Iron Mountain: Fiscal 2Q09 Financial Results

Iron Mountain Incorporated reported its financial results for the second quarter ended June 30, 2009, announcing strong reported operating income and operating income before depreciation and amortization (OIBDA) growth of 11% and 10%, respectively, compared to the second quarter of 2008.

Excluding impacts from asset gains and losses, operating income and OIBDA grew 13% and 11%, respectively, compared to the prior year period. These results were supported by solid core revenue internal growth of 6%, which more than offset forecasted weakness in complementary service internal revenue growth. As expected, the significant year-over-year weakening of major foreign currencies against the U.S. dollar led by the British pound, the Euro and the Canadian dollar reduced the Company’s reported revenue and OIBDA by 7% compared to the second quarter of 2008. Driven by increased cash flows from operations and modest capital expenditures, the Company ended the quarter with greater liquidity comprised of cash and availability under its revolving credit facility of more than $880 million.

"Iron Mountain’s business remains healthy and on track towards strong full year performance," said Bob Brennan, President and CEO. "We continue to post solid results with performance trends similar to those we saw in the first quarter. While economic factors are constraining top line growth, we continue to drive strong OIBDA growth due to our disciplined management approach and focus on execution, particularly in our North American Physical segment. "

Iron Mountain reported total internal revenue growth of 4% in the second quarter compared to the prior year period supported by core revenue internal growth of 6%. Solid storage revenue internal growth in the North American Physical and International Physical business segments partially offset pressures resulting from the severity of the recession on digital revenues and activity-based revenues such as secure shredding. 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 and fulfillment services. OIBDA of $217 million for the quarter was supported by higher gross profit margins and continued focus on overhead cost controls. Included in OIBDA for the second quarter 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. See the appendices at the end of this press release for Selected Financial Data, a discussion of non-GAAP measures and additional information regarding the Company’s results.

Net income attributable to Iron Mountain Incorporated for the quarter was $88 million, or $0.43 per diluted share, driven by higher operating income and reduced interest expense. Earnings were further enhanced by the strengthening of the Euro, Brazilian real and British pound versus the U.S. dollar during the quarter, which resulted in $17 million of other income, net as the Company marked its foreign currency forward contracts and non-U.S. dollar denominated third party and intercompany debt to market. This net gain includes both foreign currency gains and losses, which are incurred in different tax jurisdictions. As a result, the Company recorded a $19 million tax benefit. For the quarter, these gains increased earnings by $0.18 per diluted share.

Key Financial Highlights – Q2 2009
Internal revenue growth for the second quarter was 4% as expected and core revenue internal growth, while solid at 6%, was constrained on the margin by economic pressures. The overall internal growth rate was impacted by the continued softness in complementary service revenues as discussed above. The significant year-over-year weakening of major foreign currencies including the British pound, the Canadian dollar and the Euro reduced the revenue growth rate by 7% compared to the second quarter of 2008. As a result, Iron Mountain reported total consolidated revenues of $746 million for the quarter compared to $769 million for the prior year period.

The Company reported gross profits of $433 million with its gross profit margin improving from 54.9% in the second quarter of 2008 to 58.1% in the second quarter of 2009. Gross margins were supported by improved storage gross margin and productivity gains in North America as continued progress on transportation and record center optimization initiatives drove higher service gross margins. 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.

OIBDA for the quarter was $217 million. OIBDA (excluding asset gains and losses) grew 11% compared to the second quarter of 2008 including 3% growth from the above referenced recharacterization of certain vehicle leases. Excluding the impacts of the foreign currency exchange rate changes and the lease recharacterization, second quarter OIBDA (excluding asset gains and losses) grew approximately 14% compared to the prior year period. Selling, general and administrative costs decreased 4% in the quarter on a reported basis. Excluding the impacts of the foreign currency exchange rate changes, these overhead costs increased 2%, below the rate of internal revenue growth reflecting disciplined cost management.

Operating income for the second quarter of 2009 was $138 million, up 11% compared to the same period in 2008. Excluding the impact of asset gains and losses, second quarter operating income increased 13% compared to the prior year period reflecting the flow through of OIBDA gains. Net income attributable to Iron Mountain for the quarter was $88 million, or $0.43 per diluted share, including pre-tax other income of $18 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 41%. The net tax impact of the foreign currency rate fluctuations described above reduced the effective tax rate by 26% and other discrete items reduced the effective tax rate for the quarter by an additional 1%.

Capital expenditures incurred in the first six months of 2009 totaled $107 million, or 7.3% of revenues, excluding $9 million for the purchase of real estate. The Company maintained tight control over capital spending and continued to improve its capital efficiency. The Company has reiterated its 2009 capital spending outlook for total capital expenditures to be approximately $380 million for the year.

The Company’s Free Cash Flow before Acquisitions and Discretionary Investments (FCF) for the six months ended June 30, 2009 was $121 million. Higher cash flows from operating activities compared to the comparable prior year period 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 June 30, 2009, the Company had more than $880 million of liquidity including cash of $316 million and availability under its revolving credit facility of $565 million. The Company’s consolidated leverage ratio of net debt to EBITDA (as defined by its senior credit facility) was 3.6 times at June 30, 2009, well below the covenant limitation of 5.5 times included in its senior credit facility. The decrease since the end of 2007 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. Based on internal growth trends in the first half of 2009, the Company is adjusting its full year outlook to reflect expectations for 3% to 5% internal revenue growth. The Company’s full year revenue guidance remains in a similar range, as these impacts were offset by favorable changes in estimated foreign exchange rates. The Company is increasing the low end of its 2009 OIBDA guidance range primarily to reflect foreign currency rate changes and now expects OIBDA (excluding asset gains and losses) in the range of $830 million to $860 million. The significant year-over-year strengthening of the U.S. dollar against the major currencies is expected to lower results reported in U.S. dollars by approximately 5% in 2009. The Company’s guidance for the third quarter of 2009 set forth below includes a reduction of about 5% 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 of the recharacterization of these leases, 2009 rent expense is expected to decrease by approximately $20 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.