Iron Mountain: Fiscal 3Q10 Financial Results

Iron Mountain Incorporated reported its financial results for the third quarter ended September 30, 2010.

The Company announced revenue and Adjusted OIBDA (defined below) growth of 2% and 13%, respectively, compared to the third quarter of 2009 (see Appendix B). Adjusted OIBDA growth was supported by continued benefits from operational improvement initiatives that drove substantial gross margin gains and adjustments to incentive compensation accruals which contributed approximately 5% to growth in the quarter. Solid Adjusted OIBDA gains and controlled capital expenditures drove $260 million of free cash flow before acquisitions and discretionary investments (FCF) on a year-to-date basis (See Appendix B).

The Company increased its full-year 2010 outlook for Adjusted OIBDA and refined its revenue outlook to reflect current revenue growth trends and foreign currency exchange rates. The Company also recorded a $255 million, or $1.24 per share (after tax), goodwill impairment charge reflecting economic and other factors impacting its Worldwide Digital business, including lower revenues and profits in the eDiscovery business. As a result, the Company reported an operating loss of $84 million for the quarter.

"Iron Mountain’s business continues to expand and we remain on track for solid full year financial performance," said Bob Brennan, president and CEO. "We posted strong profit and cash flow results this quarter supported by solid performance in our North American operations and excellent progress in driving growth and higher returns in our International Physical segment. We are facing challenges in our digital business and it is taking longer than anticipated to build the scale and profitability we expected from this segment. We are taking proactive steps to improve our execution in this business and return it to higher growth and profitability. We will continue to manage the business with a disciplined approach, positioning Iron Mountain for long-term success."

Key Financial Highlights – Q3 2010
Iron Mountain reported total consolidated revenues of $783 million for the third quarter, a 2% increase over the prior year period, supported by 2% total internal revenue growth. Storage revenue internal growth was also 2% for the quarter. Records management volume growth moderated slightly as continued higher outgoing volume levels in North America offset new sales gains and solid momentum in International markets. Storage revenue growth also reflected moderated average net pricing gains in the North American records management business and episodic destructions in the physical data protection business.

Total service revenue internal growth was 2%, reflecting strong growth in complementary service revenues supported by recent increases in recycled paper prices and gains in hybrid service revenues, which more than offset soft demand for eDiscovery services. Core service revenue growth was (2)% as a result of lower activity levels resulting from the weak economy.

The Company reported gross profits (excluding depreciation and amortization) of $471 million with its gross profit margin improving from 58.0% in the third quarter of 2009 to 60.2% in the third quarter of 2010. These gains were supported by higher storage gross margins, particularly in the International segment. Continued benefits from productivity initiatives drove higher service margins, which were also a key contributor to our improved gross profit performance.

Adjusted operating income before depreciation, amortization and goodwill impairment (Adjusted OIBDA) for the quarter was $254 million, up 13% compared to the third quarter of 2009. Selling, general and administrative costs in the third quarter were down 1% compared to the prior year period driven by controlled spending and lower incentive compensation expense. The lower incentive compensation expense added about five percentage points to the overall growth rate of Adjusted OIBDA in the quarter. These benefits more than offset costs associated with our acquisition of Mimosa Systems, Inc. and investments against growth initiatives.

For the third quarter of 2010, the Company posted an operating loss of $84 million reflecting the $255 million goodwill impairment charge recorded in its Worldwide Digital Business segment. The goodwill impairment reflects the impact of a combination of factors including on-going economic pressures on the digital business and recent challenges specifically related to the eDiscovery business such as reduced average matter size and lower pricing. This non-cash charge does not impact revenue, Adjusted OIBDA, Adjusted EPS (defined below) or FCF. The Company is taking proactive steps to improve segment performance including changes in leadership, integrating sales efforts to drive higher growth and integrating certain support functions to drive cost efficiency.

Net loss attributable to Iron Mountain Incorporated for the quarter was $154 million, or $0.76 per diluted share, compared to net income attributable to Iron Mountain of $43 million, or $0.21 per diluted share, for the third quarter of 2009. The decrease in reported earnings was driven primarily by the $255 million goodwill impairment charge discussed above. The goodwill impairment charge was partially offset by higher Adjusted OIBDA, lower interest expense due to the $200 million partial redemption of the Company’s 7-3/4% senior subordinated notes due 2015 completed in the quarter and $9 million of Other Income, net in the third quarter of 2010 compared to $1 million of Other Expense, net in the prior year period as described below.

The structural tax rate for the third quarter was 38%, in line with our expectations. Including the impact of discrete tax items, primarily related to the goodwill impairment charge, the effective tax rate for the quarter was (16)%. There was minimal tax benefit associated with the goodwill impairment charge as the majority of the goodwill associated with the Worldwide Digital business is non-deductible. Adjusted EPS for the quarter was $0.35 per diluted share, an increase of 39% compared to the same prior year period.

Net loss for the third quarter of 2010 included $9 million of Other Income, net compared to $1 million of Other Expense, net included in net income for the third quarter of 2009. Included in Other Income, net for the quarter ended September 30, 2010 is a $7 million gain on the sale of the Company’s domain name product line, and a $4 million gain resulting from foreign currency rate changes in the quarter, which were partially offset by $2 million of early debt extinguishment charges associated with the partial redemption of our 7-3/4% senior subordinated notes due 2015.

Capital expenditures excluding real estate incurred in the first nine-months of 2010 totaled $167 million, or 7.1% of revenues. The Company is sustaining capital efficiency gains reflecting ongoing control over spending levels and reductions due to moderating growth rates.

The Company’s FCF for the nine months ended September 30, 2010 was $260 million compared to $233 million for the nine months ended September 30, 2009. Higher Adjusted OIBDA and lower capital expenditures in 2010 compared to the same prior year period drove the year-over-year increase in FCF. As of September 30, 2010, the Company had more than $945 million of liquidity, including cash of $184 million and availability under its revolving credit facility of $762 million.

The Company’s consolidated leverage ratio of net debt to EBITDA (as defined by its senior credit facility) was 3.0 times at September 30, 2010. This ratio is well below the covenant limitation of 5.5 times included in its senior credit facility. During the quarter, the Company used excess cash to redeem $200 million of its 7-3/4% senior subordinated notes due 2015. This transaction will save the Company approximately $16 million annually in interest expense.

Dividends and Share Repurchases
On September 15, 2010, the Company announced that its board of directors declared a quarterly dividend of $0.0625 per share for shareholders of record as of September 28, 2010, which was paid on October 15, 2010. During the third quarter of 2010, the Company repurchased 1.8 million shares of its common stock for a total aggregate purchase price of approximately $40 million under its existing share repurchase program. As of September 30, 2010, the Company has repurchased an aggregate of 4.0 million shares for a total cost of approximately $95 million. On October 5, 2010, the Company announced that its board of directors had approved an increase in the amount authorized under its existing $150 million share repurchase program of up to an additional $200 million in repurchases of the Company’s common stock. This $350 million in total authorization represents less than 10% of the Company’s outstanding common stock based on the closing price on October 5, 2010. As of September 30, 2010 there was approximately $55 million remaining on the original $150 million authorization for future share repurchases.

Financial Performance Outlook
For 2010, the Company is raising its 2010 Adjusted OIBDA and Adjusted EPS outlook reflecting strong year-to-date performance and updated estimates for lower incentive compensation expense in 2010. The Company now expects full year reported Adjusted OIBDA growth of 8% to 10%. Adjusted EPS will also benefit from higher year-to-date Adjusted OIBDA and lower interest expense. As a result, the Company now expects Adjusted EPS to be in the range of $1.12 to $1.16 per diluted share yielding 14% to 19% growth compared to 2009. With respect to revenues, the Company refined its full year guidance to reflect foreign currency rate changes and current internal growth trends. For 2010, based on current exchange rates, the year-over-year weakening of the U.S. dollar against the major currencies is expected to increase reported results by approximately 1%. Macroeconomic trends continue to constrain top line growth. It is expected that these trends will continue constraining internal revenue growth for the balance of the year. The Company expects reported revenue growth to be approximately 4% for the full year supported by internal growth in the range of 2% to 3%, consistent with recent trends. The Company is lowering its expected capital expenditures for the year to approximately $270 million reflecting refinements to its capital spending plans. The calculation of Adjusted EPS assumes a 39% structural tax rate and 203 million shares outstanding.