Iron Mountain: Fiscal 1Q10 Financial Results

   
Iron Mountain Incorporated reported its financial results for the first quarter ended March 31, 2010.

The Company announced 7% revenue growth, in line with expectations, and strong Adjusted OIBDA  and operating income growth of 11% and 9%, respectively, compared to the first quarter of 2009. These results were supported by improved internal revenue growth of 4% and sustainable benefits from operational initiatives which drove strong gross margin gains. Solid operating profit gains and controlled capital expenditures drove $54 million of free cash flow before acquisitions and discretionary investments (FCF) in the first quarter. The Company refined its full-year 2010 outlook to reflect the impacts of the recent earthquakes on its Chilean business.

“Iron Mountain delivered improved revenue growth and continued strong profit gains and cash flow in the first quarter. We are on track towards solid full-year financial performance,” said Bob Brennan, president and CEO. “We remain focused on improving our growth trajectory in 2010 by driving aggressively against new business opportunities while advancing our long-term strategic agenda.”

Key Financial Highlights – Q1 2010
Iron Mountain reported total consolidated revenues of $777 million for the first quarter, a 7% increase over the prior year period, supported by 4% total internal revenue growth. Storage revenue internal growth was solid at 4%, though gains were moderated by economic factors, which have constrained storage volume growth in recent quarters. Total service revenues grew 5%, reflecting strong growth in complementary service revenues supported by recent gains in recycled paper pricing. Core service revenue growth was limited by lower activity levels driven by the weak economy and by severe weather in several North American markets. The year-over-year strengthening of major foreign currencies against the U.S. dollar increased the revenue growth rate by 3% compared to the first quarter of 2009.

The Company reported gross profits (excluding depreciation and amortization) of $451 million with its gross profit margin improving from 56.2% in the first quarter of 2009 to 58.1% in the first quarter of 2010. Sustainable benefits from productivity improvements and pricing gains, particularly in our North American Physical Business segment drove higher storage and service gross margins.

Adjusted operating income before depreciation and amortization (Adjusted OIBDA) for the quarter was $217 million, up 11% on a reported basis compared to the first quarter of 2009. Excluding the impacts of the foreign currency exchange rate changes, first quarter Adjusted OIBDA grew 8%. Selling, general and administrative costs in the first quarter were up 11% compared to the prior year period on a reported basis. Excluding the impacts of the foreign currency exchange rate changes, these overhead costs increased 9%, as the Company continued to make investments in growth and productivity initiatives. Integration expenses related to the Mimosa acquisition and higher expense accruals also contributed to overhead growth in the quarter.

Operating income for the first quarter of 2010 was $133 million, up 9% on a reported basis compared to the same period in 2009 reflecting the Adjusted OIBDA gains described above partially offset by increased depreciation.

Net income attributable to Iron Mountain Incorporated for the quarter was $26 million, or $0.12 per diluted share, compared to $29 million, or $0.14 per diluted share, for the first quarter of 2009. The decreased reported earnings were impacted by a higher effective tax rate, reflecting the impact of discrete items, which more than offset the higher pre-tax income in the first quarter of 2010 compared to the same prior year period. The structural tax rate for the first quarter was 39% as the impact of expired tax legislation was less than originally expected. The impact of discrete tax items, primarily related to foreign currency rate changes, added another 23 percentage points to the effective tax rate in the quarter. Adjusted EPS for the quarter was $0.23 per diluted share, an increase of 19% compared to the same prior year period.

Net income for the first quarter of 2010 included $9 million of other expense, net compared to $7 million of other expense, net included in net income for the first quarter of 2009. Of the $9 million of other expense reported in the first quarter of 2010, $5 million was related to foreign currency rate changes and $4 million was related to the change in Iron Mountain Europe’s (IME) fiscal year end from October 31 to December 31. Since its inception in 1999, IME has operated with an October 31 fiscal year end. Therefore, IME’s financial results have historically been consolidated with the parent company’s results with a 2-month lag. In order to better align our European processes with the enterprise, the IME fiscal year end was changed to December 31 to match the Company’s fiscal year end. The $4 million charge represents the net impact of this change for the two years ended December 31, 2009.

Capital spending incurred in the first quarter of 2010 totaled $55 million, or 7.0% of revenues, excluding $3 million for the purchase of real estate. Included in the year-to-date capital spending total is $11 million incurred by IME in November and December 2009. The Company is sustaining capital efficiency gains reflecting ongoing control over spending levels and benefits from moderating growth rates.

The Company’s FCF for the quarter ended March 31, 2010 was $54 million compared to $57 million for the quarter ended March 31, 2009. Higher capital expenditures, due in part to the extra two months included for IME, drove the year-over-year decrease in FCF. The Company’s liquidity position remains strong. As of March 31, 2010, the Company had more than $1 billion of liquidity including cash of $325 million and availability under its revolving credit facility of $743 million. The Company’s consolidated leverage ratio of net debt to EBITDA (as defined by its senior credit facility) was 3.3 times at March 31, 2010, driven by strong operating cash flow performance. This ratio is well below the covenant limitation of 5.5 times included in its senior credit facility.

Dividends and Share Repurchases
On February 25, 2010, the Company announced that its board of directors had authorized a $150 million share repurchase program and initiated its first ever quarterly dividend. The new dividend has a planned $0.25 per share annual rate to be paid quarterly. The first quarterly payment was made on April 15, 2010 to shareholders of record on March 25, 2010. At March 31, 2010, $13 million was accrued for the dividends which were paid on April 15, 2010. For the period March 1, 2010 to March 31, 2010, the Company repurchased 410,000 shares of its common stock for a total cost including commissions and fees of approximately $11 million under its $150 million share repurchase program leaving approximately $139 million for future stock repurchases.

Acquisitions
In February 2010, the Company acquired Mimosa Systems, Inc. for approximately $112 million in cash. Mimosa is an industry leading provider of enterprise-class content archiving. The acquisition provides Iron Mountain with an all-in-one archive for enterprise e-mail, SharePoint data and files, and gives the Company an on-premise storage option to complement its existing cloud-based content archive offerings. It also allows the Company a new vehicle for delivering its services for back-up, compliance and eDiscovery, bringing greater value to the data stored. 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 2010, the Company is reinforcing the solid fundamental outlook first issued on February 25, 2010 as it continues to target improved revenue growth and strong, underlying operating performance. Expectations for full year revenue growth of 6% to 8% supported by internal revenue growth of 4% to 6% remain unchanged. Adjusted OIBDA growth is expected to be in the 7% to 11% range on a reported basis. The Company refined its full year dollar guidance ranges by $5 million for revenues and by $5 million to $10 million for Adjusted OIBDA to reflect the expected impacts of the recent earthquakes in Chile. The Company now expects full year revenues in the range of $3,180 million to $3,250 million and Adjusted OIBDA in the range of $925 million to $965 million. The year-over-year weakening of the U.S. dollar against the major currencies is expected to increase 2010 full year reported results by approximately 1%. The Company is lowering its expected capital expenditures for the year to approximately $290 million reflecting refined capital plans and lower expectations for real estate spending. The calculation of Adjusted EPS assumes a 39% structural tax rate and 205 million shares outstanding.