Iron Mountain: Fiscal 3Q08 Financial Results

Iron Mountain Incorporated announced its financial results for the quarter ended September 30, 2008, reporting strong revenue and operating income before depreciation and amortization (OIBDA) growth and earnings of $0.06 per diluted share.

Iron Mountain posted strong year-over-year revenue growth of 12% in the third quarter supported by internal growth of 8%, with acquisitions and foreign currency rate changes contributing approximately 4% to total growth. The Company drove solid revenue gains across its North American Physical, International Physical and Worldwide Digital business segments. Total revenue growth was highlighted by continued strength in service revenue growth, supported by strong overall performance in the North American physical business. OIBDA of $211 million for the quarter exceeded the Company’s forecasted range driven by a 14% year-over-year increase in gross profit, reflecting strong revenue gains and continued improvements in gross margins.

"While considerable volatility in foreign exchange rates impacts our reported results, our underlying operational performance and outlook remain strong, reflecting the resiliency of our business model," said Bob Brennan, President and CEO. "We are pleased with our strong third quarter operating results and continued solid business performance. These results reflect solid growth across our segments, driven by our team’s focus on disciplined execution in servicing our customers. We also continue to exercise financial discipline in the current environment, maintaining strong liquidity and financing capacity."

Net income for the quarter of $11 million, or $0.06 per diluted share, was impacted by the significant strengthening of the U.S. dollar since the end of the second quarter of 2008. Declines of approximately 9% in currencies such as the British pound sterling and the Euro versus the U.S. dollar during the quarter resulted in a net $16 million non-cash charge in other expense, net as the Company marked its U.S. dollar denominated third party and intercompany debt to market. The net $16 million expense includes offsetting foreign currency gains and losses, which are incurred in different tax jurisdictions. As a result, the Company recorded an additional $20 million of non-cash tax provision. For the quarter, these non-cash charges impacted earnings by $0.17 per diluted share and raised the effective tax rate to 81.6%.

Key Financial Highlights – Q3 2008
Iron Mountain’s total consolidated revenues for the quarter grew 12% over the prior year period to $784 million driven by solid internal growth of 8% and augmented by several acquisitions completed in 2007, most notably ArchivesOne, Inc., RMS Services – USA, Inc. and Stratify, Inc. Storage internal growth of 8% was as expected. Core service internal revenue growth of 13% was supported by continued strength in shredding services, strong performance in the physical data protection business and increased fuel surcharges. Complementary service revenue internal growth was modest, as expected, due primarily to the completion of large special projects in Europe and some softness in the more discretionary revenues such as fulfillment services and software license sales.

The Company posted a 14% increase in gross profits for the quarter driven primarily by strong revenue growth. Gross profit margin improved from 54.0% in the third quarter of 2007 to 55.1% in the third quarter of 2008 due to improved storage gross margins in North America, Latin America and Asia Pacific, and increased service margins, supported in part by higher recycled paper revenues. These benefits more than offset the impact of the shift in revenue mix, as labor and transportation intensive services such as secure shredding and Document Management Solutions (DMS) grew faster than storage.

OIBDA for the quarter grew 10% over the prior year period to $211 million, reflecting the Company’s revenue performance and gross margin gains. Selling, general and administrative costs increased 14% in the quarter, slightly ahead of revenue gains, reflecting impacts from the integration of recent acquisitions and increased investments in security, new products and infrastructure enhancements initiated in 2007. The impacts of these investments moderated in the third quarter and are expected to moderate further in the fourth quarter.

Operating income for the third quarter of 2008 was $136 million, up 6% compared to the same period in 2007, as OIBDA gains were partially offset by increased depreciation and amortization expense, driven primarily by higher levels of capital expenditures in 2007 and acquisitions. Net income for the quarter was $11 million, or $0.06 per diluted share, including other expense, net of $16 million, driven by foreign currency rate fluctuations.

The Company’s effective tax rate for the quarter before the impact of any foreign currency rate fluctuations and other discrete items was approximately 40%, which is higher than the expected rate of 38% due to an increase in the estimate of disallowed interest expense deductions at certain foreign subsidiaries. The net tax impact of the foreign currency rate fluctuations as described above added approximately 42% to the effective rate. Based on the current view of its 2008 projected tax position, the Company expects its tax rate before the impact of any foreign currency rate fluctuations and other discrete items for 2008 to be approximately 39%. Included in the 39% rate for 2008 is approximately 2% resulting from the unbenefited net operating losses of certain start-up entities. Beyond 2008, we expect our tax rate before the impact of any foreign currency rate fluctuations and other discrete items to decrease over time by approximately 2%.

The Company’s Free Cash Flow before Acquisitions and Discretionary Investments for the nine months ended September 30, 2008 was $86 million. Higher cash flows from operating activities compared to the comparable prior year period were more than offset by increased capital expenditures as the higher 2007 year end accrual reversed into the first quarter of 2008.

Acquisitions
Iron Mountain’s acquisition strategy focuses on acquiring attractive businesses that provide a strong platform for future growth by expanding the Company’s geographic footprint and service offerings while enhancing its existing operations. Since the end of the second quarter, the Company completed the previously announced acquisition of a DMS business in France.

Financial Performance Outlook
Iron Mountain is refining its financial performance outlook for the full year ending December 31, 2008. This guidance is based on current expectations and does not include the potential impact of any future acquisitions. For the full year, the Company is now targeting 11%-12% revenue growth and 11%-13% OIBDA growth (excluding gains and losses from asset disposals/write-offs). This performance is consistent with its long-term financial goals. Reductions in the company’s full year revenue and OIBDA guidance are driven by the significant strengthening of the U.S. dollar against the major currencies, which lowers results reported in US dollars. The Company’s outlook for the fourth quarter of 2008 set forth below includes a reduction of about 5% in both revenue and OIBDA driven by the strengthening U.S. dollar, which more than offset the impact of higher than expected performance in the third quarter. Also included in the full year outlook is the $5 million loss on asset write-offs reported year-to-date 2008 plus the $2 million write-off associated with planned real estate moves expected to be recorded in the quarter ending December 31, 2008.