Iron Mountain: Fiscal 3Q09 Financial Results

Iron Mountain Incorporated reported its financial results for the third quarter ended September 30, 2009.

The Company announced reported operating income and operating income before depreciation and amortization (OIBDA) growth of 5% and 6%, respectively, compared to the third quarter of 2008 (see Appendix B). OIBDA growth was 10% on a constant currency basis. These results were driven by continued focus on sustainable operating improvements and supported by storage revenue internal growth of 7%, which more than offset forecasted weakness in service internal revenue growth. Incorporating its solid operating performance, the Company raised its full year OIBDA and cash flow outlook and refined its revenue outlook to reflect year-to-date results. Backed by increased cash flows from operations, controlled capital expenditures, and recent financing activities, Iron Mountain ended the quarter with greater liquidity comprised of cash and availability under its revolving credit facility of more than $1 billion.

“Iron Mountain is a resilient, diversified business that continues to post solid results,” said Bob Brennan, President and CEO. “We have a strong foundation upon which we are building long-term growth platforms. Our disciplined management approach continues to drive solid profit performance through improved execution and is serving us particularly well in this challenging economy. We are on track to deliver solid full year results in 2009.”

Iron Mountain reported total internal revenue growth of 2% in the third quarter compared to the prior year period supported by storage revenue internal growth of 7%. Solid storage revenue internal growth in the North American Physical and International Physical business segments offset economic pressures on digital revenues and activity-based service revenues related to the handling and transportation of items in storage and secure shredding. As expected, complementary service revenues decreased year-over-year, due primarily to lower recycled paper prices and softness in the more discretionary revenues, such as project revenues and fulfillment services. OIBDA of $224 million for the quarter was supported by higher gross profit margins. Included in OIBDA for the third 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. The year-over-year weakening of major foreign currencies against the U.S. dollar reduced reported growth rates by approximately 4% compared to the third quarter of 2008. 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 $43 million, or $0.21 per diluted share, driven by higher operating income and reduced other expense, net compared to the same prior year period. The effective tax rate for the third quarter was impacted by net foreign currency gains and the associated tax expense and several discrete tax items that decreased earnings by $0.03 per diluted share.

Key Financial Highlights – Q3 2009
Internal revenue growth for the third quarter was 2% as storage revenue internal growth of 7% more than offset the expected weakness in service revenue growth. Severe economic conditions continued to impact core activity levels, complementary services and technology sales. The year-over-year weakening of major foreign currencies including the British pound and the Canadian dollar against the U.S. dollar reduced the revenue growth rate by 4% compared to the third quarter of 2008. As a result, Iron Mountain reported total consolidated revenues of $765 million for the quarter compared to $784 million for the prior year period.

The Company reported gross profits of $443 million with its gross profit margin improving from 55.1% in the third quarter of 2008 to 58.0% in the third 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 improved performance in the International Physical segment and from the recharacterization of certain vehicle leases as described above.

OIBDA for the quarter was $224 million, up 6% on a reported basis compared to the third quarter of 2008. Excluding the impacts of the foreign currency exchange rate changes, third quarter OIBDA grew 10% compared to the prior year period. 2% of this growth is attributable to the recharacterization of certain vehicle leases. Selling, general and administrative costs were flat to the prior year period on a reported basis. Excluding the impacts of the foreign currency exchange rate changes, these overhead costs increased 4%, as the Company continued to make investments in growth and productivity initiatives.

Operating income for the third quarter of 2009 was $143 million, up 5% compared to the same period in 2008. Excluding the impact of asset gains and losses, third quarter operating income increased 4% compared to the prior year period reflecting the flow through of OIBDA gains.

The Company’s effective tax rate before the impact of foreign currency rate changes and other discrete items for the quarter was approximately 36% in order to bring the year-to-date tax rate to 39%. The net tax impact of the foreign currency rate fluctuations increased the effective tax rate by 1% and other discrete tax items increased the effective tax rate for the quarter by an additional 10%.

Capital expenditures incurred in the first nine months of 2009 totaled $179 million, or 8.0% of revenues, excluding $19 million for the purchase of real estate. In the third quarter, the Company maintained tight control over capital spending and continued to improve its capital efficiency. The Company has lowered its 2009 capital spending outlook for total capital expenditures to be approximately $360 million for the year.

In August 2009, the Company successfully completed the sale of $550 million in aggregate principal amount of its 8-3/8% Senior Subordinated Notes due 2021. The notes were sold at 99.625% of par. The net proceeds of the sale were used to redeem all of the remaining $448 million aggregate principal amount outstanding of its 8-5/8% Senior Subordinated Notes due 2013 and to repay other indebtedness. The redemption was completed in September 2009.

The Company’s Free Cash Flow before Acquisitions and Discretionary Investments (FCF) for the nine months ended September 30, 2009 was $233 million, an improvement of $147 million compared to the first nine months of 2008. 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 in the quarter, the Company further improved its liquidity position. As of September 30, 2009, the Company had more than $1 billion of liquidity including cash of $449 million and availability under its revolving credit facility of $620 million. The Company’s consolidated leverage ratio of net debt to EBITDA (as defined by its senior credit facility) was 3.4 times at September 30, 2009, well below the covenant limitation of 5.5 times included in its senior credit facility. The decrease in this ratio since the end of 2007 illustrates the Company’s ability to naturally reduce its consolidated leverage ratio in the absence of significant acquisition activity.

Acquisitions
The Company has not completed any acquisitions in 2009. 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.

Financial Performance Outlook
For 2009, the Company continues to target sustainable underlying operating performance supported by solid core revenue growth and sustained progress strengthening returns in the North American Physical business segment. The Company’s full year revenue guidance range is being revised to $3,000 million to $3,020 million, reflecting year-to-date results. This outlook incorporates expectations for full year internal revenue growth of 3%, at the low end of the company’s previous guidance range. The Company is raising its 2009 OIBDA guidance range primarily to reflect year-to-date performance and now expects OIBDA (excluding asset gains and losses) in the range of $850 million to $865 million. The significant year-over-year strengthening of the U.S. dollar against the major currencies is expected to lower 2009 full year reported results by approximately 4% to 5%. However, the recent weakening of the U.S. dollar against major currencies is expected to increase the Company’s fourth quarter reported results by approximately 1%. 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. This guidance for the quarter ending on December 31, 2009 is based on current expectations and does not include the potential impact of any future acquisitions (dollars in millions):

• Revenues from 766 million to $786 million
• Operating income from $128 to $143 million
• Depreciation & Amortization from ~$84 to ~$320 million          
• OIBDA (excluding asset gains and losses) from $212 to $227 million