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IRON MOUNTAIN INCORPORATED Index
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| (Mark One) | |
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2003 |
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or |
|
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
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Commission file number 1-13045
IRON MOUNTAIN INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
| Pennsylvania (State or Other Jurisdiction of Incorporation) |
23-2588479 (I.R.S. Employer Identification No.) |
|
745 Atlantic Avenue, Boston, MA 02111 (Address of Principal Executive Offices, Including Zip Code) |
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(617) 535-4766 (Registrant's Telephone Number, Including Area Code) |
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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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o
Number of shares of the registrant's Common Stock at November 3, 2003: 85,362,615
IRON MOUNTAIN INCORPORATED
Index
2
Item 1. Unaudited Consolidated Financial Statements
IRON MOUNTAIN INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In Thousands, except Share and Per Share Data)
(Unaudited)
| |
December 31, 2002 |
September 30, 2003 |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||||
| Current Assets: | ||||||||||
| Cash and cash equivalents | $ | 56,292 | $ | 23,544 | ||||||
| Accounts receivable (less allowances of $20,274 and $22,657, respectively) | 225,416 | 276,391 | ||||||||
| Deferred income taxes | 34,192 | 35,200 | ||||||||
| Prepaid expenses and other | 51,140 | 60,983 | ||||||||
| Total Current Assets | 367,040 | 396,118 | ||||||||
| Property, Plant and Equipment: | ||||||||||
| Property, plant and equipment | 1,577,588 | 1,897,790 | ||||||||
| Less—Accumulated depreciation | (338,400 | ) | (424,314 | ) | ||||||
| Net Property, Plant and Equipment | 1,239,188 | 1,473,476 | ||||||||
| Other Assets, net: | ||||||||||
| Goodwill | 1,544,974 | 1,726,402 | ||||||||
| Customer relationships and acquisition costs | 48,213 | 102,026 | ||||||||
| Deferred financing costs | 19,358 | 21,145 | ||||||||
| Other | 11,882 | 20,374 | ||||||||
| Total Other Assets, net | 1,624,427 | 1,869,947 | ||||||||
| Total Assets | $ | 3,230,655 | $ | 3,739,541 | ||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||
| Current Liabilities: | ||||||||||
| Current portion of long-term debt | $ | 69,732 | $ | 60,812 | ||||||
| Accounts payable | 76,115 | 77,958 | ||||||||
| Accrued expenses | 168,025 | 195,087 | ||||||||
| Deferred revenue | 95,188 | 101,989 | ||||||||
| Other current liabilities | 18,902 | 37,280 | ||||||||
| Total Current Liabilities | 427,962 | 473,126 | ||||||||
| Long-term Debt, net of current portion | 1,662,365 | 2,002,160 | ||||||||
| Other Long-term Liabilities | 35,433 | 30,501 | ||||||||
| Deferred Rent | 19,438 | 20,274 | ||||||||
| Deferred Income Taxes | 78,464 | 118,944 | ||||||||
| Commitments and Contingencies (Note 10) | ||||||||||
| Minority Interests | 62,132 | 72,186 | ||||||||
| Shareholders' Equity: | ||||||||||
| Preferred stock (par value $0.01; authorized 10,000,000 shares; none issued and outstanding) | — | — | ||||||||
| Common stock (par value $0.01; authorized 150,000,000 shares; issued and outstanding 85,049,624 shares and 85,338,864 shares, respectively) | 850 | 853 | ||||||||
| Additional paid-in capital | 1,020,522 | 1,031,075 | ||||||||
| Deferred compensation | (70 | ) | (3,578 | ) | ||||||
| (Accumulated deficit) Retained earnings | (45,403 | ) | 10,808 | |||||||
| Accumulated other comprehensive items, net | (31,038 | ) | (16,808 | ) | ||||||
| Total Shareholders' Equity | 944,861 | 1,022,350 | ||||||||
| Total Liabilities and Shareholders' Equity | $ | 3,230,655 | $ | 3,739,541 | ||||||
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 September 30, |
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|---|---|---|---|---|---|---|---|---|
| |
2002 |
2003 |
||||||
| Revenues: | ||||||||
| Storage | $ | 191,377 | $ | 222,973 | ||||
| Service and storage material sales | 141,736 | 158,785 | ||||||
| Total Revenues | 333,113 | 381,758 | ||||||
| Operating Expenses: | ||||||||
| Cost of sales (excluding depreciation) | 153,858 | 171,355 | ||||||
| Selling, general and administrative | 83,986 | 98,087 | ||||||
| Depreciation and amortization | 28,950 | 33,197 | ||||||
| Merger-related expenses | 190 | — | ||||||
| Loss on disposal/writedown of property, plant and equipment, net | 139 | 1,870 | ||||||
| Total Operating Expenses | 267,123 | 304,509 | ||||||
| Operating Income | 65,990 | 77,249 | ||||||
| Interest Expense, Net | 36,017 | 38,790 | ||||||
| Other Expense, Net | 2,648 | 10,343 | ||||||
| Income from Continuing Operations Before Provision for Income Taxes and Minority Interest | 27,325 | 28,116 | ||||||
| Provision for Income Taxes | 11,241 | 12,012 | ||||||
| Minority Interest in Earnings of Subsidiaries, Net | 387 | 1,310 | ||||||
| Net Income | $ | 15,697 | $ | 14,794 | ||||
| Net Income per Share: | ||||||||
| Net Income per Share—Basic | $ | 0.19 | $ | 0.17 | ||||
| Net Income per Share—Diluted | $ | 0.18 | $ | 0.17 | ||||
| Weighted Average Common Shares Outstanding—Basic | 84,769 | 85,303 | ||||||
| Weighted Average Common Shares Outstanding—Diluted | 85,997 | 86,726 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
IRON MOUNTAIN INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except Per Share Data)
(Unaudited)
| |
Nine Months Ended September 30, |
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|---|---|---|---|---|---|---|---|---|
| |
2002 |
2003 |
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| Revenues: | ||||||||
| Storage | $ | 561,797 | $ | 634,773 | ||||
| Service and storage material sales | 416,234 | 458,066 | ||||||
| Total Revenues | 978,031 | 1,092,839 | ||||||
| Operating Expenses: | ||||||||
| Cost of sales (excluding depreciation) | 461,711 | 493,538 | ||||||
| Selling, general and administrative | 251,492 | 285,377 | ||||||
| Depreciation and amortization | 80,459 | 93,911 | ||||||
| Merger-related expenses | 770 | — | ||||||
| (Gain) Loss on disposal/writedown of property, plant and equipment, net | (1,921 | ) | 1,886 | |||||
| Total Operating Expenses | 792,511 | 874,712 | ||||||
| Operating Income | 185,520 | 218,127 | ||||||
| Interest Expense, Net | 101,685 | 110,752 | ||||||
| Other (Income) Expense, Net | (2,308 | ) | 2,361 | |||||
| Income from Continuing Operations Before Provision for Income Taxes and Minority Interest | 86,143 | 105,014 | ||||||
| Provision for Income Taxes | 35,497 | 44,635 | ||||||
| Minority Interest in Earnings of Subsidiaries, Net | 2,442 | 4,168 | ||||||
| Income from Continuing Operations before Cumulative Effect of Change in Accounting Principle | 48,204 | 56,211 | ||||||
| Cumulative Effect of Change in Accounting Principle (net of minority interest) | (6,396 | ) | — | |||||
| Net Income | $ | 41,808 | $ | 56,211 | ||||
Net Income per Share—Basic: |
||||||||
| Income from Continuing Operations before Cumulative Effect of Change in Accounting Principle | $ | 0.57 | $ | 0.66 | ||||
| Cumulative Effect of Change in Accounting Principle | (0.08 | ) | — | |||||
| Net Income per Share—Basic | $ | 0.49 | $ | 0.66 | ||||
Net Income per Share—Diluted: |
||||||||
| Income from Continuing Operations before Cumulative Effect of Change in Accounting Principle | $ | 0.56 | $ | 0.65 | ||||
| Cumulative Effect of Change in Accounting Principle | (0.07 | ) | — | |||||
| Net Income per Share—Diluted | $ | 0.49 | $ | 0.65 | ||||
| Weighted Average Common Shares Outstanding—Basic | 84,558 | 85,211 | ||||||
| Weighted Average Common Shares Outstanding—Diluted | 86,026 | 86,690 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
IRON MOUNTAIN INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
| |
Nine Months Ended September 30, |
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|---|---|---|---|---|---|---|---|---|
| |
2002 |
2003 |
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| Cash Flows from Operating Activities: | ||||||||
| Net income | $ | 41,808 | $ | 56,211 | ||||
| Adjustments to reconcile net income to income from continuing operations before cumulative effect of change in accounting principle: | ||||||||
| Cumulative effect of change in accounting principle (net of minority interest) | 6,396 | — | ||||||
| Income from continuing operations before cumulative effect of change in accounting principle | 48,204 | 56,211 | ||||||
| Adjustments to reconcile income from continuing operations before cumulative effect of change in accounting principle to cash flows provided by operating activities: | ||||||||
| Minority interests, net | 2,442 | 4,168 | ||||||
| Depreciation | 76,835 | 88,921 | ||||||
| Amortization (includes deferred financing costs and bond discount of $3,691 and $2,939, respectively) | 7,315 | 7,929 | ||||||
| Provision for deferred income taxes | 33,111 | 40,738 | ||||||
| Loss on early extinguishment of debt | 1,222 | 21,175 | ||||||
| (Gain) Loss on disposal/writedown of property, plant and equipment, net | (1,921 | ) | 1,886 | |||||
| Gain on foreign currency and other, net | (3,513 | ) | (18,024 | ) | ||||
| Changes in Assets and Liabilities (exclusive of acquisitions): | ||||||||
| Accounts receivable | (8,230 | ) | (14,880 | ) | ||||
| Prepaid expenses and other current assets | 8,898 | 5,098 | ||||||
| Accounts payable | (3,845 | ) | (6,516 | ) | ||||
| Accrued expenses, deferred revenue and other current liabilities | 10,707 | (2,014 | ) | |||||
| Other assets and long-term liabilities | 1,223 | (1,073 | ) | |||||
| Cash Flows Provided by Operating Activities | 172,448 | 183,619 | ||||||
| Cash Flows from Investing Activities: | ||||||||
| Capital expenditures | (142,018 | ) | (148,039 | ) | ||||
| Cash paid for acquisitions, net of cash acquired | (22,969 | ) | (378,803 | ) | ||||
| Additions to customer relationship and acquisition costs | (6,841 | ) | (8,638 | ) | ||||
| Investment in convertible preferred stock | — | (1,357 | ) | |||||
| Proceeds from sales of property and equipment | 6,331 | 6,621 | ||||||
| Cash Flows Used in Investing Activities | (165,497 | ) | (530,216 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Repayment of debt and term loans | (428,954 | ) | (485,408 | ) | ||||
| Proceeds from borrowings and term loans | 426,528 | 626,029 | ||||||
| Early retirement of senior subordinated notes | — | (306,439 | ) | |||||
| Net proceeds from sales of senior subordinated notes | — | 455,590 | ||||||
| Debt financing (repayment to) and equity contribution from (distribution to) minority shareholders, net | (2,859 | ) | 20,099 | |||||
| Other, net | 4,487 | 3,165 | ||||||
| Cash Flows (Used in) Provided by Financing Activities | (798 | ) | 313,036 | |||||
| Effect of Exchange Rates on Cash and Cash Equivalents | 85 | 813 | ||||||
| Increase (Decrease) in Cash and Cash Equivalents | 6,238 | (32,748 | ) | |||||
| Cash and Cash Equivalents, Beginning of Period | 21,359 | 56,292 | ||||||
| Cash and Cash Equivalents, End of Period | $ | 27,597 | $ | 23,544 | ||||
| Supplemental Information (Note 2) | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
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 without audit 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.
The consolidated balance sheet presented as of December 31, 2002 has been derived from the consolidated financial statements that have been audited by our independent auditors. The unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to those rules and regulations, but we believe that the disclosures are adequate to make the information presented not misleading. The consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K/A for the year ended December 31, 2002.
Certain reclassifications have been made to the 2002 financial statements to conform to the 2003 presentation.
(2) Summary of Significant Accounting Policies
We apply the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually for impairment or more frequently if impairment indicators arise. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives.
Upon adoption of SFAS No. 142, as of January 1, 2002, we recorded a charge of $6,396 (net of minority interest of $8,487), that was reported in the caption "cumulative effect of change in accounting principle" in the accompanying consolidated statement of operations. Impairment adjustments recognized in the future, if any, are generally required to be recognized as operating expenses. The $6,396 charge related to our South American reporting unit within our international reporting segment. The South American reporting unit failed the impairment test primarily due to a reduction in the expected future performance of the unit resulting from a deterioration of the local economic environment and the devaluation of the currency in Argentina. As goodwill amortization expense in our South American reporting unit is not deductible for tax purposes, this impairment charge is not net of a tax benefit. We have selected October 1 as our annual goodwill impairment review date. We performed our annual goodwill impairment review as of October 1, 2002 and noted no impairment of goodwill at our reporting units as of that date. As of September 30, 2003, no factors were identified that would alter this assessment and we are in the process of completing our annual 2003 assessment, utilizing data as of October 1, 2003.
7
The changes in the carrying value of goodwill attributable to each reportable operating segment for the period ended September 30, 2003 are as follows:
| |
Business Records Management |
Off-Site Data Protection |
International |
Corporate & Other |
Total Consolidated |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance as of December 31, 2002 | $ | 1,151,760 | $ | 237,178 | $ | 154,665 | $ | 1,371 | $ | 1,544,974 | ||||||
| Goodwill acquired during the year | 47,327 | 6,391 | 106,979 | — | 160,697 | |||||||||||
| Adjustments to purchase reserves | (309 | ) | (52 | ) | 66 | — | (295 | ) | ||||||||
| Fair value adjustments | (168 | ) | (150 | ) | (4,458 | ) | — | (4,776 | ) | |||||||
| Other adjustments and currency effects | 18,874 | 8 | 6,920 | — | 25,802 | |||||||||||
| Balance as of September 30, 2003 | $ | 1,217,484 | $ | 243,375 | $ | 264,172 | $ | 1,371 | $ | 1,726,402 | ||||||
The components of our amortizable intangible assets at September 30, 2003 are as follows:
| |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
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|---|---|---|---|---|---|---|---|---|---|
| Customer Relationships and Acquisition Costs | $ | 114,918 | $ | 12,892 | $ | 102,026 | |||
| Non-Compete Agreements | 20,943 | 18,832 | 2,111 | ||||||
| Deferred Financing Costs | 26,177 | 5,032 | 21,145 | ||||||
| Total | $ | 162,038 | $ | 36,756 | $ | 125,282 | |||
As of January 1, 2003, we adopted the measurement provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure." As a result we began using the fair value method of accounting in our financial statements beginning January 1, 2003 using the prospective method. The prospective method involves recognizing expense for the fair value for all awards granted or modified in the year of adoption and thereafter with no expense recognition for previous awards. We will apply the fair value recognition provisions to all stock based awards granted, modified or settled on or after January 1, 2003 and will continue to provide the required pro forma information for all awards previously granted, modified or settled before January 1, 2003.
8
Had we elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123 and No. 148, net income and net income per share would have been changed to the pro forma amounts indicated in the table below:
| |
Three Months Ended September 30, |
Nine Months Ended September 30, |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2002 |
2003 |
2002 |
2003 |
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| Net income, as reported | $ | 15,697 | $ | 14,794 | $ | 41,808 | $ | 56,211 | ||||||
| Add: Stock-based employee compensation expense included in reported net income, net of tax benefit | — | 380 | — | 502 | ||||||||||
| Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax benefit | (675 | ) | (881 | ) | (2,184 | ) | (2,061 | ) | ||||||
| Net income, pro forma | $ | 15,022 | $ | 14,293 | $ | 39,624 | $ | 54,652 | ||||||
| Earnings per share: | ||||||||||||||
| Basic—as reported | 0.19 | 0.17 | 0.49 | 0.66 | ||||||||||
| Basic—pro forma | 0.18 | 0.17 | 0.47 | 0.64 | ||||||||||
| Diluted—as reported | 0.18 | 0.17 | 0.49 | 0.65 | ||||||||||
| Diluted—pro forma | 0.18 | 0.17 | 0.46 | 0.63 | ||||||||||
The weighted average fair value of options granted for the nine months ended September 30, 2002 and 2003 was $9.31 and $10.97 per share, respectively. The 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:
| Weighted Average Assumptions |
Nine Months Ended September 30, 2002 |
Nine Months Ended September 30, 2003 |
||
|---|---|---|---|---|
| Expected volatility | 25.0% | 27.3% | ||
| Risk-free interest rate | 4.28 | 2.85 | ||
| Expected dividend yield | None | None | ||
| Expected life of the option | 5.0 years | 5.0 years |
In accordance with SFAS No. 128, "Earnings per Share," basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding. The calculation of diluted net income (loss) per share is consistent with that of basic net 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. Potential common shares, substantially attributable to stock options, included in the calculation of diluted net income per share totaled 1,228,121 shares and 1,467,641 shares for the three and nine months ended September 30, 2002 and 1,423,341 shares and 1,478,821 shares for the three and nine months ended September 30, 2003, respectively.
9
For the three months ended September 30, 2002 and 2003, 491,899 and 307,176, respectively, potential common shares have been excluded from the calculation of diluted net income per share, as their effects are antidilutive.
For the nine months ended September 30, 2002 and 2003, cash payments for interest were $96,763 and $95,043, respectively, and cash payments for income taxes were $1,810 and $3,967, respectively.
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, amendment of FASB Statement No. 13, and Technical Corrections," which, among other things, limits the classification of gains and losses from extinguishment of debt as extraordinary to only those transactions that are unusual and infrequent in nature as defined by APB Opinion No. 30 "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." We adopted SFAS No. 145 on January 1, 2003. Gains and losses on certain future debt extinguishments, if any, will be recorded in pre-tax income. Losses on early extinguishment of debt of $0 and $1,222 for the three and nine months ended September 30, 2002 and $5,510 and $21,175 for the three and nine months ended September 30, 2003, respectively, are included in other income, net in our accompanying consolidated statements of operations to conform to the requirements under SFAS No. 145.
(3) Comprehensive Income (Loss)
SFAS No. 130, "Reporting Comprehensive Income," requires presentation of the components of comprehensive income (loss), including the changes in equity from non-owner sources such as unrealized gains (losses) on hedging transactions, securities and foreign currency translation adjustments. Our total comprehensive income (loss) is as follows:
| |
Three Months Ended September 30, |
Nine Mont | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|