Iron Mountain: Fiscal 1Q09 Financial Results

Iron Mountain Incorporated, Inc. reported its financial results for the first quarter ended March 31, 2009, announcing strong operating income and operating income before depreciation and amortization (OIBDA) growth of 14% and 12%, respectively, on a reported basis. Excluding impacts from asset gains and losses, OIBDA and operating income grew 9% compared to the first quarter of 2008. These results were supported by solid core revenue internal growth of 7%, which more than offset forecasted weakness in complementary service internal revenue growth. As expected, significantly weakened foreign currencies led by the British pound and the Canadian dollar reduced the Company’s reported revenue and OIBDA by 7% and 9%, respectively, compared to the first quarter of 2008. Driven by a significant increase in cash flows from operations and modest capital expenditures, the Company ended the quarter with excellent liquidity comprised of cash and availability under its revolving credit facility of more than $830 million.

"Iron Mountain’s business is healthy and performing as expected," said Bob Brennan, President and CEO. "Our disciplined management approach and focus on execution, particularly in our North American Physical segment, is driving solid core revenue and OIBDA growth. Our complementary revenue streams, which represent less than 15% of total revenues, were pressured as expected by economic conditions. Despite these impacts, we delivered strong results in the first quarter supported by continued productivity gains and disciplined cost management. We are raising our 2009 OIBDA guidance and lowering our capital spending outlook reflecting our continued progress on these fronts."

Iron Mountain reported total internal revenue growth of 4% in the first quarter supported by core revenue internal growth of 7%. Solid core revenue internal growth was reported across all business segments – the North American Physical, International Physical and Worldwide Digital business segments. As expected, complementary service revenues decreased year-over-year, due primarily to the completion of a large special project in Europe, lower recycled paper prices and softness in the more discretionary revenues such as project revenues, fulfillment services and software license sales. OIBDA of $197 million for the quarter exceeded the Company’s forecasted range due to higher gross profit margins and continued focus on overhead cost controls. Included in OIBDA for the first quarter of 2009 is a benefit of $5 million resulting from certain vehicle leases being classified as capital leases in 2009. These leases previously met the requirements to be considered operating leases. This benefit was included in the guidance originally issued by the Company on February 26, 2009.

Net income attributable to Iron Mountain Incorporated for the quarter was $29 million, or $0.14 per diluted share, driven by higher operating income and reduced interest expense. Earnings were again impacted by the continued weakening of the Euro, Canadian dollar and British pound versus the U.S. dollar during the quarter, which resulted in a net $7 million charge in other expense as the Company marked its foreign currency forward contracts and non-U.S. dollar denominated third party and intercompany debt to market. This net expense includes both foreign currency gains and losses, which are incurred in different tax jurisdictions. As a result, the Company recorded a $5 million tax provision. For the quarter, these charges impacted earnings by $0.06 per diluted share.

Key Financial Highlights – Q1 2009
Iron Mountain reported total consolidated revenues of $723 million for the quarter compared to $749 million for the prior year period. Internal revenue growth was 4% as expected. Core revenue internal growth was 7% supported by solid storage revenue growth in the North American Physical business and higher core service internal growth in the international and digital businesses. The overall internal growth rate was impacted by the continued softness in complementary service revenues as discussed above. Significantly weakened foreign currencies including the British pound, the Canadian dollar and the Euro reduced the revenue growth rate by 7% compared to the first quarter of 2008.

The Company reported gross profits of $406 million with its gross profit margin improving from 53.6% in the first quarter of 2008 to 56.2% in the first quarter of 2009. Gross margins were supported by productivity gains and improved storage gross margins in North America. Gross margins also benefited from the sale of the low margin data product sales business in June 2008 and from the recharacterization of certain vehicle leases as described above. These benefits more than offset the impact of expenses associated with the planned real estate moves in the United Kingdom.

OIBDA for the quarter was $197 million. OIBDA (excluding asset gains and losses) grew 9% compared to the first quarter of 2008 including 3% growth from the recharacterization of certain vehicle leases. Excluding the impacts of the foreign currency exchange rate changes and the lease recharacterization, OIBDA (excluding asset gains and losses) grew approximately 15%. Selling, general and administrative costs decreased 5% in the quarter. Excluding the impacts of the foreign currency exchange rate changes, these overhead costs increased 1%, below the rate of internal revenue growth reflecting disciplined cost management.

Operating income for the first quarter of 2009 was $121 million, up 14% compared to the same period in 2008. Excluding the impact of asset gains and losses, operating income increased 9% reflecting the flow through of OIBDA gains. Net income attributable to Iron Mountain Incorporated for the quarter was $29 million, or $0.14 per diluted share, including other expense of $7 million, driven primarily by foreign currency rate fluctuations.

The Company’s effective tax rate before the impact of foreign currency rate changes and other discrete items for the quarter was approximately 39%. The net tax impact of the foreign currency rate fluctuations described above added 13% and other discrete items added another 2% to the effective tax rate in the quarter.

Capital expenditures incurred in the first quarter of 2009 totaled $49 million, or 6.8% of revenues, excluding $2 million for the purchase of real estate. This is consistent with the same measure for 2008 as the Company maintained tight control over capital spending to improve capital efficiency. The Company has refined its 2009 capital spending plans and now expects total capital expenditures to be approximately $380 million for the year, $40 million below its prior full year outlook.

The Company’s Free Cash Flow before Acquisitions and Discretionary Investments (FCF) for the three months ended March 31, 2009 was $57 million. Higher cash flows from operating activities compared to the comparable prior year period, including a $15 million cash gain on the settlement of a foreign currency forward contract, and controlled capital expenditures drove this improvement. As a result of the increase in FCF and low level of acquisition spending in the quarter, the Company further improved its liquidity position. As of March 31, 2009, the Company had more than $830 million of liquidity including cash of $272 million and availability under its revolving credit facility of $560 million. Further, the Company’s consolidated leverage ratio of net debt to EBITDA (as defined by its senior credit facility) decreased from 3.8 times at December 31, 2008 to 3.6 times at March 31, 2009, well below the covenant limitation of 5.5 times included in its senior credit facility. The decrease illustrates the Company’s ability to naturally reduce its consolidated leverage ratio in the absence of significant acquisition activity.

Financial Performance Outlook
For 2009, the Company continues to target solid underlying operating performance supported by solid core revenue growth and sustained progress in the North American Physical business segment through an ongoing focus on execution. The Company is reaffirming its full year outlook for 5%-7% internal revenue growth. Based on strong first quarter 2009 operating performance, the Company is raising its 2009 OIBDA guidance range by $20MM and now expects 11%-16% OIBDA (excluding asset gains and losses) growth before the impact of foreign currency rate fluctuations. The significant strengthening of the U.S. dollar against the major currencies is expected to lower results reported in U.S. dollars by approximately 7% in 2009. The Company’s guidance for the second quarter of 2009 set forth below includes a reduction of about 8% in both revenue growth and OIBDA (excluding asset gains and losses) growth driven by the strengthening U.S. dollar. In 2008, primarily due to a softening vehicle resale market, certain vehicle leases that previously met the requirements to be considered operating leases are now classified as capital leases. As a result, 2009 rent expense is expected to decrease by approximately $21 million with an offsetting increase to depreciation expense and interest expense. We expect this change to provide a 3% benefit to the company’s full year OIBDA (excluding asset gains and losses) growth rate.

This guidance is based on current expectations
and does not include the potential impact
of any future acquisitions (dollars in millions):