i) the reconciling items above,
which impact our reported net income (loss) before provision (benefit) for
income taxes and (ii) other discrete tax items. Our structural tax rate for
purposes of the calculation of Adjusted EPS for the three and nine months ended
September 30, 2021 and 2020 was 16.5% and 16.3%, respectively.
(2)Columns may not foot due to rounding.
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FFO (NAREIT) AND FFO (NORMALIZED)
Funds from operations ("FFO") is defined by the National Association of Real
Estate Investment Trusts ("Nareit") as net income (loss) excluding depreciation
on real estate assets, losses and gains on sale of real estate, net of tax, and
amortization of data center leased-based intangibles and adjusting for our share
of reconciling items from our unconsolidated joint ventures from FFO ("FFO
(Nareit)"). FFO (Nareit) does not give effect to real estate depreciation
because these amounts are computed, under GAAP, to allocate the cost of a
property over its useful life. Because values for well-maintained real estate
assets have historically increased or decreased based upon prevailing market
conditions, we believe that FFO (Nareit) provides investors with a clearer view
of our operating performance. Our most directly comparable GAAP measure to FFO
(Nareit) is net income (loss).
Although Nareit has published a definition of FFO, we modify FFO (Nareit), as is
common among REITs seeking to provide financial measures that most meaningfully
reflect their particular business ("FFO (Normalized)"). Our definition of FFO
(Normalized) excludes certain items included in FFO (Nareit) that we believe are
not indicative of our core operating results, specifically:
EXCLUDED
•Acquisition and Integration Costs •Stock-based compensation expense •Restructuring Charges •COVID-19 Costs •Intangible impairments •Real estate financing lease depreciation •(Gain) loss on disposal/write-down of property, plant and •Tax impact of reconciling items and discrete tax equipment, net (excluding real estate) items
•Other (income) expense, net
RECONCILIATION OF NET INCOME (LOSS) TO FFO (NAREIT) AND FFO (NORMALIZED) (IN
THOUSANDS):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2021 2020 2021 2020
Net Income (Loss) $ 68,111 $ 38,562 $ 391,264 $ 96,341
Add/(Deduct):
Real estate depreciation 79,463 72,019 230,294 224,325
Loss (gain) on sale of real estate, net of tax 748 (75,880) (106,033) (77,461)
Data center lease-based intangible assets
amortization 10,458 10,441 31,423 32,173
FFO (Nareit) 158,780 45,142 546,948 275,378
Add/(Deduct):
Acquisition and Integration Costs 1,138 - 3,415 -
Restructuring Charges 50,432 48,371 129,686 128,715
Intangible impairments - - - 23,000
(Gain) loss on disposal/write-down of property,
plant and equipment, net (excluding real estate) (1,668) 40 (2,890) (359)
Other (income) expense, net, excluding our share of losses (gains) from our unconsolidated joint ventures(1)
(21,517) 81,190 (209,001) 59,398
Stock-based compensation expense 12,644 8,065 45,913 32,056
COVID-19 Costs - - - 9,285
Real estate financing lease depreciation 3,740 3,501 10,791 10,095
Tax impact of reconciling items and discrete tax
items(2) 5,304 (4,648) 65,120 (16,464)
Our share of FFO (Normalized) reconciling items from our unconsolidated joint ventures
(17) (1) (30) (31)
FFO (Normalized) $ 208,836 $ 181,660 $ 589,952 $ 521,073
(1)Includes foreign currency transaction (gains) losses, net and other, net. See
Note 2.m. to Notes to Condensed Consolidated Financial Statements included in
this Quarterly Report for additional information regarding the components of
Other (income) expense, net.
(2)Represents the tax impact of (i) the reconciling items above, which impact
our reported net income (loss) before provision (benefit) for income taxes and
(ii) other discrete tax items. Discrete tax items resulted in a provision
(benefit) for income taxes of $5.0 million and $19.4 million for the three and
nine months ended September 30, 2021 , respectively, and $(3.9) million and
$(2.7) million for the three and nine months ended September 30, 2020 ,
respectively.
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Table of Contents Part I. Financial Information CRITICAL ACCOUNTING ESTIMATES Our discussion and analysis of our financial condition and results of operations are based upon our Condensed 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 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 ongoing 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 estimates include the following, which are listed in no particular order: •Revenue Recognition •Accounting for Acquisitions •Impairment of Tangible and Intangible Assets •Income Taxes Further detail regarding our critical accounting estimates can be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report, and the Consolidated Financial Statements and the Notes included therein. We have determined that no material changes concerning our critical accounting estimates have occurred sinceDecember 31, 2020 .
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