IRON MOUNTAIN INCORPORATED The following discussion and analysis of our financial condition and results of operations for the three and nine months endedSeptember 30, 2020 should be read in conjunction with our Condensed Consolidated Financial Statements and Notes thereto for the three and nine months endedSeptember 30, 2020 , included herein, and our Consolidated Financial Statements and Notes thereto for the year endedDecember 31, 2019 , included in our Annual Report on Form 10-K filed with theUnited States Securities and Exchange Commission ("SEC") onFebruary 13, 2020 (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 possible impact from the COVID-19 (as defined below) pandemic on us and our customers, including on our businesses, financial position, results of operations and cash flows and the goodwill associated with our reporting units, (2) expected benefits, costs and actions related to, and timing of, Project Summit (as defined and discussed below), (3) anticipated capital expenditures and possible funding sources, (4) expected total consolidated revenue declines in 2020 and (5) 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" 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 and execute on our strategic growth plan; •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 adoption of alternative technologies and shifts to storage of data through non-paper based technologies; •our ability or inability to execute our strategic growth plan, including our ability to invest according to plan, 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 cost 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 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 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; •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; •the performance of business partners upon whom we depend for technical assistance or management expertise; •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 theSEC , including under the caption "Risk Factors" in Part I, Item 1A of our Annual Report and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 (the "March 31, 2020 Quarterly Report"). Except as required by law, we undertake no obligation to update any forward-looking statements appearing in this report. 33 -------------------------------------------------------------------------------- Table of Contents 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, 2020 within each section. Trends and changes that are consistent with the three and nine month periods are not repeated and are discussed on a year to date basis only. COVID-19 InJanuary 2020 , theWorld Health Organization declared a novel strain of coronavirus ("COVID-19") a pandemic. This resulted inU.S. federal, state and local and foreign governments and private entities mandating various restrictions, including travel restrictions, restrictions on public gatherings, stay-at-home orders and advisories. In response, we temporarily closed certain of our offices and facilities across the world and implemented certain travel restrictions for our employees. The preventative and protective actions that governments have ordered, or we have implemented as an organization, 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 approximately 50 countries, and no single customer accounting for more than 1% of our revenue during the nine months endedSeptember 30, 2020 , COVID-19 is a global pandemic impacting numerous industries and geographies. While we do not currently believe that the implications of the COVID-19 pandemic have had a material adverse impact on our ability to collect our accounts receivable, global economic conditions related to the COVID-19 pandemic may have a material adverse effect on our customers, which could impact our future ability to collect our accounts receivable. We continue to monitor the credit worthiness of our customers and customer payment trends, as well as the related impact on our liquidity. We have taken certain actions during the nine months endedSeptember 30, 2020 to manage our costs and capital expenditures, including, but not limited to: (i) the termination of nearly all of our temporary and contract workers; (ii) reductions in our full-time and part-time work forces; (iii) temporary furloughs, reduced hours or other temporary reduction measures; (iv) the deferral of certain previously planned non-essential capital investments and (v) the implementation of a temporary freeze on future acquisitions. We can provide no assurance that the cost savings measures we have taken, or may take in future periods, will be sufficient to offset any future service level declines, and we continue to evaluate the need for these cost saving measures and additional cost saving measures as additional information regarding the COVID-19 pandemic and the related economic downturn become known. We have incurred certain costs due to the COVID-19 pandemic which are direct, incremental and not expected to recur once the pandemic ends, which include the purchase of personal protective equipment for our employees and incremental cleaning costs of our facilities, among other direct costs. We have excluded these costs in calculating our various non-GAAP measures (as described below).
Project Summit
InOctober 2019 , we announced our global program designed to better position us for future growth and achievement of our strategic objectives ("Project Summit"). Since Project Summit was announced, we have identified additional opportunities to streamline our business and operations, as well as accelerated the timing of certain opportunities previously identified. Such opportunities include leveraging new technology solutions to enable us to modernize our service delivery model and more efficiently utilize our fleet, labor and real estate, which has broadened the initial scope of Project Summit. 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. Including the expanded scope of Project Summit described above, we estimate that Project Summit will improve annual Adjusted EBITDA (as defined below) by approximately$375.0 million exiting 2021. In addition, we expect Project Summit to improve annual Adjusted EBITDA by approximately$165.0 million in 2020. 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. 34 -------------------------------------------------------------------------------- Table of Contents Including the expanded scope of Project Summit described above, we estimate that the implementation of Project Summit will result in total costs of approximately$450.0 million , of which we expect to incur approximately$200.0 million in 2020. These costs include (1) operating expenditures ("Restructuring Charges") that primarily consist of: (i) employee severance costs; (ii) internal costs associated with the development and implementation of Project Summit initiatives; (iii) professional fees, primarily related to third party consultantswho are assisting with the design and execution of various initiatives as well as project management activities and (iv) system implementation and data conversion costs, and (2) capital expenditures. The following table presents (in thousands) the total costs related to Project Summit, comprised of Restructuring Charges (primarily related to employee severance costs, internal costs associated with the development and implementation of Project Summit initiatives and professional fees) and capital expenditures for both the three and nine months endedSeptember 30, 2020 and from the inception of Project Summit throughSeptember 30, 2020 . For the Three For the Nine From the inception of Months Ended Months Ended September Project Summit through September 30, 2020 30, 2020 September 30, 2020 Restructuring Charges $ 48,371 $ 128,715 $ 177,312 Capital Expenditures associated with Project Summit 2,567 4,672 4,672 Total $ 50,938 $ 133,387 $ 181,984
See Note 10 to Notes to Condensed Consolidated Financial Statements included in this Quarterly Report for more information on the Restructuring Charges.
During the fourth quarter of 2019, as a result of the realignment of our global managerial structure and changes to our internal financial reporting associated with Project Summit, we reassessed the composition of our reportable operating segments and reporting units, as discussed in Note 2.h. to Notes to Consolidated Financial Statements included in our Annual Report. As a result of these changes, previously reported segment information has been restated to conform to the current presentation. Change in Presentation We have historically classified our Significant Acquisition Costs (as defined in Note 2.x. to Notes to Consolidated Financial Statements included in our Annual Report) as components of Selling, general and administrative expenses and Cost of sales. Beginning in the fourth quarter of 2019, we present Significant Acquisition Costs as its own line item within Operating Expenses in our Condensed Consolidated Statements of Operations. The prior periods have been conformed to this presentation.
All Significant Acquisition Costs were incurred by
Non-GAAP Measures
Adjusted EBITDA
Adjusted EBITDA is defined as income (loss) from continuing operations before
interest expense, net, provision (benefit) for income taxes, depreciation and
amortization, and also excludes 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 (including real
estate); (2) intangible impairments; (3) other expense (income), net (which
includes foreign currency transaction (gains) losses, net, and debt
extinguishment expense); (4) Significant Acquisition Costs; (5) Restructuring
Charges; and (6) COVID-19 Costs (as defined below). Adjusted EBITDA Margin is
calculated by dividing Adjusted EBITDA by total revenues. We use multiples of
current or projected Adjusted EBITDA in conjunction with our discounted cash
flow models to determine our estimated overall enterprise valuation and to
evaluate acquisition targets. We believe Adjusted EBITDA and Adjusted EBITDA
Margin provide our current and potential investors with relevant and useful
information regarding our ability to generate cash flows 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. We also
show Adjusted EBITDA and Adjusted EBITDA Margin for each of our reportable
operating segments under "Results of Operations - Segment Analysis" below.
35
--------------------------------------------------------------------------------
Table of Contents
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. Finally, 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, income (loss) from continuing operations,
net income (loss) or cash flows from operating activities from continuing
operations (as determined in accordance with GAAP).
Reconciliation of Income (Loss) from Continuing Operations to Adjusted EBITDA
(in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Income (Loss) from Continuing Operations $ 38,562 $ 108,284 $ 96,341 $ 231,107
Add/(Deduct):
Provision (Benefit) for Income Taxes 13,934 21,928 33,304 43,127
Other Expense (Income), Net 83,465 (13,415) 66,439 (13,397)
Interest Expense, Net 104,303 106,677 313,408 314,427
(Gain) Loss on disposal/write-down of property,
plant and equipment, net (75,840) (9,284) (78,170) (17,087)
Depreciation and amortization 157,252 157,561 483,686 484,375
Significant Acquisition Costs - 3,950 - 8,597
Restructuring Charges 48,371 - 128,715 -
COVID-19 Costs(1) - - 9,285 -
Intangible impairments - - 23,000 -
Adjusted EBITDA $ 370,047 $ 375,701 $ 1,076,008 $ 1,051,149 _______________________________________________________________
(1) 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.
36
--------------------------------------------------------------------------------
Table of Contents
Adjusted EPS
Adjusted EPS is defined as reported earnings per share fully diluted from
continuing operations excluding: (1) (gain) loss on disposal/write-down of
property, plant and equipment, net (including real estate); (2) intangible
impairments; (3) other expense (income), net (which includes foreign currency
transaction (gains) losses, net, and debt extinguishment expense); (4)
Significant Acquisition Costs; (5) Restructuring Charges; (6) COVID-19 Costs;
and (7) the tax impact of reconciling items and discrete tax items. Adjusted EPS
includes income (loss) attributable to noncontrolling interests. 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 from Continuing Operations to Adjusted EPS-Fully Diluted from Continuing Operations:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Reported EPS-Fully Diluted from Continuing Operations
$ 0.37 $ 0.33 $ 0.80
Add/(Deduct):
Income (Loss) Attributable to Noncontrolling Interests - - - 0.01 Other Expense (Income), Net 0.29 (0.05) 0.23 (0.05)
(Gain) Loss on disposal/write-down of property, plant and equipment, net
(0.26) (0.03) (0.27) (0.06)
Significant Acquisition Costs - 0.01 - 0.03
Restructuring Charges 0.17 - 0.45 -
COVID-19 Costs - - 0.03 -
Intangible impairments - - 0.08 -Tax Impact of Reconciling Items and Discrete Tax Items(1) (0.01)
- (0.05) (0.01)
Adjusted EPS-Fully Diluted from Continuing Operations(2)
$ 0.32 $ 0.80 $ 0.71
_______________________________________________________________
(1)The difference between our effective tax rates and our structural tax rate (or adjusted effective tax rates) for the three and nine months endedSeptember 30, 2020 and 2019 is primarily due to (i) the reconciling items above, which impact our reported income (loss) from continuing operations before provision (benefit) for income taxes but have an insignificant impact on our reported 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 endedSeptember 30, 2020 and 2019 was 16.8% and 18.6%, respectively. (2) Columns may not foot due to rounding.
FFO (Nareit) and FFO (Normalized)
Funds from operations ("FFO") is defined by the National Association of Real
Estate Investment Trusts ("Nareit") and us as net income (loss) excluding
depreciation on real estate assets, gains on sale of real estate, net of tax and
amortization of data center leased-based intangibles ("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, modifications
to FFO (Nareit) are common among REITs as companies seek to provide financial
measures that most meaningfully reflect their particular business. Our
definition of FFO (Normalized) excludes certain items included in FFO (Nareit)
that we believe are not indicative of our core operating results, specifically:
(1) (gain) loss on disposal/write-down of property, plant and equipment
(excluding real estate), net; (2) intangible impairments; (3) other expense
(income), net (which includes foreign currency transaction (gains) losses, net,
and debt extinguishment expense); (4) real estate financing lease depreciation;
(5) Significant Acquisition Costs; (6) Restructuring Charges; (7) COVID-19
Costs; (8) the tax impact of reconciling items and discrete tax items; (9)
(income) loss from discontinued operations, net of tax; and (10) (gain) loss on
sale of discontinued operations, net of tax.
37
--------------------------------------------------------------------------------
Table of Contents
Reconciliation of Net Income (Loss) to FFO (Nareit) and FFO (Normalized) (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Net Income (Loss) $ 38,562 $ 108,284 $ 96,341 $ 231,211
Add/(Deduct):
Real Estate Depreciation 72,019 72,939 224,325 220,179
Gains on Sale of Real Estate, Net of Tax (75,880) (9,740) (77,461) (40,252)
Data Center Lease-Based Intangible Assets
Amortization 10,441 11,356 32,173 35,337
FFO (Nareit) 45,142 182,839 275,378 446,475
Add/(Deduct):Loss (Gain) on disposal/write-down of property, plant and equipment (excluding real estate), net
40 369 (359) 28,558
Other Expense (Income), Net(1) 83,465 (13,415) 66,439 (13,397)
Real Estate Financing Lease Depreciation 3,501 3,115 10,095 9,732
Significant Acquisition Costs - 3,950 - 8,597
Restructuring Charges 48,371 - 128,715 -
COVID-19 Costs - - 9,285 -
Intangible impairments - - 23,000 -
Tax Impact of Reconciling Items and Discrete Tax
Items(2) (4,314) 1,283 (13,959) (9,202)
(Income) Loss from Discontinued Operations, Net of
Tax(3) - - - (104)
FFO (Normalized) $ 176,205 $ 178,141 $ 498,594 $ 470,659 _______________________________________________________________
(1)Includes (i) foreign currency transaction losses (gains), net of$29.6 million and$(6.3) million for the three and nine months endedSeptember 30, 2020 , respectively, and$(18.3) million and$(19.9) million for the three and nine months endedSeptember 30, 2019 , respectively and (ii) debt extinguishment expense of$51.3 million and$68.3 million for the three and nine months endedSeptember 30, 2020 , respectively. (2)Represents the tax impact of (i) the reconciling items above, which impact our reported income (loss) from continuing operations before provision (benefit) for income taxes but have an insignificant impact on our reported provision (benefit) for income taxes and (ii) other discrete tax items. Discrete tax items resulted in a (benefit) provision for income taxes of$(3.8) million and$(1.6) million for the three and nine months endedSeptember 30, 2020 , respectively, and$1.0 million and$(5.5) million for the three and nine months endedSeptember 30, 2019 , respectively. (3)Net of a de minimis tax benefit for the nine months endedSeptember 30, 2019 . 38 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies 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 policies 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 policies 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 and should be read in conjunction with the disclosure below which addresses updates in light of the COVID-19 pandemic.
Impairment of Tangible and Intangible Assets
Goodwill and other indefinite-lived intangible assets not subject to amortization: Our reporting units as ofDecember 31, 2019 are described in detail in Note 2.h. to Notes to Consolidated Financial Statements included in our Annual Report. The goodwill associated with acquisitions completed during the first nine months of 2020 (which are described in Note 4 to Notes to Condensed Consolidated Financial Statements included in this Quarterly Report) has been incorporated into our reporting units as they existed as ofDecember 31, 2019 . During the first quarter of 2020, we concluded that we had a triggering event related to our Fine Arts reporting unit, requiring us to perform an interim goodwill impairment test. The primary factor contributing to our conclusion was the expected impact of the COVID-19 pandemic to this particular business and its customers and revenue sources, which caused us to believe it was more likely than not that the carrying value of our Fine Arts reporting unit exceeded its fair value. During the first quarter of 2020, we performed an interim goodwill impairment test for our Fine Arts reporting unit utilizing a discounted cash flow model, with updated assumptions on future revenues, operating expenditures and capital expenditures. We concluded that the fair value of the Fine Arts reporting unit was less than its carrying value, primarily due to near-term revenue declines that are unable to be fully mitigated by the cost reduction measures we have taken. Therefore, we recorded a$23.0 million impairment charge on the goodwill associated with this reporting unit during the first quarter of 2020. As disclosed in our Annual Report, ourGlobal Data Center reporting unit had an estimated fair value that exceeded its carrying value by less than 20%. AtMarch 31, 2020 , we determined we did not have a triggering event requiring an interim impairment test on the goodwill associated with ourGlobal Data Center reporting unit. During the second and third quarters of 2020, for each of our reporting units, no factors were identified that would alter our interim goodwill impairment analysis performed during the first quarter of 2020, or change the conclusions reached at that time. 39 -------------------------------------------------------------------------------- Table of Contents Reporting unit valuations have generally been determined using a combined approach based on the present value of future cash flows (the "Discounted Cash Flow Model") and market multiples. There are inherent uncertainties and judgments involved when determining the fair value of our reporting units for purposes of our annual impairment testing or upon a triggering event. The success of each of these businesses and the achievement of certain key assumptions developed by management and used in the Discounted Cash Flow Model are contingent upon various factors, which may be impacted by the economic effects of the COVID-19 pandemic. Such factors include, but are not limited to: (i) our ability to maintain, or grow, storage rental and service revenues in line with current expectations and (ii) our ability to manage our fixed and variable costs in line with potential future revenue declines. These factors are incremental to those previously outlined in our Annual Report, which included, but were not limited to: (i) achieving growth from existing customers, (ii) sales to new customers, (iii) increased market penetration and (iv) accurately timing the capital investments related to expansions. In addition, the discount rates utilized in our valuation models could be impacted by changes in the underlying interest rates and risk premiums which could also result in future goodwill impairments. However, the duration and severity of the COVID-19 pandemic, as well as the related economic impact on both our business and the businesses of our customers, remain uncertain as of the filing of this Quarterly Report. As such, the current assumptions we used in determining the fair values of our reporting units may materially change as we gain additional visibility into the impact to our business and our customers' businesses. If our reporting units are not able to meet the assumptions we used in the Discounted Cash Flow Model, or there are any future adverse market conditions that are not currently known or are more severe than we currently expect, including relating to the COVID-19 pandemic, it could potentially lead to a fair value that is less than the carrying value in any one of our reporting units and cause future goodwill impairments.
Recent Accounting Pronouncements
See Note 2.n. to Notes to Condensed Consolidated Financial Statements included in this Quarterly Report for a description of recently adopted accounting pronouncements.
40
--------------------------------------------------------------------------------
Table of Contents
Results of Operations
Comparison of the three and nine months ended
Three Months Ended
September 30, Dollar Percentage
2020 2019 Change Change
Revenues $ 1,036,647 $ 1,062,224 $ (25,577) (2.4) %
Operating Expenses 796,383 838,750 (42,367) (5.1) %
Operating Income 240,264 223,474 16,790 7.5 %
Other Expenses, Net 201,702 115,190 86,512 75.1 %
Income (Loss) from Continuing Operations 38,562 108,284 (69,722) (64.4) %
Income (Loss) from Discontinued Operations,
Net of Tax - - - - %
Net Income (Loss) 38,562 108,284 (69,722) (64.4) %
Net Income (Loss) Attributable to
Noncontrolling Interests 168 609 (441) (72.4) %
Net Income (Loss) Attributable to Iron
Mountain Incorporated $ 38,394 $ 107,675 $ (69,281) (64.3) %
Adjusted EBITDA $ 370,047 $ 375,701 $ (5,654) (1.5) %
Adjusted EBITDA Margin 35.7 % 35.4 %
Nine Months Ended
September 30, Dollar Percentage
2020 2019 Change Change
Revenues $ 3,087,617 $ 3,182,994 $ (95,377) (3.0) %
Operating Expenses 2,578,125 2,607,730 (29,605) (1.1) %
Operating Income 509,492 575,264 (65,772) (11.4) %
Other Expenses, Net 413,151 344,157 68,994 20.0 %
Income (Loss) from Continuing Operations 96,341 231,107 (134,766) (58.3) %
Income (Loss) from Discontinued Operations,
Net of Tax - 104 (104) (100.0) %
Net Income (Loss) 96,341 231,211 (134,870) (58.3) %
Net Income (Loss) Attributable to
Noncontrolling Interests 1,058 1,534 (476) (31.0) %
Net Income (Loss) Attributable to Iron
Mountain Incorporated $ 95,283 $ 229,677 $ (134,394) (58.5) %
Adjusted EBITDA $ 1,076,008 $ 1,051,149 $ 24,859 2.4 %
Adjusted EBITDA Margin 34.8 % 33.0 %
41
--------------------------------------------------------------------------------
Table of Contents
REVENUES
Consolidated revenues consist of the following (in thousands):
Three Months Ended Percentage Change
September 30, Dollar Constant Organic Impact of
2020 2019 Change Actual Currency(1) Growth(2) AcquisitionsStorage Rental$ 696,294 $ 673,318 $ 22,976 3.4 % 3.8 % 2.5 % 1.3 % Service 340,353 388,906 (48,553) (12.5) % (12.2) % (13.5) % 1.3 % Total Revenues$ 1,036,647 $ 1,062,224 $ (25,577) (2.4) % (2.1) % (3.4) % 1.3 % Nine Months Ended Percentage Change September 30, Dollar Constant Organic Impact of 2020 2019 Change Actual Currency(1) Growth(2) Acquisitions Storage Rental$ 2,056,797 $ 2,005,580 $ 51,217 2.6 % 4.2 % 2.6 % 1.6 % Service 1,030,820 1,177,414 (146,594) (12.5) % (11.1) % (13.0) % 1.9 % Total Revenues$ 3,087,617 $ 3,182,994 $ (95,377) (3.0) % (1.5) % (3.2) % 1.7 %
________________________________________________________________
(1)Constant currency growth rates, which are a non-GAAP measure, are calculated by translating the 2019 results at the 2020 average exchange rates. (2)Our organic revenue growth rate, which is a non-GAAP measure, represents the year-over-year growth rate of our revenues excluding the impact of business acquisitions, divestitures and foreign currency exchange rate fluctuations. Our organic revenue growth rate includes the impact of acquisitions of customer relationships.
Total Revenues
For the nine months endedSeptember 30, 2020 , the decrease in reported consolidated revenue was driven by declines in reported service revenue, partially offset by reported storage rental revenue growth. Foreign currency exchange rate fluctuations decreased our reported consolidated revenue growth rate for the nine months endedSeptember 30, 2020 by 1.5% compared to the prior year period. We expect low single digit total consolidated revenue declines for the full year 2020. Storage Rental Revenues Primary factors influencing the change in reported consolidated storage rental revenue for the nine months endedSeptember 30, 2020 include the following: •organic storage rental revenue growth driven by volume growth in faster growing markets and revenue management; •a 2.1% increase in global records management net volume due to acquisitions (excluding acquisitions, global records management net volume decreased 1.2%); and •a decrease of$30.9 million due to foreign currency exchange rate fluctuations. Service Revenues Primary factors influencing the change in reported consolidated service revenue for the nine months endedSeptember 30, 2020 include the following: •a decrease in service activity as a result of the COVID-19 pandemic in the second quarter and, to a lesser extent, the third quarter of 2020, particularly in regions where governments have imposed restrictions on non-essential business operations; •organic service revenue declines reflecting lower service activity levels; and •a decrease of$18.0 million due to foreign currency exchange rate fluctuations. The severity of future service level declines is uncertain and is dependent on the duration and severity of the COVID-19 pandemic, the resulting governmental and business actions and the duration and strength of any ensuing economic recovery that may follow, specifically within the markets in which we operate and among our customers. 42 --------------------------------------------------------------------------------
Table of Contents OPERATING EXPENSES Cost of Sales
Consolidated Cost of sales (excluding depreciation and amortization) consists of the following expenses (in thousands):
Percentage Change % of Percentage
Three Months Ended Consolidated Change
September 30, Dollar Constant Revenues (Favorable)/
2020 2019 Change Actual Currency 2020 2019 Unfavorable
Labor $ 183,878 $ 200,471 $ (16,593) (8.3) % (7.4) % 17.7 % 18.9 % (1.2) %
Facilities 179,031 171,700 7,331 4.3 % 4.5 % 17.3 % 16.2 % 1.1 %
Transportation 30,890 40,137 (9,247) (23.0) % (23.4) % 3.0 % 3.8 % (0.8) %
Product Cost of Sales and
Other 40,706 37,064 3,642 9.8 % 10.9 % 3.9 % 3.5 % 0.4 %
Total Cost of sales $ 434,505 $ 449,372 $ (14,867) (3.3) % (2.8) % 41.9 % 42.3 % (0.4) %
Percentage Change % of Percentage
Nine Months Ended Consolidated Change
September 30, Dollar Constant Revenues (Favorable)/
2020 2019 Change Actual Currency 2020 2019 Unfavorable
Labor $ 552,396 $ 612,385 $ (59,989) (9.8) % (7.8) % 17.9 % 19.2 % (1.3) %
Facilities 537,181 523,369 13,812 2.6 % 4.3 % 17.4 % 16.4 % 1.0 %
Transportation 97,990 123,136 (25,146) (20.4) % (19.6) % 3.2 % 3.9 % (0.7) %
Product Cost of Sales and
Other 112,904 114,937 (2,033) (1.8) % 0.6 % 3.7 % 3.6 % 0.1 %
COVID-19 Costs 7,648 - 7,648 100.0 % 100.0 % 0.2 % - % 0.2 %
Total Cost of sales $ 1,308,119 $ 1,373,827 $ (65,708) (4.8) % (3.0) % 42.4 % 43.2 % (0.8) %
Primary factors influencing the change in reported consolidated Cost of sales
for the nine months ended September 30, 2020 include the following:
•a decrease in labor costs driven by cost containment actions taken in response
to lower service activity levels due to the COVID-19 pandemic, partially offset
by incremental labor costs associated with recent acquisitions;
•a decrease in transportation costs, primarily driven by lower third-party
carrier costs and fuel costs, reflecting cost containment actions taken in
response to lower service activity levels;
•an increase in facilities expenses driven by increases in rent expense, in part
due to recent acquisitions; and
•a decrease of $25.4 million due to foreign currency exchange rate fluctuations.
43-------------------------------------------------------------------------------- Table of Contents Selling, General and Administrative Expenses
Consolidated Selling, general and administrative expenses consists of the following expenses (in thousands):
% of Percentage
Three Months Ended Percentage Change Consolidated Change
September 30, Dollar Constant Revenues (Favorable)/
2020 2019 Change Actual Currency 2020 2019 Unfavorable
General and Administrative
(1.4) % (1.0) % 12.7 % 12.6 % 0.1 %
Sales, Marketing and Account
Management 55,294 58,011 (2,717) (4.7) % (4.6) % 5.3 % 5.5 % (0.2) %
Information Technology 40,351 37,781 2,570 6.8 % 6.9 % 3.9 % 3.6 % 0.3 %
Bad Debt Expense 4,539 7,563 (3,024) (40.0) % (40.5) % 0.4 % 0.7 % (0.3) %
Total Selling, general and
administrative expenses $ 232,095 $ 237,151 $ (5,056) (2.1) % (1.9) % 22.4 % 22.3 % 0.1 %
Percentage
Nine Months Ended Percentage Change % of Change
September 30, Dollar Constant Consolidated Revenues (Favorable)/
2020 2019 Change Actual Currency 2020 2019 Unfavorable
General and Administrative
(7.4) % (6.1) % 12.9 % 13.5 % (0.6) %
Sales, Marketing and Account
Management 167,138 186,717 (19,579) (10.5) % (9.3) % 5.4 % 5.9 % (0.5) %
Information Technology 120,995 125,981 (4,986) (4.0) % (3.0) % 3.9 % 4.0 % (0.1) %
Bad Debt Expense 25,715 16,350 9,365 57.3 % 57.4 % 0.8 % 0.5 % 0.3 %
COVID-19 Costs 1,637 - 1,637 100.0 % 100.0 % 0.1 % - % 0.1 %
Total Selling, general and
administrative expenses $ 712,775 $ 758,018 $ (45,243) (6.0) % (4.7) % 23.1 % 23.8 % (0.7) %
Primary factors influencing the change in reported consolidated Selling, general
and administrative expenses for the three months ended September 30, 2020
include the following:
•a decrease in bad debt expense, primarily driven by improved collection
activity; and
•a decrease of $0.5 million due to foreign currency exchange rate fluctuations.
Primary factors influencing the change in reported consolidated Selling, general
and administrative expenses for the nine months ended September 30, 2020 include
the following:
•a decrease in general and administrative expenses, driven by decreased wages
and benefits expense and other employee related costs, as well as lower
professional fees, reflecting benefits from Project Summit and ongoing cost
containment measures, partially offset by higher bonus compensation accruals;
•a decrease in sales, marketing and account management expenses, driven by
decreased compensation expense and other employee related costs, reflecting
benefits from Project Summit and ongoing cost containment measures;
•higher bad debt expense, primarily driven by increased collectability risk
resulting from the COVID-19 pandemic; and
•foreign currency exchange rate fluctuations decreased reported consolidated
Selling, general and administrative expenses by $9.8 million .
44
--------------------------------------------------------------------------------
Table of Contents
Depreciation and Amortization
Depreciation expense decreased by $1.7 million , or 0.5%, for the nine months
ended September 30, 2020 compared to the prior year period. See Note 2.f. to
Notes to Consolidated Financial Statements included in our Annual Report for
additional information regarding the useful lives over which our property, plant
and equipment is depreciated.
Amortization expense increased by
Restructuring Charges
Restructuring Charges for the nine months endedSeptember 30, 2020 were approximately$128.7 million and primarily consist of employee severance costs, internal costs associated with the development and implementation of Project Summit initiatives and professional fees.
Intangible impairments
The intangible impairment charge for the nine months endedSeptember 30, 2020 was$23.0 million and related to the write-down of goodwill associated with our Fine Arts reporting unit in the first quarter of 2020, as discussed above.
Gain on disposal/write-down of property, plant and equipment, net
Consolidated gain on disposal/write-down of property, plant and equipment, net, for the three and nine months endedSeptember 30, 2020 was approximately$75.8 million and$78.2 million , respectively. These amounts primarily consisted of gains of approximately$76.4 million associated with the sale-leaseback transactions of two facilities during the third quarter of 2020. Consolidated gain on disposal/write-down of property, plant and equipment, net, for the three and nine months endedSeptember 30, 2019 was approximately$9.3 million and$17.1 million , respectively. These amounts consisted of (i) a gain of approximately$36.0 million associated with the sale of certain land and buildings during the second quarter of 2019 and (ii) a gain of approximately$9.8 million associated with a sale-leaseback transaction of five facilities during the third quarter of 2019, and were partially offset by losses incurred during the second quarter of 2019 primarily associated with an impairment charge on the assets associated with the select offerings within our Iron Mountain Iron Cloud portfolio of approximately$24.8 million .
OTHER EXPENSES, NET
Interest Expense, Net
Consolidated interest expense, net decreased by$1.0 million , to$313.4 million in the nine months endedSeptember 30, 2020 from$314.4 million in the prior year period. This decrease was mainly driven by a decrease in the weighted average interest rate on our outstanding debt, partially offset by higher average debt outstanding during the nine months endedSeptember 30, 2020 . See Note 5 to Notes to Condensed Consolidated Financial Statements included in this Quarterly Report for additional information regarding our indebtedness. 45 -------------------------------------------------------------------------------- Table of Contents Other Expense (Income), Net Consolidated other expense (income), net consists of the following (in thousands): Three Months Ended Nine Months Ended September 30, Dollar September 30, Dollar Description 2020 2019 Change 2020 2019 Change Foreign currency transaction losses (gains), net$ 29,635 $ (18,251)
51,260 - 51,260 68,300 - 68,300
Other, net 2,570 4,836 (2,266) 4,432 6,488 (2,056)
Other Expense (Income), Net $ 83,465 $ (13,415) Foreign currency transaction losses (gains), net
We recorded net foreign currency transaction gains of$6.3 million in the nine months endedSeptember 30, 2020 , based on period-end exchange rates. These gains resulted primarily from the impact of changes in the exchange rate of the British pound sterling againstthe United States dollar compared toDecember 31, 2019 on our intercompany balances with and between certain of our subsidiaries. We recorded net foreign currency transaction gains of$19.9 million in the nine months endedSeptember 30, 2019 , based on period-end exchange rates. These gains resulted primarily from the impact of changes in the exchange rate of the British pound sterling againstthe United States dollar compared toDecember 31, 2018 on our intercompany balances with and between certain of our subsidiaries.
Debt extinguishment expense
Debt extinguishment expense represents the call premiums and write-off of unamortized deferred financing costs associated with the early redemption of the 6% Notes due 2023, the 43/8% Notes, the 53/4% Notes, the CAD Notes, the Euro Notes and the 53/8% Notes (as defined below).
Other, net
Included in Other, net are losses on certain of our equity method investments, which are partially offset by a gain of approximately$10.0 million recorded during the first quarter of 2020 in connection with our acquisition of the remaining 75% equity interest inOSG Records Management (Europe) Limited ("OSG" and such acquisition, the "OSG Acquisition"), as our previously held 25% equity investment in OSG was remeasured to fair value at the closing date of the OSG Acquisition. Provision for Income Taxes
We provide for income taxes during interim periods based on our estimate of the effective tax rate for the year.
Our effective tax rates for the three and nine months endedSeptember 30, 2020 and 2019 are as follows: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Effective Tax Rate(1) 26.5 % 16.8 % 25.7 % 15.7 %
_______________________________________________________________
(1)The primary reconciling items between the federal statutory tax rate of 21.0% and our overall effective tax rate for the three and nine months endedSeptember 30, 2020 and 2019 were the benefit derived from the dividends paid deduction and the impact of differences in the tax rates at which our foreign earnings are subject, including foreign exchange gains and losses in different jurisdictions with different tax rates. In addition, for the three and nine months endedSeptember 30, 2020 , the costs associated with Project Summit are more heavily weighted to ourUnited States qualified REIT subsidiaries, and, therefore, provide no tax benefit. 46 -------------------------------------------------------------------------------- Table of Contents INCOME (LOSS) FROM CONTINUING OPERATIONS AND ADJUSTED EBITDA The following table reflects the effect of the foregoing factors on our consolidated Income (Loss) From Continuing Operations and Adjusted EBITDA (in thousands): Three Months Ended September 30, Dollar 2020 2019 Change Percentage Change
Income (Loss) from Continuing Operations
$ (69,722) (64.4) % Income (Loss) from Continuing Operations as a percentage of Consolidated Revenue 3.7 % 10.2 % Adjusted EBITDA$ 370,047 $ 375,701 $ (5,654) (1.5) % Adjusted EBITDA Margin 35.7 % 35.4 % Nine Months Ended September 30, Dollar 2020 2019 Change Percentage Change
Income (Loss) from Continuing Operations
$ (134,766) (58.3) % Income (Loss) from Continuing Operations as a percentage of Consolidated Revenue 3.1 % 7.3 % Adjusted EBITDA$ 1,076,008 $ 1,051,149 $ 24,859 2.4 % Adjusted EBITDA Margin 34.8 % 33.0 % Adjusted EBITDA Margin increased by 180 basis points for the nine months endedSeptember 30, 2020 compared to the same prior year period, reflecting benefits from Project Summit, revenue management, favorable revenue mix and ongoing cost containment measures, partially offset by fixed cost deleverage on lower service revenue and higher bonus compensation accruals. Adjusted EBITDA for the nine months endedSeptember 30, 2020 excludes$9.3 million of direct and incremental costs related to COVID-19 incurred in the second quarter. The decrease in Adjusted EBITDA for the three months endedSeptember 30, 2020 compared to the same prior year period, reflects the impact of lower service activity levels and higher bonus compensation accruals, partially offset by benefits from Project Summit. Adjusted EBITDA for the three months endedSeptember 30, 2020 includes direct and incremental costs related to COVID-19. 47 -------------------------------------------------------------------------------- Table of Contents Segment Analysis (in thousands)
See Note 9 to Notes to Consolidated Financial Statements included in our Annual Report for a description of our reportable operating segments.
Global RIM Business
Three Months Ended Percentage Change
September 30, Dollar Constant Organic Impact of
2020 2019 Change Actual Currency Growth Acquisitions
Storage Rental $ 598,949 $ 582,844 $ 16,105 2.8 % 3.4 % 1.8 % 1.6 %
Service 322,824 366,720 (43,896) (12.0) % (11.7) % (13.0) % 1.3 %
Segment Revenue $ 921,773 $ 949,564 $ (27,791) (2.9) % (2.5) % (3.9) % 1.4 %
Segment Adjusted EBITDA $ 393,883 $ 395,181 $ (1,298)
Segment Adjusted EBITDA
Margin 42.7 % 41.6 %
Nine Months Ended Percentage Change
September 30, Dollar Constant Organic Impact of
2020 2019 Change Actual Currency Growth Acquisitions
Storage Rental $ 1,773,364 $ 1,738,192 $ 35,172 2.0 % 3.9 % 2.0 % 1.9 %
Service 981,930 1,112,111 (130,181) (11.7) % (10.3) % (12.3) % 2.0 %
Segment Revenue $ 2,755,294 $ 2,850,303 $ (95,009) (3.3) % (1.7) % (3.6) % 1.9 %
Segment Adjusted EBITDA $ 1,169,671 $ 1,156,596 $ 13,075
Segment Adjusted EBITDA
Margin 42.5 % 40.6 %
Primary factors influencing the change in revenue and Adjusted EBITDA Margin in
our Global RIM Business segment for the nine months ended September 30, 2020
include the following:
•a decline in organic service revenue mainly driven by reduced service activity
levels, primarily related to the COVID-19 pandemic;
•organic storage rental revenue growth driven by revenue management;
•a decrease in revenue of $48.7 million due to foreign currency exchange rate
fluctuations;
•a 2.1% increase in global records management net volume due to acquisitions
(excluding acquisitions, global records management net volume decreased 1.2%);
and
•a 190 basis point increase in Adjusted EBITDA Margin primarily driven by
benefits from Project Summit, revenue management, favorable revenue mix and
ongoing cost containment measures, partially offset by fixed cost deleverage on
lower service revenue and higher bonus compensation accruals.
48
--------------------------------------------------------------------------------
Table of Contents
Global Data Center Business
Three Months Ended Percentage Change
September 30, Dollar Constant Organic Impact of
2020 2019 Change Actual Currency Growth Acquisitions
Storage Rental $ 68,416 $ 62,001 $ 6,415 10.3 % 9.5 % 9.5 % - %
Service 4,398 2,417 1,981 82.0 % 79.9 % 79.9 % - %
Segment Revenue $ 72,814 $ 64,418 $ 8,396 13.0 % 12.1 % 12.1 % - %
Segment Adjusted EBITDA $ 33,359 $ 32,261 $ 1,098
Segment Adjusted EBITDA
Margin 45.8 % 50.1 %
Nine Months Ended Percentage Change
September 30, Dollar Constant Organic Impact of
2020 2019 Change Actual Currency Growth Acquisitions
Storage Rental $ 196,823 $ 182,301 $ 14,522 8.0 % 8.0 % 8.0 % - %
Service 10,116 5,944 4,172 70.2 % 69.6 % 69.6 % - %
Segment Revenue $ 206,939 $ 188,245 $ 18,694 9.9 % 9.9 % 9.9 % - %
Segment Adjusted EBITDA $ 94,812 $ 85,913 $ 8,899
Segment Adjusted EBITDA
Margin 45.8 % 45.6 %
Primary factors influencing the change in revenue and Adjusted EBITDA Margin in
our Global Data Center Business segment for the nine months ended September 30,
2020 include the following:
•organic total revenue growth from leases signed in prior periods and service
revenue growth partially offset by churn of 290 basis points;
•non-recurring revenue benefits in the prior year include a previously disclosed
lease modification fee of $3.4 million , while non-recurring revenue benefits in
the current year were $1.8 million ; and
•a 20 basis point increase in Adjusted EBITDA Margin driven by ongoing cost
containment measures, partially offset by headwinds from flow through of
non-recurring revenue items described above.
49
--------------------------------------------------------------------------------
Table of Contents
Corporate and Other Business
Three Months Ended Percentage Change
September 30, Dollar Constant Organic Impact of
2020 2019 Change Actual Currency Growth Acquisitions
Storage Rental $ 28,929 $ 28,473 $ 456 1.6 % 1.0 % 1.1 % (0.1) %
Service 13,131 19,769 (6,638) (33.6) % (34.1) % (34.0) % (0.1) %
Segment Revenue $ 42,060 $ 48,242 $ (6,182) (12.8) % (13.4) % (13.3) % (0.1) %
Segment Adjusted EBITDA $ (57,195) $ (51,741) $ (5,454)
Segment Adjusted EBITDA as a
percentage of Consolidated
Revenue (5.5) % (4.9) %
Nine Months Ended Percentage Change
September 30, Dollar Constant Organic Impact of
2020 2019 Change Actual Currency Growth Acquisitions
Storage Rental $ 86,610 $ 85,087 $ 1,523 1.8 % 1.8 % 3.3 % (1.5) %
Service 38,774 59,359 (20,585) (34.7) % (34.4) % (34.9) % 0.5 %
Segment Revenue $ 125,384 $ 144,446 $ (19,062) (13.2) % (13.0) % (12.5) % (0.5) %Segment Adjusted EBITDA $ (188,475)$ (191,360) $ 2,885 Segment Adjusted EBITDA as a percentage of Consolidated Revenue (6.1) % (6.0) % Primary factors influencing the change in revenue and Adjusted EBITDA in our Corporate and Other Business segment for the nine months endedSeptember 30, 2020 include the following: •a decline in organic service revenue due to lower service activity levels in our Fine Arts business, primarily related to the COVID-19 pandemic; and •an increase in Adjusted EBITDA driven by benefits from Project Summit and ongoing cost containment measures, partially offset by the impact of lower service activity in our Fine Arts business in addition to higher corporate bonus compensation accruals. 50 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources
Project Summit
As disclosed above, inOctober 2019 , we announced Project Summit. We estimate that the implementation of Project Summit will result in total costs of$450.0 million . During the nine months endedSeptember 30, 2020 , we incurred approximately$133.4 million of costs related to Project Summit which were comprised of$128.7 million of Restructuring Charges, primarily related to employee severance costs, internal costs associated with the development and implementation of Project Summit initiatives and professional fees, and$4.7 million of capital expenditures.
© Edgar Online, source
